Principal Compensation

Oct 24, 1994

Deciding how to reward principals is a perennial problem. Spread out the rewards equally, and one principal is bound to feel cheated while another principal gets more than he deserves. Vary the compensation of principals, and you’ll probably hear complaints and in-fighting, and waste a lot of time with internal politicking. So how do you determine who gets what, and do it in a way everyone agrees is fair? Here are a few thoughts: Make sure every principal has a real job. A lot of the bickering I hear related to principal’s pay starts with a principal who is perceived by one or more of his peers as not carrying his weight. Every principal, just like every employee, should have a “real” job. To me, that means either being the CEO of the company, the CFO, an office manager, a department manager, a business developer, and so on. It doesn’t mean being a “free-floater” who essentially does nothing but go to meetings, call meetings, and take old friends to lunch at the club, but who really can’t point to any billable work, sales, or particular management accomplishments at the end of the year. Let the marketplace determine salaries. My belief is that salary should be set by what the marketplace as a whole is willing to pay for someone with a particular background. You should be close to the market— not significantly less, nor significantly more. Occasionally, I run into firms that pay salaries that are much lower than the market. This gives them a better-than-normal pre-tax, pre-bonus profit and distorts their sense of managerial well-being. I have also been involved with firms that thought they weren’t making any profits, when in reality they were paying their profits out in excessive salaries. There are several industry statistical sources on salaries that can help you determine what the “marketplace” standard is for a particular principal. These sources include D. Dietrich & Associates (Phoenixville, PA); the American Society of Civil Engineers (Reston, VA); the American Institute of Architects (Washington, DC); the National Society of Professional Engineers (Alexandria, VA); and Mark Zweig & Associates. These surveys are by no means a panacea, nor should they set absolute limits on what somebody can earn. But they can give you an idea of what’s normal for a principal in a particular position in a firm of the same size, type, and location as yours. Have the president/CEO/managing partner set the principals’ salaries, except his or her own. Have the board of directors/partners/stockholders set the president’s/CEO’s/managing partner’s salary. Base bonuses on multiple factors and use a formula to determine specific bonuses. Be sure to include overall firm performance and share of ownership in the equation, but leave some percentage or portion of “the pot” to address the individual’s contribution to the process— through the amount of work he or she has sold, profitability of the business unit he or she is in charge of, and so on. And although I didn’t always feel this way, as far as I’m concerned, the more you can quantify or “formularize” the incentive compensation system, the better off you’ll be. That way, everyone knows the rules, and you’ll hear less complaints. Just make sure you set up the right rules in the first place, because engineers, architects, and environmental professionals will figure out what they have to do to get rewarded under those rules, and do it. An example of a “bad” rule would be to pay unit managers’ bonuses based on the utilization or chargeability of their work group. You’ll end up with high chargeability, but lower multipliers. Every activity remotely related to the job will get charged to it, but eventually the resulting overruns will require much of that supposedly chargeable time to be written off. Paying all principals the same thing just because they are all owners does not work. No two people have exactly the same role, nor make exactly the same contribution to the firm. On the other hand, anyone not carrying his or her weight should be cut loose, even if that person happens to be a principal. With a company culture that relentlessly clears out the deadwood, you can afford to use some of the more “socialistic” reward schemes that dole out the rewards for principals more equally. Unfortunately, too many A/E/P and environmental firms do not have such a culture. Paying all principals the same thing just because they are all owners does not work. No two people have exactly the same role, nor make exactly the same contribution to the firm. On the other hand, anyone not carrying his or her weight should be cut loose, even if that person happens to be a principal. With a company culture that relentlessly clears out the deadwood, you can afford to use some of the more “socialistic” reward schemes that dole out the rewards for principals more equally. Unfortunately, too many A/E/P and environmental firms do not have such a culture. Originally published 10/24/1994

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