The Seven Banes of Pay For Performance Systems in Consulting Firms

The Seven Banes of Pay For Performance Systems in Consulting Firms

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

It seems nowadays clients should have the right to stone some of the consulting firms that fail to deliver the value they have promised.

So, what causes this discrepancy between value promised and value delivered?

It seems the problem lies high in the management hierarchy of consulting firms.

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 respected experts and potential clients wanted to talk to them to define whether or not to hire the firm.

Peer-level connections between buyers and sellers were vital. Senior managers from buyers’ companies were interacting with high level people in consulting firms.

Then someone had an incredible idea to be more efficient…

“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 created an attitude among many consultants that selling their services is far too low for their stature, and they’ve decided to assemble separate sales forces on a pay for performance basis to bring in new business.

These salespeople are not subject matter experts. They are salespeople who sell used cars for a while then used coffins for a while and now they sell consulting services.

There is a mistaken belief that there is direct correlation between salespeople’s commission and the revenue they generate.

But not all revenues are equal, and not all clients are equal.

And to maximise salespeople’s revenue performance, some firms include various closes in their contracts to cap salespeople’s commissions.

But have we thought about the attitude of these commissioned salespeople who are hired as mercenaries, and what happens when they start operating as mercenaries?

Most consulting firms have never looked at the dark side of pay for performance.

So, it’s time we do here and now…

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

Consulting firms are supposed to be a non-compartmentalised business structures.

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. Which fibre do you want to reward for helping you to survive the winter?

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. It’s always a team effort both on the buyer and the seller sides.

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 the kind of engagements with whom they can do their best work.

But when salespeople are in a pay for performance system, they don’t care about what kind of client they land. They need their commissions to pay the mortgage, the kid’s college tuition and put food on the table. So all they need is a live body with a cheque in hand that clears the bank, so they get paid. From their standpoint, the rest is just irrelevant.

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

And even if they land a troublesome clients, who cares? It’s the consultants who have to work with them not the salespeople.

2. Focusing On What The Seller Wants

We only have 100{919468b76a1b111b1791bdf3e51426d8562c963af300c016649515c15309dd6c} of our focus and energy. The more salespeople focus on what they can get out of the deal, the less they 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… often the wrong ones.

And in a reward for performance environment, which is really a scarcity-driven environment, salespeople have to focus on what they can get because they’re out there on a sink or swim basis. If they don’t make the sale, they starve.

3. Neglecting The Firm’s Long Term Success

If salespeople are paid for short term “quick buck” performance, they can’t focus on the firm’s 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 clients and the margin on their projects.

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

4. Competing Not Collaborating With Colleagues

Now if salespeople are paid on an individual basis for producing some quick buck, then what is their incentive to help their colleagues?? Nothing! Not a sausage. Actually they have a vested interest in stealing opportunities from my colleagues so, they can look better in their managers’ eyes and make more money.

The way I see it, there is plenty of competition in the marketplace outside the firm, so all the associates had 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 salespeople are in a pay for performance system, they know they don’t really belong to the firm, and if something undesirable happens to them, they can’t expect the firm to stand up for them. They are 100{919468b76a1b111b1791bdf3e51426d8562c963af300c016649515c15309dd6c} expendable.

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 salespeople don’t belong to the firm, then they don’t have to offer their performance exclusively to the firm. They are essentially free agents, so whatever business they conjure up, they are free to offer it to anyone. As mercenaries, they are free to offer opportunities to anyone that they see fit and that pays better than their 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 the manager of these salespeople, you have no right whatsoever to expect your salespeople to produce anything. But you have the right to hope that they do. You don’t pay them, thus they don’t even belong to your firm.

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{919468b76a1b111b1791bdf3e51426d8562c963af300c016649515c15309dd6c} of the value they’ve produced, and 85-90{919468b76a1b111b1791bdf3e51426d8562c963af300c016649515c15309dd6c} 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{919468b76a1b111b1791bdf3e51426d8562c963af300c016649515c15309dd6c}, should also make an investment in the production capability. And that’s a base salary to demonstrate that this salesperson actually part of the firm.

This is why the money firms eventually earn is called a return on investment. The current commission structure feels like return on someone else’s investment. A return for the firm on salespeople’s investment of 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

I while ago I watched a presentation by Dan Pink, entitled “The Surprising Science Of 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.”

So, high individual performance doesn’t necessarily translate to high firm-wide performance.

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 pay for performance.

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 supposed to be too dumb to produce anything without the close scrutiny of superior life forms called management. And they’re supposed to be too lazy to move their butts without the proverbial carrot and stick.

But it seems people with autonomy, mastery and purpose do.

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.

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