Latest InSights

By Philip Thomas – Advisory

Employee Stock Ownership Plans (ESOPs) in the USA offer benefits for both employers and employees. They have the potential to reshape the traditional employment relationship and contribute to a more inclusive and participatory culture.

For some US consulting firms, ESOPs may be the best and most viable means of allowing employees to become shareholders in the company.

Here we offer an overview of the potential benefits of ESOPs for both the employer and employee.

Advantages for the employer

The following are some of the key potential positives from an employer perspective:

• Increased employee retention and motivation - Employees with a stake in the firm are likely to be more committed and engaged.
• Increased productivity - Employees may well feel a stronger sense of responsibility and ownership in their work.
• Recruitment advantages - Potential employees may be attracted to the prospect of becoming owners and sharing in the company's success. In addition, ESOPs provide employees with an opportunity to accumulate wealth over time, especially as the value of the company increases, which can be an important part of an employee's overall compensation package.
• Tax advantages - In the United States, there are tax benefits for the employer as contributions to the ESOP trust are tax-deductible.
• Improved long-term company performance - ESOPs help to promote the goal of long-term success but not at the cost of short to mid-term success.
• Reinforcement of positive corporate culture and values - Employees are more likely to embrace a culture of teamwork and collaboration when they have a stake in the firm's performance.

Advantages for the employee

The following are some of the key potential positives from an employee perspective:

• Gaining an ownership stake - When employees become partial owners of their firm, it can create a sense of pride and loyalty, increase job satisfaction and strengthen connections to the organisation.
• Increased financial rewards - As the firm performs well, the value of the ESOP shares may increase, providing employees with financial rewards and the potential for wealth accumulation.
• An additional stream of retirement savings - ESOPs can serve as an additional and significant retirement savings vehicle. They allow employees to accumulate further wealth over their tenure with the company and help to offer a diversified set of incentives.
• Job Security - Employees may feel more secure in their jobs as the firm’s ultimate success will be more likely given the additional financial incentives for all individuals.
• More desirable culture - Employee-owned companies often foster a unique company culture based on shared ownership values, teamwork, and collaboration. Employees may find this culture more fulfilling and supportive.
• More transparency from the firm - ESOPs often promote transparency in financial matters and firm performance, as employees have a vested interest in understanding the factors affecting the value of their ESOP shares.

ESOPs for mutual growth and success

Through the alignment of individual and organisational interests, ESOPs pave the way for a future where shared ownership values fuel mutual growth and success.

While not all US consulting firms will be in the position to offer an ESOP, those that can’t would be well advised to consider covering many of the potential positives that ESOPs offer via mutually beneficial and well-balanced remuneration structures.

We are at your disposal for further questions and suggestions regarding how to optimally design your company’s compensation package and implement ESOPs or other compensation elements.

Contact us here.

‍

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.

By Andy Klose - Associate Partner

This article explores the complexities and challenges associated with benchmarking and aligning C-Suite compensation with market practices, addressing issues of data variability, company size influence, and discrepancies between public and private entities. It proposes a multi-step solution leveraging standardized data, market comparisons, and pay ratio definitions to create fair, balanced, and market-aligned C-Suite compensation structures.

Navigating the Complexity of C-Suite Compensation

The landscape of C-Suite compensation transcends a simplistic evaluation of roles and responsibilities. It’s a labyrinthine domain shaped by diverse metrics. Major factors, among others, are:

• legal structure
• revenue
• profitability
• operational scale

While no universal blueprint exists, patterns among similar-sized firms offer invaluable insights into shaping tailored compensation practices aligned with strategic goals and organizational cultures.

Challenges in Compensation Evaluation

Compiling compensation data for C-Suite roles or executive leadership positions, specifically within the consulting industry, poses challenges due to the scarcity of publicly available information. The complexity of this task is magnified by the varying compensation across different roles and companies.

Company size emerges as a critical factor, however, the correlations between different size criteria, such as:

• revenue
• employee count
• EBITDA
• Total Cash Compensation

exhibit significant variability. For instance, a corporation employing approximately 40,000 employees and generating a revenue of approximately $10 billion pays a total of $12 million to its CEO. Meanwhile, another corporation with around 120,000 employees and around $4 billion in revenue compensates its CEO with $4 million.

Addressing Variances and Inadequacies

1. Benchmarking exercises using a broad comparison range often yield flawed results due to the diverse sizes and operations of compared entities. The exercise should be as specific and targeted to relevant competitors as possible.
2. Variance among C-Suite positions and discrepancies between public and private entities further complicate fair evaluations. Make sure you are benchmarking either public or private, and only include entities from the other group with full awareness of the possible influence on results.
3. Limiting datasets to similar-sized companies and standardizing compensation data based on the most correlated size criterion emerge as crucial solutions. Even where similar firms are under comparison, failure to adequately match the C-Suite levels being benchmarked, or account for differences in compensation structure will result in misleading conclusions.

Solutions for Fair C-Suite Compensation Packages

A multi-step approach is advocated, involving:

1. defining pay ratios between C-Suite roles
2. standardizing data for market comparison
3. factoring in complexities associated with different company types

This approach aims to develop fair pay ranges, considering market ratios between roles and aligning compensation with organizational and industry-specific benchmarks.

In summary, developing compensation packages for C-Suite executives involves overcoming multifaceted challenges influenced by company size, data variability, and discrepancies between public and private entities. By utilizing a multi-step approach involving standardized data, market comparisons, and role-based pay ratios, organizations can craft fair, balanced, and market-aligned compensation structures that reflect the intricacies of their operations and strategic goals.

We are at your disposal for further questions and suggestions regarding how to optimally design your company’s C-Suite compensation package (and/or model).

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.

By Cara Solorzano

Our latest article addresses professionals and decision-makers in the consulting industry involved in shaping the global expansion strategy of their firms. It delves into Location Responsibility models—Local, Regional, or Global and offers insights into strategic planning, effective management, and balancing global consistency with local nuances.

The Global Landscape of the Consulting Industry

In an era marked by rapid technological advancements, evolving business landscapes, and an increasing demand for specialized expertise, the consulting industry has witnessed a remarkable global expansion. The traditional role of consultants as problem solvers has transcended geographical boundaries, and consulting firms now find themselves navigating the complexities of a world interconnected by digital networks and international markets.

The Location Responsibility Dilemma: Local, Regional, or Global?

As consulting firms strive to navigate this dynamic landscape, the crucial question emerges: What Location Responsibility model best serves your firm's vision - Local, Regional, or Global?

Regionalizing Offices for Global Competitiveness

Many consulting firms that have a significant global presence organize their country markets by regions, such as APAC (Asia Pacific), or LATAM (Latin America). Regionalizing offices empowers consulting firms to navigate the intricacies of diverse markets, respond rapidly to client needs, and leverage local talent, ultimately strengthening their overall competitiveness in the global consulting arena.

Strategic Planning for Successful Regional Expansion

While regionalizing offices has its advantages, consulting firms must carefully weigh these against the potential downsides, such as increased operational complexity, challenges in maintaining consistency, and any potential impacts on company culture and financial performance. Through Vencon Research’s years of data collection, we have observed that strategic planning and effective management are crucial factors in mitigating the aforementioned risks. Ensuring successful regional expansion can be resolved by assigning one country market to be responsible for the entire global standardization and operations of company acculturation.

Centralized Global Oversight: Enhancing Consistency and Collaboration

Global oversight of consulting firms, where a centralized management structure governs operations across various regions, presents several advantages.

Establishing Consistent Standards

One significant advantage is the ability to maintain consistent standards based on the philosophy of the company. With a centralized approach to oversight, consulting firms can establish and enforce standardized methodologies, best practices, and service quality benchmarks that apply uniformly across all offices worldwide.

Fostering Collaboration and Synergy

This consistency enhances the firm's reputation, instils client confidence, and fosters a sense of reliability in the delivery of consulting services. Centralized management enables efficient sharing of information, resources, and expertise across different regions. This interconnectivity allows for a more collaborative and synergetic approach to problem-solving, leveraging the diverse skills and perspectives available within the global consulting firm.

Drawbacks of Global Oversight

While a model predicated on global oversight provides uniformity in strategies and operations, this method of management also has some disadvantages.

Overlooking Local Nuances and Cultural Differences

One potentially significant drawback is the risk of overlooking the nuances inherent within local cultural differences. A centralized management structure may struggle to fully understand and address the unique challenges and business environments in specific regions. This lack of localized insight can result in strategies that are less effective or may not resonate well with clients in certain markets.

Communication Challenges and Team Detachment

Cultural and communication barriers may also arise in a globally overseen consulting firm. Effective communication becomes more challenging as the organization spans different languages, time zones, and cultural contexts. Furthermore, global oversight may lead to a sense of detachment among local teams. Employees in regional offices may feel less connected to the overarching vision and decision-making processes of the firm, potentially affecting morale, engagement, and retention.

Striking the Right Balance: Considerations for Success

While global firm oversight offers benefits in terms of consistency and efficiency, consulting firms must carefully consider and address the potential downsides, including the risk of overlooking local nuances, reduced agility, and communication challenges.

Balancing Global Oversight with Regional Specifics

Balancing global oversight with mechanisms to understand and address regional specifics is essential for success in a diverse and dynamic consulting industry. It ensures that your firm can adapt to local nuances while maintaining global consistency, fostering resilience in the face of evolving market dynamics. This equilibrium is the cornerstone of sustainable growth and competitiveness in the global consulting arena.

Tailored Collaboration for Success

Vencon Research is your collaborative partner in navigating the complexities of global expansion. Our bespoke recommendations are crafted with your unique needs in mind, ensuring local relevance and global consistency. Contact Vencon Research today to discover the ideal Location Responsibility model for your company's success in the global consulting arena.

‍

By Andy Klose - Associate Partner

In this series of articles, we would like to highlight 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 today's fast-paced professional services landscape, the recruitment and retention of highly-skilled employees is paramount for success. However, not all companies can offer cash compensation packages that meet (or exceed) industry benchmarks, making the strategic design of pay structures increasingly important. This article explores the nuances of pay mix and its influence on a firm's capacity to both attract and retain top talent. Benchmarking percentiles are instrumental in guiding companies to align their compensation strategies with market realities. Through practical examples, we reveal how even minor alterations to remuneration structure can impact a company's competitiveness in the labour market.

In Part 1 of this series, we explained why the pay mix can be the defining differentiator, particularly from an employee’s perspective, when many of the other key elements of compensation across competing organisations are considered to be broadly similar. In Part 2 we discussed how pay mix affects the financials of firms, especially with regards to personnel costs. This Part 3 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.

Introduction

As people are the key asset 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.

Companies have different operational models, service different market segments or clients resulting in different economic realities. As a consequence, not all companies will be able to offer total cash compensation packages which are “in line” with the market (i.e. around the market’s median) or above to attract the best talent in the market.

Therefore, particularly for companies forced to offer total cash compensation below the market’s median it is crucial to get the pay-mix right. Understanding and utilizing percentiles in the benchmarking process can provide valuable insights into compensation competitiveness.

Total cash compensation in relation to fixed and variable pay

The following example (Exhibit 1) illustrates this: Assuming the following five 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, both Firm 1 and Firm 4 offer the lowest total cash compensation (90). On the contrary, Firm 3 and Firm 5 offer the highest total cash compensation (100). Firm 2’s offer (95) is in between the other four offers.

The key difference though lies in the pay mix, particularly when comparing offers amounting to the same total cash compensation:

When comparing Firm 1 and Firm 4: Both firms offer the same total cash compensation (90), but Firm 1 offers a higher base salary (70) and a lower variable pay (20) than Firm 4, which offers a lower base salary (60) and a higher variable pay (30). When comparing these two offers, obviously Firm 1’s offer is more attractive, because less money is “at risk”.

The second comparison refers to Firm 3 and Firm 5. Both firms offer the same total cash compensation (100), but Firm 3 offers a lower base salary (60) and a higher variable pay (40) than Firm 5, which offers a higher base salary (70) and a lower variable pay (20). When comparing these two offers, obviously Firm 5’s offer is more attractive, because less money is “at risk”.

But generally, Firm 4s offer is the least attractive from all five offers, since it offers the lowest total cash compensation (90) and the lowest base salary (60). Assuming full transparency in the market, Firm 4 would be having the most problems in attracting talent.

In contrast, Firm 5s offer is the most attractive from all five offers, since it offers the highest total cash compensation (100) and the highest base salary (70). On the other hand, one could argue whether Firm 5 is overpaying by offering both, the highest total cash compensation and a very comfortable pay mix (with relatively little money “at risk”).

Pay mix as a means of offering competitive compensation

In the next example (Exhibit 2) we will focus on the first three offers of Firms 1 to 3, which are more in line what one would consider a rational approach for adjusting pay mix according to the size of total cash compensation offered:

We already highlighted the inverse correlation between size of total cash compensation and ratio of fixed to variable compensation components (aka pay mix): Simplified one can say, the higher total cash compensation, the higher is also the variable pay in relation to base salary and total cash compensation (or in other words: the “riskier” is the pay mix).

Pay mix and market percentiles of different pay elements

Assuming that these offers match the market’s pay range as follows: Firm 1’s total cash compensation (90) matches the lower quartile (25th percentile) of the market’s range, Firm 2’s offer (95) matches the median (50th percentile), and Firm 3’s offer (100) matches the upper quartile (75th percentile).

Considering the market positioning with regards to total cash compensation, ideally the positioning with regards to base salary should be the other way around: Firm 1 should target a higher market percentile (e.g. the 75th percentile) for base salary, Firm 2 could be targeting the median (50th percentile), and Firm 3 could offer a slightly more “aggressive” pay mix by targeting a lower percentile (e.g. the 25th percentile) for base salary.

From our experience in benchmarking hundreds of consulting and professional services firms we see, that these relationships and ratios are often overlooked when designing compensation models.

In summary, not all firms can offer market-competitive total cash compensation packages, making it critical to optimise their pay mix. We illustrated how companies with similar total cash compensation packages can differ in their attractiveness to candidates due to differences in their pay mix. Companies with a higher base salary and lower variable pay may be more attractive because they involve less financial risk for employees. The pay mix should be adjusted in relation to the total cash compensation offered, with higher compensation typically having a larger variable component (and vice versa). Ideally, companies should aim to align base pay with market percentiles to effectively attract and retain top talent.

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.

‍

By Yao Tang - Business Development

The goal of effective benchmarking is to ensure that an organisation's compensation structures align with the skill levels and expertise of their employees as well as promote internal fairness and competitiveness in the external job market.

In our last article we looked at the significance of acknowledging in-demand talent, or employees and candidates who possess so-called “hot skills”. In this article we’ll be taking a closer look at the role of skills at a broader level, to find out their relevance in the benchmarking process.

The role of skills in determining compensation

A basic framework for approaching skills in compensation benchmarking should consider the following steps:

1. Identify key skills: determine the essential skills and competencies needed for each job role.
2. Define skill levels: establish a clear framework for categorizing skill levels, such as beginner, intermediate, and expert.
3. Job role mapping: match specific skills to corresponding job roles to create a comprehensive skill-job matrix.
4. Gather compensation data: collect data on existing compensation packages for employees in each role.
5. Skill-based compensation analysis: analyse how compensation aligns with skill levels to identify disparities and opportunities.
6. Internal assessment: evaluate if the current compensation structure adequately rewards employees for their skill levels.
7. Adjusting compensation: make necessary adjustments to compensation packages to ensure they reflect skill-based benchmarks.
8. Competitor analysis: compare your organization's skill-based compensation with competitors to stay competitive in the talent market.
9. Regular review: continuously monitor and update compensation packages to adapt to changing skill demands and market trends.
10. Communication: effectively communicate compensation changes to employees to promote transparency and understanding.

While many of the above steps are the bread and butter of any efficient HR department, there are key steps that will also require external input. Finding a reliable and effective benchmarking provider is essential when it comes to establishing the market value of specific roles, related skills, and the rates paid by competitors in the market.

Skill-based benchmarking

What emerges from our experience in regards to how special competencies are translated into compensation models, is that specific skills or qualifications are a) not always reflected in a higher salary b) only rarely separately remunerated on a skill-by-skill basis.

Exceptions may be found when it comes to specific “hot skills”, often in the IT-realm, which may reflect in a higher salary or extra salary payment (though often only when this IT skill is actively deployed).  Even in these cases, there is not a direct connection between remuneration and specific skills, as:

a)       Unique & in-demand (i.e. scarce) skills at time of hire/promotion can over time become more ubiquitous in the market amongst more incumbents (and therefore would not require unique compensation).

b)      Additional compensation afforded a consultant for a unique/in-demand skill is difficult to retract once said skill becomes more ubiquitous.

c)       The exact number of skills acquired by an incumbent does not automatically align with the execution of some/all of those skills while the consultant is part of a consulting project, i.e. resulting in overpaying for unused skills.

What we can confirm from observation, is that specific skills are often a deciding factor in staffing the consulting position itself (as opposed to added remuneration). Skills are important in as much as they are linked to a particular role, but additional skills can also imbue an advantage to achieve greater success in the hiring process, and thus incur a more likely/faster career progression to the next career level(s).

Here at Vencon Research we approach our remuneration benchmarking analysis on a “type of consulting/advisory work” (i.e. line of business) basis, with the inherent understanding that incumbents are expected to have a wide variety of skills in order to be hired and perform their duties effectively. We follow a meticulous process of aligning a firm with the most suitable competitors, precisely matching job roles (while taking into account required skills), conducting business-oriented mapping, and incorporating appropriate compensation elements. This meticulous approach ensures that each of our clients receives the utmost granularity and individuality, optimizing their compensation strategy.

In this sense skills are essential determinants in defining job roles for accurate matching against competitors in the benchmarking process. However, with the exception of some "hot skills" they are not usually assessed as a value component of compensation themselves.

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.

‍

By Yao Tang – Business Development

In the world of consulting, staying competitive means possessing the necessary skills to offer innovative and effective solutions to clients’ problems. These competencies, often referred to as “hot skills”, are continually evolving, with new skills consistently taking centre stage.

Hot skills can vary over time as technology and industry trends change, but they typically represent expertise in areas that are currently experiencing rapid growth, innovation, or a shortage of qualified professionals. Current examples include machine learning, cloud computing, blockchain, cybersecurity, and specific programming languages such as Python, Ruby, JavaScript and others. Hot skills can also extend beyond technical skills and include skills related to management consulting, strategy development, industry-specific knowledge, and more - depending on the specific focus of the consulting firm and the needs of their client base.

Consulting firms seek professionals with these skills because they are essential for delivering services to clients looking to adopt or optimize new technologies or approaches in their business operations.

Hot skill-based compensation

In order to attract and retain professionals with these in-demand skills, consulting firms often find they need to adjust their compensation and talent acquisition strategies. Doing so, they are seeking to address a number of issues:

1. Skill Shortages: Paying a premium for hot skills attracts professionals possessing these skills, combating skill shortages in particular areas.
2. Competition for Talent: Offering competitive compensation for hot skills sets the firm apart in the competitive talent market, making it more appealing to top candidates.
3. Client Demands: Hot skills enable consultants to meet clients' evolving needs efficiently and with expertise, enhancing client satisfaction and trust.
4. Retention and Motivation: Paying a premium motivates employees to acquire and maintain hot skills, reducing turnover and preserving institutional knowledge.
5. Market Rate Alignment: Aligning salaries with market rates ensures the firm can secure and retain skilled professionals, staying competitive in talent acquisition.
6. Efficiency and Effectiveness: Hot skills lead to more efficient project execution and higher-quality outcomes, enhancing the firm's effectiveness in delivering value to clients.
7. Strategic Business Goals: Investing in hot skills aligns the firm's workforce with its strategic objectives, enabling it to tackle specialized projects effectively.
8. Talent Pipeline: Attracting individuals with hot skills helps build a talent pipeline of skilled professionals ready to contribute to ongoing and future projects.
9. Client Trust: Demonstrating expertise in hot skills instils confidence in clients, fostering trust and long-term relationships based on the firm's ability to deliver on their needs.

While an increase in compensation is the obvious way to attract and retain candidates with particular hot skills, exactly how such adjustments are introduced and managed may vary from one firm to another.

Our market analysis reveals three main approaches to hot skill compensation among consulting and IT firms:

Group 1:

Firms offering broad salary bands that encompass higher pay for a particular hot skill.

This is the largest group among the firms we looked at or spoke to in our analysis. The adjustment is reflected in a wider, albeit existing, salary range for the position in question.

As such the adjusted hot skill-based salary does not necessitate a change in the salary ranges being offered by the firm because the hot skill premium is within the existing salary range; it only increases the average salaries being paid.

Interestingly, the majority of this group of firms offered their hot skills-based employees a fixed increase in salary. Should the skill go from hot to “vanilla”, i.e. no longer cutting edge or exceptional, or if the employee were not working on a project requiring this hot skill, their salary was not adjusted (i.e. downwards).

Group 2:

Firms paying or adjusting salaries only for the hot skill in question.

In this model, only employees with the respective hot skill are offered a higher salary – outside of the firm’s existing salary range.

Again, the majority of this group of firms offered their hot skills-based employees a fixed increase in salary. Should the skill go from hot to “vanilla”, or if the employee were not working on a project requiring this hot skill, their salary was not adjusted (i.e. downwards).

Group 3:

Firms that pay a hot skills bonus or additional component.

This group offers an additional bonus or salary component to employees who can demonstrate that they possess a desired skill (e.g. via a certificate or diploma or otherwise). This additional income functions in a similar way to a bonus and can be discounted should the hot skill become “vanilla”, or as in the case of some firms, when the employee is not working a case or project that requires the hot skill in question.

The cooling effect

As our clients have frequently noted, the hot skill of today may become vanilla tomorrow. This is why the strategy of Group 3 is often the most efficient from a firm perspective. It is clear that HR managers at consulting firms may not be able to hire the talent they require without offering the premium required by the market. However, with this approach the skill is paid for only when it is in use.

It is up to firms to decide which approach is best suited to their business and perform a balanced assessment of the effects of each approach on their goals, considering firm competitiveness, profitability, talent acquisition and retention.

In our forthcoming article, we will further explore the intriguing relationship between hot skills and their influence on consultant compensation, delving into the finer details of how these hot skills are factored into our benchmarking assessments here at Vencon Research.

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.

‍