Aktuelle InSights

By Andy Klose - Associate Partner, Head of Advisory

Traditional single-track career and salary models often employ wide salary bands, which can lead to pay compression and employee dissatisfaction. In contrast, multi-track career and salary models offer a clear path for advancement and compensation, fostering motivation and transparency. This article explores the drawbacks of wide salary bands and the benefits of adopting multiple career tracks with defined salary increments.

The Problem with Wide Salary Bands

Wide salary bands within a single-track career model can create significant challenges for organizations and their employees. These bands are typically characterized by overlapping salary ranges that are often wider than the market average.

These wide salary bands can lead to several issues:

1. Pay compression and low pay hygiene: Wide salary bands result in pay compression, when salary increases over time do not adequately reflect differences in responsibilities, role, experience, or performance. This compression can cause high-performing employees to feel underappreciated and undervalued, leading to decreased motivation and loyalty. Moreover, the lack of clear pay hygiene — meaning transparent and fair salary structures — can result in dissatisfaction and disengagement.
2. Confusion and false expectations: The lack of clarity regarding pay increases and promotions often leads to confusion and false expectations. Employees may expect significant pay increases upon promotion, only to be disappointed by minimal adjustments. This can result in frustration and a sense of stagnation, particularly for high-performers who feel their efforts are not adequately recognized.
3. Sense of unfairness and demotivation: Employees may perceive the wide salary bands as unfair, especially if they see colleagues at the same career level (even if roles and performance may be different) earning significantly different salaries. This perception of unfairness can demotivate employees, reducing their productivity and commitment to the organization.
4. Lack of transparency and meritocracy: The single-track model frequently lacks transparency, as the pay grid is not shared with employees. This opacity allows for pay increases to be subject to discretion, leading to end-of-year negotiations that can descend to the level of haggling. Such practices undermine meritocracy, affecting employee motivation and loyalty.

Examples of Single-Track Model Issues

Theoretical potential vs. reality (1): In theory, an employee could move from the bottom of one salary range to the top of the next, a potential increase of approximately 250%. However, in reality, the company may offer just an 8% raise.

Discretion vs. planned pay advancement (2): A high-performer may expect to receive a 15% increase based on experience from previous promotions, while the company may prefer to offer just an 10% raise.

Frustration with pay disparities (3): Employees can become frustrated when they learn that colleagues at the same level are earning significantly more, e.g., with Base Salaries several times higher, especially if there is not much more differentiation than career level (e.g. to understand how roles may differ).

The Benefits of Multiple Career Tracks

In contrast to the single-track model, multi-track career and salary models offer a more structured and transparent approach to compensation. The multi-track model defines specific roles and levels within the organization, each with a set Base Salary or “spot value” along various distinct tracks.

Key advantages of the multi-track career and salary models include:

1. Clear pay development: For each track and level, Base Salary is clearly defined, with increases to the next levels outlined as specific percentages. This clarity creates a straightforward path for employees, allowing them to understand exactly what they need to achieve to advance.
2. Transparency and clarity: The pay grid in a multi-track model is typically transparent, providing employees with a clear understanding of their pay potential. This transparency eliminates confusion and sets realistic expectations for salary development.
3. Reduced need for negotiation: Since the company adheres to a set pay grid, there is little need for negotiation. Variance in compensation is based on KPI achievements and variable bonus pay-outs, which reflect performance differences and motivate high-achievers.
4. Focus on meritocracy: The model based on "spot values" promotes a meritocratic environment, as seen in many leading strategy consulting firms. Employees know what Base Salary to expect at the next career level, shifting their focus to achieving promotions rather than negotiating salaries.

Optimising Career Tracks

The transition from a single-track career and salary model with wide salary bands to a multi-track model with defined salary increments offers numerous benefits for both organizations and employees. By providing clear pathways for advancement and compensation, companies can foster motivation, transparency, and a meritocratic culture that attracts and retains top talent.

The multi-track model addresses the challenges posed by wide salary bands, creating an environment where employees are motivated to excel and achieve their career goals.

We are at your disposal for further questions and suggestions regarding how you optimally design career tracks (and/or remuneration systems) for your company.

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Andy Klose is an Associate Partner at Vencon Research International and heads the firm’s consulting unit.

Vencon Research International is a leading provider of compensation benchmarking and research as well as of compensation and performance-related consulting services for professional service firms, especially for audit and tax, management consulting, and IT services firms. Vencon Research International provides services to a full range of clients in more than 75 countries worldwide and is proud to name more than 85% of the world’s major consulting and/or professional services firm its clients.

Disclaimer: The example provided is simplified, and these are not suggestions but ideas. Any real-life application or implementation requires an in-depth analysis of the client’s circumstances, along with a custom-designed solution. Decisions regarding compensation models should be made with careful consideration of the organization’s specific needs and objectives.

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By Cara Solorzano - Business Development

Stay on pulse with HR trends in the consulting industry as our advisors share the latest insights and strategies gleaned from engagements with firms worldwide.

1. Budget considerations

Many consulting firms are being cautious with their company spending and HR budgets are not immune to imposed constraints. Such budget considerations seem to affect small to mid-size consulting firms more than larger and global players.

2. Both consulting firms and their clients err on the side of caution

Consulting firms are cautious due to a general sense of insecurity surrounding market stability, compounded by clients hesitant to embark on consulting projects, often delaying confirmation and constraining project size and scope in the name of “cost saving”.

3. Q1 offers promising talent in 2024

HR leaders tell us 2024 is offering up a rich pool of consulting talent in Q1. Hirers are excited about having options, something denied them for the past few years as outstanding talent seemed rare to find.

4. Candidate green demands

New hires are very focused on company sustainability and are questioning not only which “green” Employee Benefits a firm may offer, but also the company’s eco-friendly operating policies.

5. Office presence, on occasion

Many firms have cut their physical offices (one client cut 70% of physical locations) and are developing new strategies to maintain team spirit and social interaction. One has endeavored to build “chit chat” culture into video comms: “setting up calls can be daunting, so we are starting to call employees outside of fixed meeting times to simply say hello and have a cup of coffee, like we would in the office”. Another firm that sees a majority of work done remotely has recognized that many younger employees are still keen to come into the office due to their living situations (shared flats or smaller apartments), or simply the desire for more “in-person” connection, and has set up a system allowing consultants to book the times they intend to spend in the office, where space may otherwise be limited.

6. No office, no oversight?

Many consulting firms are concerned about employee output, especially in the context of increased remote work. One client informed us that managers have created a due diligence system to account for employees’ timelines. If an employee is falling behind their quotas they set up one-on-ones and set appointments to review both prioritization and strategy on accomplishing both goals and tasks.

As a trusted HR partner for the consulting industry, Vencon Research is here to help you unlock the full potential of your team. Contact us to learn more about how we can support your HR needs and drive success for your business.

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By Andy Klose - Associate Partner

The rise of remote work after the COVID-19 pandemic has led to discussions among consulting firms about how to adjust pay for remote employees. This article explores the complexities of compensation strategies for remote work, including different pay models, remote work policies, and long-term perspectives within the consulting industry.

Exploring Pay Strategies

The question of whether consulting companies employ different pay strategies for their remote employees is a common one. To address this, we must first consider the various pay strategies employed by consulting firms (there are other as well as hybrid strategies in place):

1. Employee location-based pay: In this approach, companies adjust salaries based on the cost of living in the employee’s location (which often applies also to remote employees). This ensures equitable compensation, with higher salaries in high-cost areas such as San Francisco.
2. Office location-based pay: Some companies base employee salaries on the location of their offices, considering the local cost of labour which is not only driven by cost of living but also by talent supply and demand.
3. Country-based Pay: Another strategy is to set salaries based on a national average or maintain consistent pay across all locations in the country. While straightforward to implement and to maintain consistency across the organization, this approach may not account for regional cost-of-living differences.

Given these pay strategies, companies with employee location-based pay strategies are less likely to differentiate pay for remote employees. Conversely, those with office location-based or country-based pay strategies may be more inclined to do so.

Remote Work Policies

Furthermore, the diversity of remote work policies further complicates the issue (there are other as well as hybrid policies in place):

1. Fully remote: Some companies allow employees to work entirely remotely.
2. Hybrid remote: Many companies offer a blend, where employees work remotely part-time and attend office meetings or collaborations as needed.
3. Remote-friendly: Others permit remote work on an as-needed basis or with managerial approval.

Therefore, companies that have fully remote or hybrid remote work policies are less likely to differentiate pay for remote employees. This means that companies with remote-friendly policies seem to be more likely to consider different pay to their remote employees.

Long-Term View on Remote Work Policies

Additionally, consulting companies’ long-term view on remote work policies vary:

1. For remote work: Advocating for remote work indefinitely, some firms commit to embracing its advantages.
2. Against remote work: Conversely, other companies aim to return to pre-pandemic office norms, underscoring e.g. the value of in-person interactions.
3. Undecided: Certain companies are struggling with the decision of whether to continue remote work or return to the office. They recognize the challenges of reversing current remote work trends or are unsure about the potential benefits, such as increased efficiency.

Only firms in the first category, which are for remote work, are likely to consider pay differences for their remote employees. The other two groups are less likely to do so due to a possible transition.

Conclusion

All in all, most consulting companies remain hesitant to implement different pay strategies for their remote employees due to strategic and ethical considerations:

1. Strategic considerations: Companies typically choose office locations strategically, independent of individual employee locations, to achieve business metrics like revenue and margin. Thus, business outcomes remain unaffected by remote work. For example: A consulting company will charge the same billing rate to a bank in Manhattan regardless whether the consultant will be working in the New York office or remotely.
2. Misusing financial leverage: Paying remote employees less could be seen as an attempt to force them to return to the office. Transparent communication about the reasons for this request would be more effective.
3. Efficiency evidence: There is little or conflicting evidence (depending on the sources) that a full return to the office improves long-term employee efficiency.

In summary, creating suitable payment strategies for remote work requires thoughtful consideration and customised solutions. If you and your team require assistance, we are ready to provide support and expertise. Our aim is to ensure that your compensation approach aligns with your organisational goals while promoting fairness, engagement, employee satisfaction, and productivity.

Andy Klose is an Associate Partner at Vencon Research International and heads the company’s consulting unit.

Vencon Research International is a leading provider of compensation benchmarking and research as well as of compensation and performance-related consulting services for professional service firms, especially for audit and tax, management consulting, and IT services firms. Vencon Research International provides services to a full range of clients in more than 75 countries worldwide and is proud to name more than 85% of the world’s major consulting and/or professional services firm its clients.

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By Philip Thomas – Senior Consultant, Advisory

Increasing demand for specialist knowledge across a range of industries means that generalist consulting firms are having to adapt in order to compete. The solution of choice is an increase in the hiring of specialist talent. This calls for evolution not revolution. Firms that evolve successfully and first will be well placed to be at the front of the race for such talent.

An increasing demand for specialisation

Across all major industries, businesses are hurting from a severe lack of internal specialist expertise. The open labour market is unable to satisfy their need for talent. As a result, they turn to consulting firms and demand ever-increasing levels of specialisation to ensure the quality of the tailor-made solutions required. For consulting firms, client impact increasingly requires deep knowledge in niche areas such as digital, blockchain, cybersecurity, climate and sustainability, data science, etc.

Specialist consulting firms, by their nature, may be well placed already. Generalist consulting firms, however, need to react if they have not already done so.

Tapping into the specialist talent pool

Not all personalities suit the traditional generalist consultant role. Requirements to resolve poorly defined problems, to be flexible enough to fill any resource gaps and to work towards leadership positions where people management and dealing with the unknown is a common theme is not only not suitable but also simply not desirable for some individuals. Many such individuals are actively searching for a different career path and they may well be looking to specialise.

Specialists (also sometimes referred to as experts or subject matter experts), with their deep subject knowledge, have strong problem-solving abilities with respect to their speciality. By nature of experience and proven, known solutions, their approach to work is streamlined and efficient. Given their subject matter passion, they actively seek specialist roles that suit their skills, interests and career goals best rather than force fitting themselves into alternative career scenarios they may consider less satisfying.

When given the opportunity to do so, specialists find places to excel. They find a home where their talents thrive and their subject matter passion can be nurtured and maximally leveraged.

Leading generalist firms are already evolving

A number of generalist consulting firms, ahead in the rapidly advancing game, have already partially evolved. They have recognised that no single career path suits all possible talent. Such firms are becoming more flexible and creative with respect to offering differing, alternative types of careers.

Specialist career tracks are now being offered by increasing numbers of generalist consulting firms, as well as many of the top-tier strategy-oriented firms, including Bain, BCG and McKinsey. These specialist tracks typically differ from generalist tracks in a number of ways, including:

Less client-facing time: Specialists are typically less client facing than generalists, often working across multiple project teams while focussing on the same topic.

Career path: The path to partnership is not yet common. In many cases Specialists will not have a path to partnership. In these cases, career levels before partnership are viewed as landing positions and this was historically accepted by the incumbents. However, with the large increase in the number of specialists working for consulting firms, more and more firms are developing specific tracks, which do provide specialists with a path to partnership.

Progression timeline: The timelines for progression on specialist tracks are less rigid. There is often no up-or-out policy. Actual timelines can vary considerably from very quick to relatively slow.

Performance evaluation: While performance expectations are broadly similar to generalists (i.e. utilisation), a specialist’s knowledge and expertise form a much more significant portion of their evaluation and therefore more heavily influence their ultimate success.

Pay: Many firms offer comparable pay. However, specialists carry high credibility due to their deep level of knowledge and experience. This may allow consulting firms to charge higher fee rates for specialist services, so in some cases specialists are able to demand higher salaries. Interestingly, at the most ‘senior’ career levels, specialists may currently lag behind their generalist peers.

Aside from dedicated specialist tracks, many firms are also hiring more specialist consultants but on generalist tracks while allowing for increased specialisation.

Challenges on the road to specialisation

Generalist consulting firms wanting to catch up with the trail blazers are faced with two key and immediate challenges. Those being the limited supply of specialist talent and the need to evolve in order to attract and retain such talent.

Key Challenge #1: The race for specialist talent is already well under way with some firms setting an early pace while others are yet to leave the starting blocks. The mad dash to the always moving finish line is yet to begin. When it does, the intensity of the race will rapidly increase as more and more firms attempt to attract talent from a decreasing supply of specialists.

The longer firms wait, the harder it will become for them to secure the talent they need to compete. To compound the problem, once the supply of specialists starts to run dry, it may take significant time before it is replenished considering the time and effort it takes to reach a certain level of specialisation.

Key Challenge #2: Generalist consulting firms need to become more attractive to specialists. Firms will need to evolve in order to attract the increasingly confident and vocal specialist labour force. Robust and competitive specialist career tracks, sufficiently attractive to specialists but not to the detriment of generalists, must be created and installed. Informed action by firms should be decisive and taken before too long or they may get left behind.

Some firms have a healthy head start with their evolution in this respect. However, with such a dynamic situation, even those that have paved the way so far would do well not to rest on their laurels. We also believe signals coming from the labour market show that candidates are demanding more bespoke career tracks beyond the existing generalist track.

In short, consulting firms should not be asking what specialists can do for them, but what they can do to become attractive to the specialists.

Evolution not revolution

The foundations built on generalist consultants are solid and the demand for the broad expertise of generalists will not disappear. Client demand for specialisation, however, does necessitate the evolution of generalist consulting firms. They will need to evolve by harnessing the power and deeper expertise of specialist consultants. Those firms that fully embrace the importance of specialists and those firms that make themselves more attractive to specialists by offering desirable and specific career tracks will have a major advantage in an increasingly competitive race.

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^{Note: We use the term specialists in this article for simplicity and to avoid inferring that generalists are not experts in their own way.}

For more information on this topic or on how you may successfully respond to the issues raised in this article, please contact Vencon Research – as always, we are happy to assist you.

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By Andy Klose - Associate Partner

In this series of articles, we are highlighting an aspect of remuneration strategy that is often not given sufficient attention: The ratio of fixed and variable pay to total cash compensation (also known as "pay mix").

In Part 1 of this series, we explained why the pay mix can be the defining differentiator, particularly from the perspective of attracting and retaining employees.

In this Part 2 we will discuss how pay mix affects the financials of firms, especially with regards to personnel costs. In the upcoming Part 3 we will examines how pay mix should be adjusted in relation to the total cash compensation offered and how benchmarked market percentiles are the most effective indicator of competitive positioning. And, in the final Part 4 we will assess how pay mix may influence firms’ culture and performance, we will examine how pay mix may influence firms’ culture and performance.

Part 2: Bottom line up front:

The higher the total cash compensation, the higher the variable pay as a proportion of total cash compensation (or in other words, the pay mix is "riskier" because a larger proportion of pay is performance related). In companies with a well-designed performance appraisal system, underperformers may "finance" the additional variable pay needed to reward overperformers. But the cost effect is only one consideration: companies will achieve significantly better overall results if more employees over-achieve their targets, which will also have a positive impact on the bottom line.

Introduction

For professional services firms in particular, hiring the right people, motivating them to perform at their best and retaining top talent are critical to success.

In an ideal world, the solution would be very simple: companies pay their employees the highest salary relative to all other “competitors for talent” (which could be market participants within the same industry, but also in other sectors) in the hope of attracting and retaining the best performing employees in the market.

In the real world, however, the interests of stakeholders other than employees, such as the owners of the company, stand in the way: owners are interested in sustainable profits and above-average growth rates, and are therefore generally only prepared to pay above-average salaries to employees if they also perform exceptionally well.

Pay mix as a means of offering higher total cash compensation

For this reason, higher pay - in certain jobs - is usually strongly or directly linked to the achievement of results and performance. In professional services firms, especially for client-facing or sales staff, this is often achieved through variable pay components such as bonuses.

Generally, there is an inverse relationship between the amount of total cash compensation and the ratio of fixed to variable and total cash compensation (hence, the pay mix): The higher the total cash compensation, the higher the variable pay relative to base salary and total cash compensation (or in other words, the “riskier” the pay mix).

The following example (Table 1 and Exhibit 1) illustrates this: Assume that the following three offers relate to comparable positions with comparable future prospects and development opportunities, etc., offered by three comparable companies with similar brand, status, market and growth prospects, etc.:

In the example above, Firm 1 offers the highest total cash compensation (100) with the lowest base salary (60) and the highest ratios of variable pay to base salary (67%) and variable pay to total cash compensation (40%). On the contrary, Firm 3 offers the lowest total cash compensation (90) with highest base salary (70) and the lowest ratios of variable pay to base salary (29%) and variable pay to total cash compensation (22%). Firm 2’s offer is in between the other two offers. In essence, the higher the total cash compensation offered, the more money is “at risk” (due to performance-related variable pay).

Performance appraisal and pay mix

Now, we will take a closer look at how pay mix also affects the financials of companies, especially with regards to personnel costs. The following example (Table 2) uses the same three offers as above:

As illustrated in the example above, when analysing variable pay (which in most cases is “pay for performance”), it is also important to address the issue of performance appraisal. In our practice, we often see that companies are more inclined to use a more sophisticated system to assess individual performance when variable pay is more relevant, i.e. higher in relation to base salary and/or total cash compensation. On the other hand, companies tend to spend less time assessing individual performance when variable pay is relatively low (or some companies do not offer variable pay based on individual performance at all, but rather, for example, a bonus based on company results or performance).

The amount of effort put into individual performance appraisals has an impact on the outcomes for both the employee and the organisation: A more detailed performance appraisal may also lead to more diverse performance outcomes, i.e. performance outcomes may look rather “bell-curve” shaped, i.e. some high performers, many on target performers and some low performers. Less sophisticated performance appraisal systems on the other hand will often lead to more heterogeneous performance results (i.e. a narrower but steeper bell-curve with fewer high and low performers). And, in companies where individual performance is not assessed, there will be no differentiation at all. Accordingly, the expectation is that all employees will have the same level of variable pay (or bonus).

In the example above, assuming that all employees perform at 100% of their targets, Firm 1 is expected to have the highest total personnel costs, Firm 3 the lowest and Firm 2 in between. On the other hand, the more sophisticated the performance appraisal, the greater the potential to differentiate between employees and thus “optimise” personnel costs, while still paying good and exceptional performers according to their contribution.

More diverse distribution of performers in performance appraisal

On the other hand, from the company’s point of view, a more differentiated assessment of individual performance usually results in a potentially wider range of variable pay costs, i.e. if more employees over-achieve their targets, the company will have to pay out more variable pay. Conversely, if more employees do not achieve their targets or under-achieve, the company will have to pay out less variable pay. Compared to the example above where all employees meet their targets, there may be a “cost optimisation” effect, i.e. part of the variable pay may be “saved” as a result of some employees’ underperformance, which can be paid (in part) to the overperformers. Based on the same three offers from the previous example, the following example (Table 3) examines three scenarios in which the distribution of achievers is changed:

In the example above, Firm 1 uses a more detailed performance appraisal, which is likely to result in more diverse performance outcomes: more high performers, less on target performers and more underperformers compared to Firm 2. In the case of Firm 3, where individual performance is not assessed, there will be no differentiation at all.

Obviously, Firm 1 has the highest variance in its total cost of variable pay (from 360 to 440 in the three scenarios). Company 2's variance in terms of total variable pay costs is lower than Firm 1's (from 270 to 330) and Firm 3 will not see any change in its budget if the performance of individuals changes. This also means that Firm 1 and Firm 2 can “save” up to 10% of their variable pay budget if more people underperform (which is by no means a target, but if it happens, it also saves money).

Personal performance and pay mix affect personnel costs

Since base salary is a “fixed” component of personnel cost, variable pay is the only component which may fluctuate according to distribution of performers, and thus, so will the total personnel cost (Table 4):

In this example, Firm 1’s total budget for personnel costs will vary the most (between 960 and 1,040), Firm 2’s will vary a little less (between 920 and 980) and Firm 3’s will not vary at all.

The cost effect is only one aspect: Firm 1 will achieve significantly better results in the first scenario if more employees over-achieve their targets, which will also have a positive effect on the company’s results, growth and so on.

Conversely, Firm 3 has no impact on its personnel costs, regardless of whether or not its employees perform. On the other hand, Firms 1 and 2 may save some personnel costs when employees do not perform.

Finally, all the above concepts are less relevant (or even counterproductive) for “creative” jobs or for jobs where meaningful and measurable metrics cannot be defined (such as some administrative jobs).

In summary, the pay mix can also have significant implications for both the employee (in terms of “money at risk”) and the company (e.g. higher personnel costs if more employees overperform and vice versa). In companies where there are clear performance appraisal systems in place, underperformers may “finance” the additional variable pay needed to reward overperformers. But the cost effect is only one consideration: Companies will achieve significantly better overall results if more employees over-achieve their targets, which will also have a positive impact on the bottom line. On the other hand, no differentiation at all in terms of personal performance can have a negative impact on the “motivation” of high performers (which will be discussed in more detail in Part 3).

We are at your disposal for further questions and suggestions regarding how you optimally design the pay mix (and/or remuneration systems) for your company.

Andy Klose is an Associate Partner at Vencon Research International and heads the firm’s consulting unit.

Vencon Research International is a leading provider of compensation benchmarking and research as well as of compensation and performance-related consulting services for professional service firms, especially for audit and tax, management consulting, and IT services firms. Vencon Research International provides services to a full range of clients in more than 75 countries worldwide and is proud to name more than 85% of the world’s major consulting and/or professional services firm its clients.

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