Commando Consulting: September 2009 - Does Pay For Performance Programmes Work In Consulting Firms? Part 1

By Tom "Bald Dog" Varjan

There is also a podcast version of this newsletter for subscribers. If interested, you can subscribe through my Practice Management Black Paper.

Do you know that in ancient Greece, business owners would collect on their overdue accounts by throwing stones at the non-paying customers?

That way customers got the products and services that they needed and business owners got paid as well for delivering them.

But what about employees who repeatedly fail to deliver the value they got hired and are paid for? Should we stone them too?

Or should we stone business owners who've created such adversary work environments in which employees lose their energy and enthusiasm to produce at all?

When we assess this situation in consulting firms, it seems the blame lies pretty high in the management chain and not with the people who actually underperform.

And a large chunk of the blame must be placed on the notorious pay for performance system.

But before we dive deep into the topic, let's take...

A Closer Look At History

Once upon a time consulting firms were happy to do their client acquisition because they knew they were positioned as experts and potential clients wanted to talk to them to define whether or not to hire the firm.

There was peer-to-peer match between buyers and sellers. High level people from the buyer's company were interacting with high level people in the seller's company.

Then someone had this earth-shattering idea that...

"Hey, we're professionals. Client acquisition is just too low of a function to our highly respected stature. Let's hire some grunts to bring in clients on a reward for performance basis."

But this mentality has also created the other side of the same coin. Consulting firms started accepting pay for performance engagements.

But first let's look at the grunts who are supposed to bring in new business.

In other business models it's customary to create a separate group of people for the sole purpose of landing new business, and these people are in a pay for performance system. And these people are not necessarily subject matter experts. They are parrots who're taught some scripts and techniques, and then sent out to roam the land and start hunting for people.

One is network marketing and the other is commissioned salespeople.

In network marketing new distributors are taught that the sky is the limit to their earnings. But distributors also quickly learn that the sky is pretty low and it's full of storm clouds. The average network marketing distributor earns less than $50 a year and the annual attrition rate of distributors is well over 50%.

And if there are people on the face of this planet that lose their friends faster than you can say Jemima Puddle-duck, it's definitely network marketers.

The other group is commissioned salespeople. They are the modern day commercial mercenaries who do anything to make some quick buck. Their employers mistakenly believe that the more these salespeople earn, the more they make for their companies. Yet, most salespeople's contracts are full of fiendish closes about financial limitations and other restrictions on personal earnings.

And looking for better opportunities, the annual attrition rate among salespeople is 43%. And to all this comes the fact that the public distrusts and disrespects them.

In 2004 the Gallup Organisation surveyed the population, and after politicians, salespeople turned out to be least trusted professionals. And popular movies like Sinclair Lewis's "Babitt", Arthur Miller's "Death of a Salesman" and David Mamet's "Glengarry Glen Ross" certainly confirm the image of glib, smooth-talking class act shysters who do anything to make a quick buck.

And when we look at the compensation of these reward for performance folks, is there really a direct proportion between their personal and their companies' financial wellness?

I know a number of car salespeople who are making excellent money while their dealerships are struggling.

I also know several salespeople who've made great deals for their companies just to get their commissions capped by the company's greedy executives, so they can pay themselves more.

Over the years, I've even advised some salespeople on what to do when their companies start capping their earnings. I've always told them to click over into broker mode, and instead of bringing the deal to their employers, issue RFPs to find some highest bidder, and become dealmakers.

Since they get paid for performance, they might as well demand full control of the engagement.

So How Does The Pay For Performance System Work In Consulting Firms?

In reality, the professional service firm, like a consulting firm, is supposed to be a non-compartmentalised business structure.

In industrial plants you find independent silos where - very often - the left hand has no idea what the right hand is doing. And it works because they are independent silos. It's like a symphonic orchestra. You play your part of the piece from your sheet, and that's it. You watch the conductor and your sheet.

But a consulting firm is like a jazz combo. There is no sheet music. There is no conductor. Members pass around the role of the next solo in a pretty even fashion. They can change from bebop to R&B in a fraction of a second, and no one will miss a beat.

But can this band-wide capability broken down to individual performers? Yes, a pullover can keep you warm at winter but which fibre keeps you warm.

Similarly, can firm-wide performance be broken down to individual contribution and then reward individuals according to that contribution? I don't think so. And I think it would be a mistake even to try.

Even if we look at sales. In most cases it's a team effort, yet, in most companies one single person gets compensated for it, while all the others, who've assisted and advanced the sales, get nothing.

Consulting firms sell 5-6 or even 7-figure engagements, and there is no way one person can be singled out for the completion of that sale.

Somehow the business world is convinced that the more you pay people the more they will produce. Well, to a certain extent this is correct. That is, if you underpay your people, so you can keep more money for yourself, then they won't produce.

But people are not motivated by the typical carrot-and-stick approach.

Let's just look at the Open Source movement. A bunch of unpaid and uncertified misfits have created Firefox and Wikipedia without any supervision and tight managerial control.

And the market share of Microsoft's Internet Explorer, developed by highly paid professionals, keeps shrinking.

And where is Wikipedia's competition, Microsoft's Encarta, again, developed by highly paid professionals?

Encarta has already disappeared. Internet Explorer is on its way out.

How is it possible? People are too dumb to produce anything without the close scrutiny of superior life forms called management.

And now we have Wordpress too.

So, does really carrot and stick type pay for performance programmes work? I think it does... provided your job is something monotonous, like shovelling manure from one pile to the next.

So, let's take a closer look at...

Some Drawbacks Of The Pay For Performance System

1. Ignoring The Firm's Perfect Client Profile

Consulting firms should have Perfect Client profiles to attract the kind of clients with whom they can do their best work.

But when I'm in a pay for performance system, do I care what kind of client I land at my firm's doorstep? No I don't? I need my commission to pay my mortgage and put food on the table, so all I need is a live body with a cheque in hand that clears the bank, so I can get paid. From my standpoint, the rest is just aesthetics.

Yes, it's nice to have great clients, but I can't afford to turn down money.

And even if I land a few shitty clients, who cares? It's the consultants who have to work with them not me.

2. Focusing On What The Seller Wants

We only have 100% of our focus and energy. The more I focus on what I can get out of this deal, the less I can focus on prospects.

According to RainToday, an online knowledge base and research repository on professional services, the number 1 client complaint is that consultants don't listen and are too quick to jump in to recommend solutions.

And in a reward for performance environment, which is really a scarcity-driven environment, I have to focus on what I can get because I'm out there on a sink or swim basis. If I don't make the sale, I can't put food on the table.

3. Neglecting The Firm's Long Term Success

If I'm paid for short term "quick buck" performance, I can't focus on long-term success.

The problem with the quick buck is that the margin on it is usually pretty thin. There seems to be an inverse proportion between the speed of landing the client and the margin on the project.

Focusing on the quick buck also means that this firm doesn't have built-in longevity. Here today, gone tomorrow. So, I also keep my eyes open for greener pastures before this pasture gets grazed to death.

4. Competing Not Collaborating With Colleagues

Now if I'm paid on an individual basis for producing some quick buck, then what is my incentive to help my colleagues to produce their numbers? Nothing! Not a sausage. Actually I have a vested interest in stealing opportunities from my colleagues so, I can look better in my managers' eyes.

The way I see it, there is plenty of competition in the marketplace outside the company, so we'd better work together to cope with that external competition through internal collaboration.

But this internal collaboration hardly ever happens. So, we are back to competition in order to make our personal numbers.

5. Falling To Fully Engage

If I'm in a pay for performance system, I know I don't really belong to the firm, and if something undesirable happens to me, I can't expect the firm to stand up for me.

It reminds me of a scene from the movie Ben Hur, when the new consul, Quintus Arrius, goes down to the belly of the galley and makes an announcement to the slaves...

"You are all condemned men! We keep you alive to serve this ship! So, row well and live!"

This is the essence of individual rewards, although in the galley the slaves had to work as a team. You can't out-row the others. Individual rewards create individualistic people who don't care about your team mumbo-jumbo. They want to earn their money and they know how to get it.

6. No Loyalty

If I don't belong to the firm, then I don't have to offer my performance exclusively to the firm. I'm essentially a free agent, so whatever business I conjure up, I'm free to offer it to anyone. As a mercenary, I'm free to offer opportunities to anyone that I see fit and that pays better than my own firm.

Some may call this betrayal, but my contention is that you can't betray an institution that you don't even belong to. And if you are employed on an "Eat what you kill basis", I don't feel I belong to the institution.

7. No Expectation Only Hope

As my manager, you have no right whatsoever to expect me to produce anything. But you have the right to hope that I do. You don't pay me, thus I don't even belong to your company.

Expectation is something which we gain the right to when we make an investment. A beggar can only hope to receive some food. He wants it for free. A paying guest has the right to expect to be served in a restaurant. She's willing to pay for it.

In the commission type compensation structure, producers receive some 10-15% of the value they've produced, and 85-90% goes to the employer or client. That's well and good, but I also believe that he who is the ultimate beneficiary of the value, the party that gets 85-90%, should also make an investment in the production capability.

This is why the money they eventually earn is called a return on investment. The current commission structure feels like return on someone else's investment. Investment on time, money, effort, education, etc.

Otherwise work feels like communism. The people in the frontlines work hard and produce the value, then the communist party grabs it, takes it away and in the stores sells it back to the producers at a great profit.

On Summary

As a summary, I'd like to encourage you to watch Dan Pink's interesting presentation on human motivation.

According to Dan, instead of paying for performance, we'd better give people...

• Autonomy: Giving people control over how, when and where they work (ROWE)


• Mastery: Helping people becoming increasingly better at work that matters


• Purpose: Connecting the dots between what people do and some purpose more important than themselves

A 2005 MIT study (D. Ariely, U. Gneezy, G. Lowenstein, & N. Mazar, Federa; Reserve Bank of Boston Working Paper No. 05-11, July 2005.) reports that...

"As long as the task involved only mechanical skill, bonuses worked as they would be expected: The higher the pay, the, the better the performance. In eight of the nice tasks we examined across the three experiments, higher incentives led to worse performance."

London School of Economics Study by Dr. Brend Irlenbusch reports that...

"We find that financial incentives can result in a negative impact on overall performance."

Now there is one important point here. These studies are based on knowledge work. When we're talking about manual labour like making simple things in a robotic fashion on a piecemeal basis, money is still a great incentive.

But when you have to think about what you're doing, more money doesn't buy more engagement. Maybe from hookers.

And the other point is that high individual performance doesn't necessarily translate to high firm-wide performance.

Oh, and performance is not only financial performance.

Alfie Kohn expressed it rather succinctly in the Harvard Business Review (Nov/Dec 1993)...

"The essence of professional service firm management: Pay your people well and fairly, and do your best to help them to forget about money."

I'd like to encourage you to read two of Alfie's great books: 1) No Contest: The Case Against Competition and 2) Punished By Rewards: The Trouble with Gold Stars, Incentive Plans, A's, Praise, and Other Bribes.

I think you will find them eye-opening.

In my view, no one should choose a profession just because there is great money to be made in that profession. I think people should take time to discover their "callings" and master that skill at such high level that the market is willing to pay premium price for it.

So, stay tuned for the next blood-boilingly exciting instalment in which we discuss how to acquire true talents not merely commercial mercenaries who do anything for anyone for money.

"Dynamic Duo" Mentor Programme... ...has 3 openings for January and 5 for February 2010. Click here to continue to the fiendish details.

Recommended Reading

The Power of Full Engagement: Managing Energy, Not Time, Is the Key to High Performance and Personal Renewal

By Jim Loehr and Tony Schwartz

By Jim Loehr and Tony Schwartz

Many consulting firms are convinced that the secret of higher firm-wide performance is to hire more people and force them to work longer hours.

I believe I've read it in Kennedy Research that the typical consultant works abo0ut 64 hours a week. But in spite of the long and hard hours, consulting firms are not getting proportionally more profitable.

Actually what we can see is that small firms and solo consultants, who work "sane" hours and have fulfilling personal lives too, far out-earn their colleagues who work at some of the consulting behemoths.

There are quite a few solo consultants out there who earn seven figures year after year, but when you look at the large consulting firms, productivity is almost always under $500,000 per person. Take away salaries, perks and other cost elements, and you have almost nothing left you can call profit.

And this is the engagement thing.

Large firms hire superstar MBAs from the best business schools, but once hired, these same firms miserably fail to actually engage them. Yes, these firms pay great money but it's not money that creates engagement in highly talented people. Money creates engagement in money-hungry people. And the overlap between highly talented people and money-hungry people is very tiny, if there's any.

I think this book is 100% relevant to our topic this month. The authors prove with lots of case studies that performance is all about gaining people's full engagement, and this engagement can't be bought like sacks of potatoes.

Place your order with Amazon.com for The Power of Full Engagement. You'll be glad you did.