Owners Need Incentives, Too

Feb 01, 1993

Several recent experiences with consulting engineering firms lead me to believe that it’s time all of us looked at our compensation schemes and put some incentive back into the business— especially for principals. The desire to keep costs down and stay out of debt may be systematically destroying the very conditions necessary for our firms to be successful. We recently helped an old-line, well-respected company with multiple owners to prepare a strategic and operating business plan. The principals of this firm were discouraged by the disproportionate risk-reward ratio of ownership in their firm. One principal had even gone so far as to sell his stock, even though he still wanted to stay on as an employee. Although the company had gone through some tough times a number of years back, they had worked themselves out of the hole nicely. Yet, the owners still weren’t taking any significant profits out of the firm, and none of their salaries reflected their ownership in the firm (something we agree with as a good practice, by the way). Any of them could have earned as much or more as an employee somewhere else. One reason for this was that the founder of the company, near retirement, was very conservative and wanted to operate the firm responsibly, which meant building up cash and retaining earnings so as to ensure their capitalization and future viability. As we became more familiar with the company, we learned that this ultra-conservative approach toward bonuses was discouraging to the rest of the company’s partners. As is the case with any design or environmental consulting firm, it took a 110% commitment from the principals to capitalize on all of the opportunities before them— after all, if the principals didn’t feel the opportunity of their business, how would anyone who worked for them? But the lack of any financial incentive to put in this extra effort ate away at the principals’ enthusiasm. It was also de-motivating to the professional staff, who, while very secure in their jobs (and well-paid, thanks to the company’s practice of paying straight-time overtime for all hours over 40), didn’t for the most part have any “fire in their bellies” or push themselves to optimize the company’s profits. How could this company provide incentive to its owners and staff, while still respecting the founder’s wise goal of keeping the company on a solid footing? Our solution was to make two simple changes. First we convinced the founder/CEO to set aside a specific, pre-determined percentage of the company’s profits to be paid out to owners halfway through the new year and again at the end of the year, according to the company’s accrual-basis performance. We also eliminated overtime for exempt (in this case, all professional) staff and created a new bonus program for them which also paid out profits on a twice per year schedule. Profitability and the accrued bonus pool will be posted monthly. Since this plan was implemented, several principals of the firm have called to tell me that these steps alone have revitalized their own spirits and their staff’s morale. As the new year gets underway, they are working harder than ever because for the first time, they know what will happen if they can put something on the bottom line. It turned out that the professional staff was very receptive to the elimination of paid overtime, since it meant they now stood the chance of getting some significant bonus payouts twice per year. The moral of the story: Sometimes, in our zeal to preserve what we have, we destroy the motivation and the intangible, extra effort that a professional service firm needs out of everyone—especially principals— to make any serious money. Unfortunately, this non-incentive culture is so pervasive throughout our business that I am hearing more and more often from both owners and employees alike that “you can’t make any money in the design business.” That attitude is dangerous! Each person has to believe individually that they can affect the bottom line and benefit from it in a tangible way. Originally published 2/1/1993

About Zweig Group

Zweig Group, a four-time Inc. 500/5000 honoree, is the premiere authority in AEC management consulting, the go-to source for industry research, and the leading provider of customized learning and training. Zweig Group specializes in four core consulting areas: Talent, Performance, Growth, and Transition, including innovative solutions in mergers and acquisitions, strategic planning, financial management, ownership transition, executive search, business development, valuation, and more. Zweig Group exists to help AEC firms succeed in a competitive marketplace. The firm has offices in Dallas and Fayetteville, Arkansas.