Commando Consulting: October 2009 - Does Pay For Performance Programmes Work In Consulting Firms? Part 2

By Tom "Bald Dog" Varjan

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Do you know that the human head contains 22 bones, the cranium and the facial bones?

So, in a biological sense every human being qualifies to be called a bonehead.

But in a business sense, there are certain criteria that must be fulfilled in order to call a person a bonehead. And I believe, one of these criteria is to expect knowledge professionals to perform better by promising them more money for the higher performance.

And it fails again and again.

I think, just like marketing, finding good people also boils down to psychology and mathematics.

We have to find the right psychological conditions to attract great people and then use some firm-wide, NOT individual, indicators to track the firm's performance.

Why the firm's not the individual's?

Well, a sleeping bag can keep you warm all the way down to -20 Celsius, but if you take the sleeping bag apart, you'll find that none of the fibres can keep you warm at the same level.

So, we have to focus on firm-wide performance.

Last month we started invading an exciting territory of firm management: How to pay associates, and the dreaded pay for performance system.

So, let's continue by categorising your people based on their mindsets about work...

Stars

These people are the proverbial Dr. House from the popular television series. They are certainly geniuses but they come at a very high price for their employers.

They do amazing work and produce incredible results with minimum supervision and with seemingly very little effort. Somehow everything works out for them, leaving their colleagues with their jaws dropped in amazement.

They nicely fit into "get results by any means" culture. They may bend or even break the rules but get the kind of results that can further elevate their status in the eyes of their managers. And they can spin the results in such a way as if they did it for the firm.

And since they are out for personal glory, they don't care about leaving a few corpses behind. That is, the corpses of their own colleagues. Not literarily of course, but they don't mind stepping on a few toes and seriously hurt some people's feelings in order to get what they want.

And what do they want? They want to advance their personal agendas.

And while they produce great results to impress their managers, they won't buy into your "teamwork" stuff and your firm's code of honour. As the proverbial mercenaries, they have their own codes and refuse to play by other's rules.

And when they find greener pastures than what your firm can offer (Other pastures are always greener than the one we're grazing on), they pack up and leave, usually taking their clients with them. By "their clients" I mean the clients whose projects they are working on.

Now you may say clients belong to the firm, but imagine yourself at the receiving end of the situation. When your attorney leaves his firm, do you stay with the firm which you have nothing to do with or do you follow your attorney based on the long-term relationship with her? This is the reality of the relationship dynamic.

I believe people pledge their loyalty to other people not to institutions. The good thing is that great professionals don't move to scumbag firms, because great professionals don't move for money alone.

But can we regard Stars to be great professionals, especially considering that "great professional" means a tad more than great subject matter expertise?

Entrepreneurs

This is a very interesting group of people.

They work to learn the trade and make all the beginner's mistakes on your dime, but when they are ready to fly on their own, they pack up, leave you and start their own businesses now in competition with your firm.

Yes, they can pretend to work in your firm and on your team, but it's just part of their learning curves. They try to take whatever they can and give as little as they can, because they know that a few years from now their current firms will be their competitors. Their destiny is not to stay with you but to leave you and, putting it bluntly, putting your firm out of business.

Both Stars and Entrepreneurs concentrate on what is best for them personally, even if it's detrimental to the firm.

True Players

I believe this is the very group of professionals firm leaders should concentrate on.

The good news is that this is the largest group.

While these people need a bit of initial hand-holding, they can quickly grow into high-performing professionals. And it all depends on the environment you provide.

But these people are willing to learn and learn for the sake of long-term success.

What these people seek more than anything else is sense of belonging to something bigger than themselves. And that is the mission of the firm. That's a movement which they want to belong and march with.

But the snag is that many firms are not worth belonging to. Truly belonging, that is. Merely showing up for 40 hours busy-ness Monday to Friday is not belonging.

Yet, isn't it interesting to note that when HR people see too many employers on candidates' resumes, they automatically assume that these candidates are job hoppers, that is, unemployable.

But they are not. They are smart people who leave sinking ships. On a percentage basis, there are more scumbag employers with deceptive hiring practices than scumbag employees with misleading resumes.

I suppose, if candidates were allowed to conduct reference checks on their future employers, which now they can on the Internet, many firms would be in deep shit because the best and the brightest talents would avoid them like the plague, and those firms would be forced to hire from the bottom of the unemployment scum barrel.

As their default settings, true players contribute their best and brightest to their teams and firms, and there is no need to spur them into more contribution by offering them incentive schemes (scams?!)

Let's remember Alfie Kohn's words in the Nov/Dec 1993 issue of Harvard Business Review...

"Pay your people well and fairly, and do your best to help them to forget about money."

And while the first two groups can never forget about the money, the third group can.

Since human beings are not cut out for multitasking, we either focus on the money or on the work at hand. But, using sports language, if we keep staring at the score board, we soon drop the ball, the opponent picks it up and scores. And no matter how hard we stare at the score board, we're left in the dust.

Are Job Hoppers Really Job Hoppers Or Just Smart Enough To Jump Sinking Ships Captained By Idiots

Let's see the firm is hiring.

The appropriate people write up a sexy ad for the position that promises the sun and the moon.

So, Joe Candidate applies, does a great interview and he's hired.

A few days later Joe starts at his new position, but there is one snag.

His salary is only 60% of what the ad promised. Reason: The promised salary is something he can earn after 10-15 years of hard work. It's a potential salary.

The medical and dental benefits are suddenly gone. He has only 75% of the vacation that was initially promised.

He has a one-hour lunch break, but if he ever wants to be promoted, he'd better skip lunch and think twice about going to the loo.

Oh, and the scope of work has somehow bloated up like a seriously pissed off toad.

A few weeks later, Joe realises that he's stepped into a big pile of shit by accepting the firm's offer, and hands in his resignation.

His next employer is also a dud.

This firm delivered on the salary, vacation and medical plan, but something was definitely off.

The partners kept buying new and expensive toys for themselves by raiding the firm's kitty, so the firm itself was always cash poor.

Joe also discovered that the partners were involved in unethical practices, including encouraging consultants to drag out billable time as long as possible and do half-work, so a few months later the firm has to be re-hired.

By the way, both kitty-raiding in the form of secret bonuses for partners and time-stretching are common practices among far too many consulting firms.

So, Joe has quit two jobs in three months. According to HR, this is hard-core job-hopping and is punishable by lifetime unemployment.

But he's not a job-hopper. He's just smart enough to avoid landmines that could blow up in his face.

For instance Enron was still on a massive spree of hiring superstar MBAs from top-notch business schools long after the head of the Securities and Exchange Commission desperately tried to warn Congress about the soon-arriving Enron scandal. Then the scandal hit a mere 13 months later.

The event is nicely documented in America Robbed Blind, a book written by USA Today investigative reporter, Greg Farrell.

Now I'm asking you. Were the people who were hired and quit during those last 13 months job hoppers or just smart enough to protect their careers from scumbag employers.

If you are looking for a career not merely a job, and want to make some serious contribution to a specific company, you can't ignore the fact that 96% of start-ups die in their first 10 years.

So, instead of blindly accepting positions, you'd better be on your toes when you first notice that the partners are steering the ship straight into an iceberg. And you'd better jump ship before the mass notices the trouble and people start fighting for the lifeboats. Instead, jump early and pick the most reliable life boat.

So What Creates "Pay For Performance" Mentality, And How To Overcome It?

First, let's imagine Earnest Shackleton's ad looking for people for his dangerous adventure to the South Pole in 1914.

Legend has it that, Shackleton ran a short classified ad:

Men Wanted:

For hazardous journey.

Small wages, bitter cold, long months of complete darkness, constant danger, safe return doubtful.

Honour and recognition in case of success.

Sir Ernest Shackleton

The people who respond to this type of ads don't perform just because they get paid. They perform because challenging themselves and performing at high levels of excellence are in their blood.

No one had offered piles of dough and celebrity status to Sir Edmund Hillary to climb Mount Everest. No one offered anything to Amelia Earhart to fly solo across the Atlantic Ocean.

I believe great talents perform because of two ingredients: 1) internal: Performance is in their blood. 2) External: Performance is in the culture and environment that surround them.

Sadly many firms ignore the external factor. But I think the external factor is stronger than the internal one.

A US Army Example

Many years ago, Tony Robbins was hired by the US Army to conduct some personal development programmes.

Later, the organising general lamented that many soldiers regard their military services as the best days of their lives and the highlight of their careers. After leaving the military, most of them, in spite of their special training and capabilities to do amazing things, they fall back into insignificance, and live their lives in quiet mediocrity.

Then Tony told the general that this happens because soldiers no longer operate in an environment that holds them up to a higher standard and supports them on their journeys to be the best they can be.

And here is one more proof that talented people love challenge and whatever they do, they don't do it for the money.

A US Marines Example

In the mid 90s the US Army, the Navy and the Air Force kept coming short of newly recruited soldiers. They wanted to better appeal to people to join the military, so they decided to soften their standards.

Defying the softening plan, one military division decided to further toughen the already very tough training and in doing so to further improve the quality of recruits and the quality and the overall strength of the whole unit.

The Marine Corps, under the leadership of General Charles Krulak, introduced "The Crucible" concept to Marine training. The Marine Crucible is a 54-hour non-stop life fire exercise peppered with long forced marches, sleep deprivation and other survival exercises, marking the completion of basic Marine training. After completing the Crucible, candidates would receive their eagle, globe, and anchor emblems to formally become Marines.

As a result of increased demands, the number of new recruits has increased to unprecedented heights. It's not only that the very high standards, demands and expectations didn't turn off candidates; they have attracted even more and better recruits.

To this date, despite its politically incorrect nature, The Marine Corps is the pride of the US military institution with a worldwide reputation.

And Let's Look At The Money Now

The median expected salary for a typical US Army Recruit during basic training is about $1,200 a month.

Starting with George Washington in June 1775, up until October 2009, there have been 198 Four Star Generals in the US military (Army, Navy and Air Force). It takes about 25-30 years of outstanding service to reach this position, and there is a limited number of four star generals.

And now the pay. A four star general, on an O-10 pay scale, makes between $14-16,000 a month.

So, a general makes about 12 times of what a new recruit makes.

In the world of commerce, CEOs make 3-500 times of what frontline workers make.

This is the problem.

The higher you go in the hierarchy, the more you get paid and the less you're responsible for what happens to the firm.

And there is one more difference between the military and civilian employment.

Every four-star general starts out as a private, cleaning toilets and other lovely activities.

Long gone are the days when CEOs have ever worked in the frontlines. School kids know they can jump the queue by obtaining their MBAs, and they are on their ways to the boardroom.

And this is what stabs moral in the heart and kicks integrity in the arse. This creates a kick-down and kiss-up environment.

Many years ago Frederick Taylor in his Scientific Management assumed that humans were lazy slobs who hated working and would prefer to drink, smoke pot and watch soap operas and reality shows on TV all day.

Therefore management's job is to force, coerce, whip and threaten people to get any work out of them.

According to Taylor, people try to avoid responsibility and must be tightly controlled. They must be managed with a cold steel heart, an iron hand and a wooden leg.

Since humans crave security, people can be manipulated with the notion of security. They must be paid just enough so that they have to come back for another day of drudgery to earn money in order to live another day. This way they can't afford to leave even if they hate the job.

And this is what we see in so many firms today. They operate as manufacturing plants churning out canned deliverables.

But this is not knowledge work, the kind of work what consulting firms are supposed to do.

So, what's the logic in buying the most expensive goldfish and putting it into the toilet bowl because we want to skimp on the fish tank?

So What Else Is Possible?

Based on what I've seen, I believe in buying "budget" goldfish and also buying a kick-arse fish tank. In a better environment that fish will come truly alive. That's the nature of human beings.

In American writer, John Steinbeck's (of Mice and men) words...

"It is the nature of man to rise to greatness if greatness is expected of him."

What I've learnt over the years is that instead of coercing, whipping and threatening people to perform better, I can manipulate the environment that is more conducive to peak performance.

I set the bar higher than it has ever been set before. I stretch people mentally, emotionally, spiritually and physically, so as a result of being stretched and see what is possible for them, they rise to the challenge, and not only want to stay there, but want to rise even higher.

And this has nothing to do with the widely accepted dogma of pay for performance.

Humans expend the same amount of physical and mental effort in their work as in their private lives. If they are inspired by the firm's mission, task, colleagues and the environment, they can be self-directing to achieve great feats.

People don't need this pay for performance bullshit. People are willing to do a lot for the sense of job satisfaction and contributing to a great cause. People naturally seek and accept responsibility.

But this approach calls for participative management, and since many firm leaders are mere bosses, they can't pull it off.

On Summary

In consulting firms, end results are created by teams of people not by individuals.

Pay for performance assumes that one person is in full control of creating specific results, therefore the compensation for that result can be attributed to one person.

No. It's always a team effort, and it's hard to exactly establish each person's contribution.

Let's look at the example of a sales team in a consulting firm. It's a retarded model to use dedicated salespeople in consulting firms, but coward firm leaders who want to dump responsibility to underlings, this is a commonly used approach.

But I have some questions here...

Can these people be made financially responsible for selling something for which there is no market? In this case the firm's leaders grossly misread the market. Whose fault is that?

Can these people be made financially responsible for selling services which are out of alignment with what the market is looking for?

Can these people be made financially responsible for shoddy post-sale client service or project management?

Can these people be made financially responsible for selling services that the firm hasn't bothered to market properly? This is a typical small firm illness.

Can these people be made financially responsible for selling services for which the marketing people have never generated sales leads?

Can these people be made financially responsible for ill-priced services priced by partners who know nothing about pricing?

Selling anything is the climax of the buying cycle. But the cycle doesn't start with the climax. And the climax can only happen if the other steps are in place.

Think of lovemaking. You have to do a few things, and it takes some time before you can go south and your spouse actually enjoys the process.

And the way I see it is that if one group gets paid for performance, it only happens because another group in the firm wants to get paid regardless of performance.

Haven't you noticed this problem in smaller businesses?

Dumbarse owners who couldn't sell themselves out of a piss-soaked paper bag beat their chests that they pay only for performance, but nevertheless they pay themselves for the lack of performance. What sort of double standard bullshit is this?

They do the pay for performance scheme because they erroneously think this motivates people.

Let's assume he's right, but in reality he's not.

But by the same token, what motivates business owners to help and support their salespeople to sell the company's products and services?

Nothing. Not a sausage.

So How To Pay Your People Then?

I believe consulting salaries should be based on three ingredients...

Base salary: The base salary demonstrates whether the employer is a winner or loser. I'm a bit surprised by ads where companies call themselves world-class but want to pay minimum wage or expect people to work on full commission.

I believe in that investment creates commitment and commitment leads to improvement. And whoever is the main beneficiary of the improvement must have a skin in the deal.

Personally I also believe in paying everyone the same amount. No, this is not socialism. I expect the same 100% from everyone, so I offer the same for everyone.

Revenue bonus: This bonus is based on a pre-established percentage of firm-wide revenue, and, as you might guess, I suggest clients that they keep it the same for everyone.

I do this because I want to reward the synergy of the team not individual performance. Depending on the collaboration between your people, 1 plus 1 can be either 2 or 11. It's just a matter of how the ingredients relate to each other. And, personally, I prefer 11.

Professional development: This is a multiplier on the bonus. For every fiscal quarter or year, every associate has specific professional development objectives. At the end of the fiscal quarter or year, the associate's achievement on her professional development goals is assessed, and evaluated on a percentage basis. And this percentage of her bonus gets paid to her.

And this requires some explanation.

Now we can see that work is split between doing paid work today and acquiring knowledge to be able to do high-value paid work in the future.

Associates can maximise their bonuses by increasing firm-wide revenue, but they neglect planting the intellectual seeds for the future.

And this leads to declining intellectual capital and intellectual property (i. e. documented intellectual capital) in the firm, and this is a disaster in any PKF (professional knowledge firm).

So, what is the mandate on pay for performance?

In my view, for the sake of profitability, avoid it like the plague. People don't work for money but in support of causes that are bigger than themselves.

Yes, there are people who work for money, but I wouldn't want to have them in my firm or on my team.

So, what do you think about it? Feel free to voice your thoughts in my blog.

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Recommended Reading

Pricing With Confidence: 10 Ways To Stop Leaving Money On The Table

By Reed Holden and Mark Burton

By Reed Holden and Mark Burton

Pricing is undoubtedly one of the most complex aspects of running a consulting firm.

In various other articles on this site, we've already established that selling manual labour on an hourly or cost plus materials basis is not consulting, and the only truly honest way of pricing consulting services is value pricing.

Basically, as the title suggests, the book explains the 10 ways knowledge professionals, including consultants, leave money on the table and what they can do about it.

One of the greatest points of the book is that it clearly explains three distinctive pricing terms that consultants often mix up and, as a result, make pricing mistakes of biblical proportions.

Place your order with Amazon.com for Pricing with Confidence: 10 Ways to Stop Leaving Money on the Table. You'll be glad you did.