FAQs about team member compensation and performance measurements

On December 31, I received this E-mail question from John Loebmann, general manager of a 15-member accounting firm.

Hi Ron,

I stumbled across your blog about a week ago and I am very excited about the possibilities of value pricing. I am the general manager of a small accounting practice (15 employees) and we are looking to overhaul the way the we do business.

I think that value pricing is the way to go, however, before I order your book I had a couple of questions. I believe I understand the value pricing theory and while I have a lot to learn about the methodology, the one question that keeps nagging at me is how does this impact the compensation and performance management aspects.

I read the table of contents and index and could not find anything related to compensation. I would be very interested in your recommendations regarding compensation with respect to:

  • base salaries
  • bonuses
  • targets—team, individual
  • adding new clients

In addition, I would also appreciate any recommendations regarding performance management:

  • objectives
  • criteria
  • job descriptions

Thank you very much and I look forward to discussing this with you further.

Best regards,

John

Hi John,

Thank you for your E-mail, and I’m glad you found our Web site. We hope you visit often, become a member, and eventually end up as one of our “Trailblazer” firms.

Regarding your questions, let me first say that the theory of Value Pricing is intimately intertwined with the methodology. There is nothing as practical as a good theory. Many firms fail in their attempts to implement Value Pricing not because they don’t execute properly, but rather because they truly don’t understand the theory. Hence I applaud your attempt to first understand the theory behind what we are advocating—the “why to” is much more important than the “how to.” Many people doubt this, but trust me when I say it’s emphatically true.

If you truly want to “overhaul the way we do business” then you have to answer two questions: What type of future do we want to create? The next question is: Are we willing to pay the price? Commitment is everything. Once you answer these questions the “how to” is merely plumbing; you will figure it out as you go.

The reason you won’t find much in my books regarding compensation of team members is there is no one standard framework on “how to” do this. Every firm is different, with various cultural influences that effect compensation. Our mission with Value Pricing is to get you a larger pie to distribute internally, which is the sort of problem most firms would love to have.

Because value and pricing exist outside the four walls of your firm, that is where we put our focus. How you distribute and share the profits internally is up to the leadership of your firm, and no one model exists.

I will say this: firms that Value Price and don’t do timesheets have essentially replaced “billable hours” with revenue for determining base compensation. Some firms do not try to allocate revenue to individuals, as this contradicts the idea of being one firm. I agree with this method, but most firms still insist on allocating revenue per person.

Value Pricing firms tend to put less emphasis on base salaries and more emphasis on firm-wide profitability. Some deploy a team-based profit sharing plan as well, while still others recognize outstanding individual achievement with bonuses, etc. Some pay for bringing in new customers, other make that function a basic expectation of one’s job.

As for your second question on performance management, I’m not big into job descriptions. In a knowledge economy, jobs don’t have value—only people do. Hence, we strive to develop the talent a firm does have by focusing on their strengths and ignoring their weaknesses. That’s hard to do if you pigeon-hole people into a job description.

We are strong advocates of utilizing Key Predictive Indicators, which differ from Key Performance Indicators (made popular by the Balanced Scorecard). The difference is enormous: a Key Performance Indicator is nothing but a measurement, and it’s lagging. Since we can’t lose by weighing ourselves more frequently (or accurately, for that matter), these indicators don’t offer much help to change outcomes.

What firms need are Key Predictive Indicators. These are measurements, or judgments, tied to a theory, which allows us to test a cause and effect relationship. In other words, KPIs are a theory—they can predict, or control, the future. They are leading indicators, which measure the success of your firm the same way the customer does. There’s not a customer on the planet that defines the success of their CPA by how many hours they charge.

This is a very short description of KPIs. For more information, start with my latest book, Measure What Matters to Customer: Using Key Predictive Indicators. This book details KPIs used by knowledge firms, rather than measuring lagging indicators.

You may also want to read my three-part series, published by the ACCA and available for free download in pdf: Burying the Billable Hour; Trashing the Timesheet; and You Are Your Customer List. These are shorter versions of my book, The Firm of the Future.

Eventually, you’ll want to delve into pricing in depth; my Professional’s Guide to Value Pricing, Sixth Edition and Pricing on Purpose: Creating and Capturing Value will take you through the methodology of implementing Value Pricing.

Warning: This is a enormous cultural change, and it’s not for wimps. Nor will it happen overnight. It’s also not for people not committed to entirely changing the way they run their firm. VeraSage is committed to helping only those truly committed to this change. It’s only by working with the early adapters that we can change the culture of our entire profession from thinking they sell time to understanding they sell intellectual capital, while capturing more of the value they create for the customers they are privileged to serve.

I hope this helps, John, and let us know if we can be of any assistance as you overhaul your firm and become a true Firm of the Future.

Sincerely,

Ron Baker

Comments

  1. My idea of compensation is about rewarding the whole team. What we’ve done in some open-minded firms is this:

    We established an annual base salary for team members. The same salary for everyone.

    Then we take a certain percentage of the revenue and distribute it evenly between team members.

    Every single employee of the firm – except the founder(s) – earns the same. This totally eliminates internal competition and maximises collaboration and creates a collegial environment.

    Now here is the question I often get: What is the incentive for people to pull their weight?

    In my experience certain people naturally do their best whatever they touch. That’s what they learnt from their parents. They produce 100% regardless of compensation because this is their nature.

    How is this possible? When I help clients to hire team members, we hire for character. I’ve never read a resume and never checked a reference. I sit down with people and “read” them in about 5 minutes.

    There are other flaws in hiring: The standard question is: “Can this person do it?”

    I ask: “Will this person do it.”

    Just as a cobra can control the amount of venom it injects into its victim, we can control the amount of knowledge we “inject” into the project we work on,thus we can control the “delivered value.”

    I’ve found that excited and enthusiastic people with college diplomas make better and more valuable knowledge workers than dutiful and apathetic MBAs often with inflated egos and expectations.

    Also, since people play to their own innate talents and strengths, there is no promotion. People love what they do, and their aspiration lies in improving in their current area, which means increased profits for the firm, and higher level of professional fulfilment for the associates.

    Some say a bit of internal competition is good. Well, maybe, but I disagree. Based on my military (also referred to as the “Ultimate Professional Service Firm”) experience, the last thing I need when the stakes are high and the heat is on (as it often is in professional firms), is that team members rival with each other, while the enemy is slaughtering us or the competition attracts all our clients away from us.

    However, I’m biased, and firmly believe that the military is probably the only institution on the planet that really understands the ins and outs of building cohesive teams.

  2. Interesting points, Ed. I try to clarify my points a bit.

    > I am not sure I agree with you egalitarian, some would say communistic, approach to salary.

    Having grown up in communist Hungary, I can confidently say that world of business sucked at building productive teams. There was too much internal competition.

    > but some people are just better or smarter than others are.

    My payment approach is built on the premise that an excellent environment attracts excellent people who are inspired by contributing to higher goods, but their contribution is not the direct function of money. At the same time less than excellent people stay away from an excellent, challenging environment. They are scared of it.

    > Unless there is a reward for that individual what is to drive them as individuals forward.

    I’d like to drive the team without driving the individuals. Individual driving can create rivalry among team members.

    Individuals work to their natural strengths, so they are in a state of flow. Here is Dr. Csikszentmihalyi?s definition of flow:

    “Being completely involved in an activity for its own sake. The ego falls away. Time flies. Every action, movement, and thought follows inevitably from the previous one, like playing jazz. Your whole being is involved, and you’re using your skills to the utmost.”

    So, if I create a ?flow? environment, then everyone will operate in a state of ?flow?, and the team will achieve great things. What do you think?

    > I take issue with the following phrase ?we can control the amount of knowledge we ?inject? into the project we work on, thus we can control the ?delivered value.??

    Let?s say I?m hired as a marketing person for a company and offered $10 per hour. Although I could use some skills I learnt at a $5,000 Jay Abraham marketing seminar, and I know that applying this knowledge could do miracles for my company, I?m reluctant (most probably unwilling) to invest $5,000 of my education (skill, knowledge) in a $10 an hour job. So, I?m controlling the value I offer. I deliver enough value to my company that reflects my $10 an hour wage.

    > The value delivered to the customer is really determined by the customer, is it not?

    Good point. I missed this baby. I don?t control value per se. Of course, value is in the eye of the client. I control the expected impact my help and support can make on the company. And can control the return (performance) I offer for their investment (working environment, including but not limited to money).

    Have I made it a touch clearer, Ed?

  3. Ed Kless, Senior Fellow, Verasage Institute says:

    Tom,

    Sorry for the delay in posting a reply to your comment, but to be clich? about it, it is better late than never.

    You certainly have clarified your point on your control of ?value in.? I understand and concur. With regard to ?value to the customer? we are also in agreement.
    However, on team based compensation, I am afraid I still disagree.

    First, I am glad you did not take too much offense at my communism comment. It was meant in a little intellectual fun. You should know that I, too, am a big believer in compensating contributions to the team. All studies that I have seen have shown it to be one of the few ways to motivate great work. That being said, I strongly believe that there must be some recognition of individual accomplishment.

    Perhaps the simplest way to do this is with a discretionary bonus, perhaps even voted on by the team. I firmly believe that without recognition of individual accomplishment, the team will eventually disintegrate.

    Every day, I become more of an Objectivist in the Ayn Rand sense.

  4. Ed,

    Thanks for your response. I love these Verasage discussions.

    I’ve just come across something that may be interesting to consider

    In a 1997, organisational psychologist, Dr Amy Wrzesniewski of Yale University School of Management, did an extensive study, and categorised employees into three groups.

    Group #1 views work as a job. For these people the motto is, “Fair work for fair wage.” They don’t care about what they do. They do it because the money they receive pays the bills. There is no pride and fulfilment in the work. It’s merely another chore like taking out the rubbish or mowing the lawn. It’s just another necessary evil to kill time between weekends. Loyalty is non-existent. These people leave their companies for the smallest wage increase. In society, you can compare these people to the lowest level of hookers: “We do anything for anyone for money.”

    Group #2 views work as a career, and the main goal is promotion and financial advancement. These people do the work because it gives them social status, prestige and title power. These are the people who love using their designations after their names. They also make significant investments in their careers and keep advancing their skills.
    But their work satisfaction still depends on promotions and other external conditions (motivation), while the internal conditions (inspiration) are missing. But when promotion (in jobs) or the quick buck (in self-employment) stops, they get pissed off and move on to something else. Or they give in and stay where they are but their enthusiasm is gone.

    Group #3 views work as a higher calling, who do the work for the sake of work. These people don’t have balance in their lives. They seamlessly blend life and work together. No, they’re not workaholics. Workaholics are driven by external motivation an internal insecurity, not by internal inspiration. These are people who also have happy, healthy and fulfilling personal lives.

    If needed, they would do the work for free too because they work for the love of what they do. They regard money as the side effect for their contribution, not an incentive for doing the work. I?ve met a successful computer consultant who?s become a career counsellor and a dentist with a flourishing practice to become a personal trainer. Both of them took a significant pay cut but their decisions were not driven by money.
    These people do their work to serve a higher purpose, and in doing so they make a their societies and the world a better place. Using Mihaly Csikszentmihalyi’s definition, these people operate in flow, that is “being completely involved in an activity for its own sake. The ego falls away. Time flies. Every action, movement, and thought follows inevitably from the previous one, like playing jazz. Your whole being is involved, and you’re using your skills to the utmost.”

    So, I think we have to figure out how to create an environment that attracts only Group #3 people and repels everyone else.

    And then we feed the whole team with money as we feed the the whole body with nutrients.

    Obviously to hire Group #3 people we have to forget about HR (Human Repression) departments and hiring agencies. While they are good for hiring workers, they can’t hire talents. Talents ought to be acquired by the partners and the traditional resume method just doesn’t work.

    Am I making sense here? The large amount of Tchaikovsky and Pink Floyd during the day may have impacted my thinking.

  5. Ed Kless, Senior Fellow, Verasage Institute says:

    Yes, you are making a lot of sense. (BTW – You can’t have too much Tchaikovsky or Pink Floyd.)

    We are in violent agreement on hiring talent not workers! I agree that in an organization with a great culture, money is pushed aside. In an organization with poor culture, money becomes the default culture.

    I still believe we need to reward (maybe not even with money) individual accomplishment in some way. In the best case you would reward each individual based on what they feel is valuable. I.e., time off, preferred parking.

  6. > I still believe we need to reward (maybe not even with money)

    Our points are getting closer, Ed.

    I see this kind of individual reward as, for instance, letting people go home when their daily work is done.

    I use the analogy as a 4x400m running relay race. After having run my 400m chunk, and having contributed to my team’s success, I can go home. The team has no better or worse chance of wining if I stay. I’ve done my part, and there is not a sausage more I can do.

    Thoughts?

    And regardless how much time I take to run my 400m segment, as soon as I’m done, I can leave.

  7. Ed Kless, Senior Fellow, Verasage Institute says:

    I think you are correct; we are very close. Let me see if I can bring this to closure.

    We agree:

    * Culture trumps the compensation systems everyday of the week. Twice on Sundays!

    * Hire for fit into culture rather than technical ability.

    * Where culture is poor, money will become the default culture.

    * Reward the perfomance of the team to a greater extent than individual performance.

    * Individual performance can be and should be rewarded, but the reward does not necessarily have to be money.

  8. I think we agree, Ed.

    I’ve just fond this interesting piece. Chimpanzees have the largest brains among animals, but their group IQ is borderline idiotic.

    Baboons have pretty low individual IQ, but when ganged together, they form a very smart group. They have very high group IQ. If I were a firm leader, I would go for the baboons.

    Thanks for the great discussion.

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