Latest InSights

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.

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By Philip Thomas - Advisory

The answer could very well depend on who you ask.

With a number of major and mid-size consulting firms recently electing to evolve from traditional partnerships into corporations, debates on the pros and cons of such a move abound. The switch to corporate structure is seen as controversial, if not ill-advised, by many, yet touted as a path to significant growth and shared success by others.

Firms which continue to employ the partnership model will undoubtedly have keen eyes on how firms undertaking the transition develop, while some may even be persuaded into rethinking their own structures.

Below, we take a look at some of the major pros and cons for consulting firms considering the switch to corporation from a traditional partnership.

What are the potential benefits of changing from a traditional partnership to a corporation?

A change to a corporation could stand to benefit a firm, existing partners, entire workforces and future employees in a variety of ways including:

For the firm:

• Tax advantages.
• Possibility of additional capital for investments in growth and other investments, e.g. in Know-How.
• Additional financial flexibility.
• Efficient governance, e.g. allowing leaders to make difficult proactive decisions that otherwise may previously have been held off by the partner collective.
• Attractive means of enticing elite talent to join.
• A chance to realign retirement funding.

For the existing partners:

• Cashing in now, i.e. by selling portions of shares (especially advantageous for the more senior partners).
• Retaining influence.
• Reduction in legal requirements and administration.
• Preservation of limited legal liability.

For the entire workforce including future employees:

• Everyone has the chance to benefit from the firm’s success.
• The best talent will be in a position to benefit early.
• Working together under a ‘one company’ philosophy.

What are the potential drawbacks of changing from a traditional partnership to a corporation?

The prospect of changing from a traditional partnership to a corporation introduces of number of potential drawbacks, including:

• The risks of changing an already advantageous situation. Proven performance, continued growth and the longevity of the traditional partnerships should not be undervalued.
• Losing one of the key drivers of success, that being the enviable partner pay that results from equity-owned or profit-sharing.
• Adding new complexities and fear into the mix. Significant change itself is understandably daunting and often goes hand in hand with doubt and infighting. Not all people and groups deal with change well.
• Dropping a culture and mindset that may be desired by the current workforce. Many of those at the traditional partnerships chose to be there with reasonable knowledge of the existing structure. They may well not wish to work under an alternative structure.
• If the firm goes public, there will be a subsequent increase in administration.

There are also legitimate concerns around the opportunities for additional capital

Additional borrowing or private equity investment are not strictly speaking necessary in order to change to a corporation, however more often than not the opportunity to do so is a driving factor in the move. While the benefits of extra capital are easily deduced, the process can also bring detrimental effects. The concerns here are as follows:

For the taking on of debt:

• Taking on debt is, by its nature, almost always a controversial and divisive topic that may lead to fierce debate among stakeholders.
• Owed money must be paid by the firm (and therefore effectively by employees) at some point.
• Perceptions that existing partners, especially the most senior, are set to cash while other staff are left out.
• May create some level of suspicion and distrust within the firm.
• The firm’s next leadership teams could well feel hard done by leading to high attrition.

For a private equity investment:

• Relinquishing full control of the firm’s strategic direction.
• A period of difficult transition that may lead to dissatisfaction among employees.
• Uncertainty over whether the investors are the right group for the firm in the long-term.
• Financial implications of the new model for the existing workforce.

Time will tell

The change to a corporation could be the catalyst that some firms need in order to step-up and begin to significantly disrupt the status quo in their respective markets. The move is forward thinking, proactive rather than reactive, and bold. It could also find itself aligning neatly with the motivations, ethics and culture of the new generations of workforce.

However, there are clearly legitimate concerns and potential drawbacks that need to be appreciated and taken into consideration. These worries are only heightened when the burden of significant debt is part of the package.

With the pioneers of this transition still at the beginning of their new journey, a final verdict on the overall benefits of a change from a traditional partnership to a corporation will take time to reach. In the meantime, competitors will be keenly watching to see whether recent examples light the way or serve as a warning.

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 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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By Gonzalo Lavín Alfaro - Business Development

Evaluating the "new normal"

Factors such as the COVID-19 pandemic, technological advancements, and evolving work dynamics have ushered in a new era of flexibility, leading to a rapid surge in remote work. This paradigm shift has not only redefined our work practices but has also presented several advantages for both employees and employers. However, it is crucial to retain a reserved approach to evaluating remote work while identifying the trends that have emerged since its widespread adoption and implications for human resources managers worldwide.

What was once considered unimaginable a few years ago is now commonly referred to as the "new normal", especially in sectors where office work predominates. And by now, we are all familiar with the benefits commonly associated with remote work, including:

1. Enhanced employee well-being: Reduced commute times translate into decreased stress levels, improved mental well-being, and lower transportation costs.

2. Optimal utilization of office space: Remote work diminishes the need for extensive office space, leading to cost savings for organizations.

3. Promoting sustainability: With no commuting involved, there is a reduction in vehicle usage and subsequent pollution.

Challenges and debates around remote work

Despite the well-publicized advantages, remote work also poses certain challenges. Potential drawbacks include isolation and reduced social interaction, which can impact mental health. Moreover, while arguments extolling the productivity gains of remote work abound, there are also serious voices that claim the exact opposite. While these are often dismissed as reactionary management positions, they deserve equal consideration.

The rise of remote work has also given rise to other challenges, particularly in relation to location flexibility. Some individuals now work remotely from different cities, regions, or even countries. In such cases, questions arise regarding fair compensation for those residing in lower-cost areas, as well as concerns related to insurance and taxation.

An evolving landscape: keeping abreast of developments is crucial

Over time, work-from-home policies have undergone further evolution. During and directly after the pandemic, the proportion of companies offering full-time remote work exceeded 90% in applicable sectors. However, more recently, some companies have begun reverting to traditional in-office work to address the aforementioned issues. According to Vencon Research surveys, it is common to see consulting companies offering employees 1 to 3 days of remote work, representing the majority of responses. While some firms in certain industries like IT and technology continue to offer 100% remote work, the overall trend has shifted towards a hybrid work model.

As firms worldwide continue to consider the efficiency and balance offered by different work models, remote work will remain an evolving and important aspect of human resources management. To further discuss our findings on trends in your industry or to seek our assistance in benchmarking your remote work policies, please don't hesitate to get in touch.

venconresearch.com/contact

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By Jalol Khodjaev - Senior Consultant
and Osas Ohenhen - Associate Business Development

Key highlights

The global mergers and acquisitions (M&A) market slowed in 2022 with a 35% drop in transaction values. In this context a significant number of management consulting firms providing M&A services as well as pure M&A advisory firms (hereafter together referred to as "M&A consulting firms") experienced negative financial impacts.

Despite declining revenues, M&A consulting firms were cautious in making immediate adjustments to employee compensation. The surveyed firms made minimal to moderate changes to base pay, with variable pay adjustments fluctuating among firms, mostly due to differences in bonus structures. Adjustments to additional benefits (i.e. equity-related pay, allowances, pension plan, non-cash benefits) were minimal.

In 2023, M&A consulting firms may encounter difficulties in attaining well-balanced compensation for their workforce, as the market remains uncertain due to global recession fears and rising interest rates.

Less than half of the M&A consulting firms surveyed plan to raise base pay for employees, while the remaining firms have no intention to implement changes here.

Most firms will keep performance-based bonuses (Bonus 1) unchanged in 2023. About one-third of firms have no plans to change firm-based bonuses (Bonus 2), while the remaining firms appear uncertain about future actions regarding this bonus. Only few firms intend to increase Bonus 3, which derives from the M&A team’s bonus pool.

A majority of firms (over 70%) maintained existing allowances and pension plans, while a small percentage introduced equity-pay (less than 10%) and non-cash benefits (less than 20%) to their compensation plans.

Introduction

Global M&A activity declined in late 2022 due to economic and financing hurdles, such as inflation, higher interest rates, reduced leveraged finance, bond-market concerns, and the potential for a recession.

Vencon Research reached out to M&A consulting firms operating in Western and Central Europe to understand the impact of the economic and financial downturn on their businesses and, potentially, on their workforce and compensation.

In this article, we will explore the survey’s findings, gaining insights into the approaches M&A consulting firms employed to mitigate the repercussions of challenging market conditions on the workforce. 

Global M&A activities slowed substantially in the second half of 2022

The total value of M&A transactions globally fell 35% in 2022 from 2021’s record high, to USD 3,390 billion (refer to Graph 1.). That is the biggest year-over-year percentage drop since 2001, a year when the U.S. economy slid into a recession and the value of global transactions plunged approximately 50%, to USD 1, 866 billion.

The outlook for 2023 still remains clouded for global M&A business due to global recession fears and rising interest rates as national central banks try to curb the inflation in many regions. The estimated year-end transaction volume for 2023 is USD 2,153 billion, which would be 37% lower than the 2022 values.

Market conditions had varying impact on M&A

Vencon Research’s survey results showed that market conditions have had varying impact on the M&A business of M&A consulting firms. A significant number of firms (> 60%) experienced a slightly negative impact, while a small portion (<10%) reported a very negative impact. Interestingly, the firms involved in transactions ranging between €5 to €25 million and €25 to €100 million were the ones that experienced the highest proportion of negative impacts. Roughly a quarter of the firms reported experiencing insignificant impact.

The majority of participants witnessed a decline in the demand for their M&A services. Furthermore, nearly half of the firms reported a decrease in the number of M&A deals and transactions, while approximately one-third of the firms experienced a decline in their overall M&A revenue. None of the firms reported an increase in their M&A revenue.

Graph 1. Value and number of global M&A transactions [1]

M&A consulting firms cautious in adjusting workforce compensation

Retaining top-performers, ensuring financial well-being of employees, as well as maintaining attractiveness for young talent during such economic and financial turmoil was a pressing challenge for M&A consulting firms, as they were forced to make significant cuts in expenses to minimize the negative impact on the overall health of their businesses. Potentially this included adjustments to employee compensation. As such cuts could lead to growing resentment among employees and a high turnover rate, many M&A consulting firms were rather cautious and selective when making compensation adjustments. 

Adjustments to base pay (fixed salary)

Less than half of the M&A consulting firms surveyed implemented a moderate increase in base pay for their entry to mid-level employees[2], with only a small percentage (<10%) opting for significant raises at this level. At approximately one-third of the firms, senior employees[3] experienced a moderate rise in their base pay. None of the surveyed firms opted to reduce base pay.

However, a considerable number of M&A consulting firms (around 70%) chose not to make any changes to base pay for senior employees, whereas nearly half of the firms applied a similar approach with respect to base pay for entry to mid-level employees. It can be inferred that these firms viewed unstable financial and market conditions as a temporary phenomenon. Consequently, they approached base pay adjustments with caution, recognizing that once implemented, these changes may be challenging to reverse when the situation stabilizes and returns to its previous levels.

Adjustments to variable pay (bonuses)

The survey findings revealed that M&A consulting firms had diverse variable pay/bonus structures. Therefore the adjustments made to this compensation component varied.

For the purpose of this research and for effective comparison, we have defined three types of variable pay/bonus:

Bonus 1 (also known as personal or individual bonus): This refers to a financial reward granted to an individual employee based on personal performance or contribution to the firm. It is typically independent of a bonus pool and is not directly linked to the overall performance of the firm or a specific business area. Such bonuses are awarded based on the achievement of personal KPIs.

Bonus 2 (also known as firm-performance or firm-based bonus): This type of bonus is awarded to an individual employee based on the financial success of the firm. It may be determined by factors such as profitability, revenue growth, or the attainment of other firm-wide metrics. The award can be a portion of a bonus pool allocated to employees or a percentage of the firm’s EBIT or similar financial indicators. The distribution of this bonus category may consider factors such as job role, career level, and other relevant considerations.

Bonus 3: This bonus category involves a share of the overall bonus pool or a separate/dedicated bonus pool specifically allocated to the M&A team. The size of the bonus pool, allocation, or similar factors is typically determined by various criteria, including the successful completion of M&A transactions, meeting or exceeding performance metrics of the M&A team, achieving targets or KPIs, and other relevant indicators.

Note: In pure M&A advisory firms Bonus 2 (firm-based bonus) and Bonus 3 (bonus allocated from bonus pool) are not considered as separate, but rather refer to the same concept.

Among the M&A consulting firms surveyed, Bonus 1 was frequently granted to entry to mid-level employees, while Bonus 3 was more commonly provided to senior employees. A majority of the firms offered a combination of bonuses to their M&A teams. Approximately 40% of the firms provided all three bonus components (Bonus 1, Bonus 2, and Bonus 3) to their senior employees, whereas only a quarter of the firms afforded the same offerings to entry to mid-level employees. Around 40% of the firms offered a combination of two bonuses (Bonus 1+Bonus 2, Bonus 1+Bonus 3, Bonus 2+Bonus 3) to employees in both groups. The remaining surveyed firms offered either Bonus 1 (over 15% - exclusively for entry to mid-level employees), or Bonus 2 (less than 10% - exclusively for senior employees), or Bonus 3 (less than 10% - offered to both groups).

In terms of adjustments to Bonus 1, most M&A consulting firms (above 70%) made no changes, despite the challenging economic and financial conditions. Only some firms (20%) moderately decreased Bonus 1 for senior-level employees. The remaining few firms either made moderate increases to Bonus 1 or implemented significant reductions to it.

As for Bonus 2, approximately half of the M&A consulting firms implemented a moderate decrease for entry to mid-level employees, while around 40% of the firms did the same for senior-level employees. One-third of the firms chose not to make any changes to Bonus 2 for entry to mid-level employees, while around 50% of the firms took a similar approach for senior employees. Less than one-fifth of the firms opted for a moderate increase in Bonus 2 for both groups. A significant portion of the surveyed firms made no changes to Bonus 2.

Finally, for Bonus 3, over half of the M&A consulting firms opted for a moderate decrease for entry to mid-level employees, while the remaining firms maintained the bonus at the same level. On the other hand, approximately 40% of the firms implemented moderate and/or significant decreases in Bonus 3 for senior employees, while the remaining firms made no changes to the bonus for the same level.

Adjustment to additional benefits (i.e. equity-related pay, allowances, pension plans)

Roughly half of the surveyed firms provide additional benefits, either separately or in combination, primarily for their senior employees. Across all surveyed M&A consulting firms, the adjustments made to equity and additional benefits were minimal in magnitude. This can be attributed, to some extent, to the fact that only a small number of companies included these additional benefits in their offerings to the workforce.

Outlook for 2023: expectations and future changes in compensation

The global M&A business outlook for 2023 remains uncertain due to fears of a global recession and rising interest rates introduced by central banks to curb inflation in many regions. This gloomy perspective is unfortunately maintained when looking at statistical data on 2023 M&A activity so far. A report from the GlobalData Insurance Intelligence Center reveals a significant decline of M&A deals by 44% to USD 413 billion in Q1 2023, down from $744 billion in Q1 2022. The year-end deal volume projected for 2023 is anticipated to reach USD 2,153 billion - a significant decrease of 37% compared to the figure recorded in 2022. This indicated that ensuring well-balanced compensation for the workforce may remain a pressing challenge for M&A consulting firms.

Vencon Research’s survey revealed that just under half of the M&A consulting firms intended to raise base pay for entry, mid-level and senior employees, while the remainder had no plans to adjust base pay at any level.

Despite the financial uncertainty, the majority of firms (over 60%) intended to keep performance-based bonuses (Bonus 1) unchanged in 2023.

As far as firm-based bonuses (Bonus 2), many M&A consulting firms (over 60%) did not provide a response. It appears challenging for them to accurately anticipate their firms’ performance in 2023. Nevertheless, about one-third of firms indicated no intention to make any changes to Bonus 2.

In terms of Bonus 3, which is allocated from an M&A team's bonus pool, few firms (<20%) reported an intention to increase it. However, the rest of the firms intended no changes or found it difficult to provide a definitive answer due to the prevailing uncertainties.

Regarding additional benefits, the majority of firms (over 70%) intended not to make any changes to allowances and pension plans, while the rest faced difficulties in providing a definitive answer. However, a small number of firms (less than 10%) introduced equity-pay, and non-cash benefits (less than 20%) as a new component in their compensation plans, while others either didn't offer these components, mentioned no changes, or didn't respond.

Vencon Research Advisory

Should you or your team seek further guidance on how your firm can adjust, or your competitors have adjusted, compensation strategies amid challenging market conditions, please reach out to us here at Vencon Research. We are, as always, eager to assist you and provide valuable insights.

Disclaimer

Please note that the survey insights are based on the analysis of a carefully chosen group of survey participants. Therefore, while the report may provide valuable insights, it is important to acknowledge that it may not offer a comprehensive representation of all M&A consulting firms. However, the information regarding compensation structures, including the bonus pool, remains highly relevant and can still provide valuable insights for a wide range of M&A consulting firms. 

Sources:

1.       The Institute for Mergers, Acquisitions and Alliances (IMAA), https://imaa-institute.org/mergers-and-acquisitions-statistics/

2.       GlobalData Insurance Intelligence Center, https://imaa-institute.org/mergers-and-acquisitions-statistics/

Notes:

[1] Data for 2023 is estimated

[2] Entry to mid-level employees (from Analyst to Manager levels)

[3] Senior employees (from Senior Manager to Partner/Managing Director)

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by Andy Klose, Associate Partner and Advisory Team Lead

In the dynamic consulting industry, performance metrics and compensation packages for C-Suite executives are invariably a central topic of discussion. Recent debate has raised concerns about the potential short-term focus of these metrics, which may hinder the long-term development of consulting firms.

This article provides an overview of current practices surrounding C-Suite Key Performance Indicators (KPIs) and compensation in the consulting industry, while also exploring the evolving notion of stakeholder engagement and the need for a balanced approach. The insights presented here are based on an anonymous survey conducted by Vencon Research International among leading consulting firms.

Aligning Goals for Long-Term Success

Consulting firms adopt diverse approaches to structuring their C-Suite positions. In our survey, fewer than expected firms reported a fully dedicated C-Suite, while many firms implemented structures where their C-Suite members are at least partially involved in project related or client-facing work. Most firms offer between 4 and 5 C-Suite positions, often following a functional breakdown that includes CEO, CFO, COO, CHRO, CTO, and CLO. This breakdown aligns with the traditional focus on key stakeholders such as clients, firms, owners/partners, and employees.

Balancing Short-Term and Long-Term Goals

A key concern highlighted by the survey is the potential short-term orientation of C-Suite performance metrics. While most firms maintain a focus on traditional stakeholder groups, only a few have formally incorporated broader societal and environmental goals. It is essential for consulting companies to strike a balance between short-term quantitative goals and long-term qualitative objectives. By doing so, they can achieve sustainable growth and promote the well-being of their stakeholders.

Setting Long-Term Goals

The majority of consulting firms have embraced longer-term goals for their C-Suite, typically spanning a 3-5 years horizon with annual milestones. These goals primarily revolve around achieving growth and improving profit margins. The use of compounding multi-year averages has been suggested as a means to encourage consistent performance and mitigate the impact of short-term fluctuations.

Tailoring Goals for Success

While aligning goals across the C-Suite is common practice at most firms, some firms intentionally differentiate goals for individual members. This approach fosters lively discussions and progress, allowing each function to be managed using the most appropriate and impactful metrics. However, effective cross-management by the CEO is vital in implementing this strategy.

Linking Performance to Compensation

In the consulting industry, the link between goal achievement and C-Suite compensation is strong, with a majority of firms implementing models that correlate the two. Also, most firms apply minimum thresholds that impact compensation, ensuring that executives meet certain performance criteria. However, the quite regular use of caps on variable pay has been debated, with alternative methods suggested to manage performance peaks.

Navigating Challenges

While most firms reported being well or fully aligned with their company's strategic goals, more than half acknowledged challenges in defining a long-term orientation and evaluating progress. To address these issues, Vencon recommends setting clear, measurable, and comparable goals that consider both past performance and future aspirations. Transparency and control in the evaluation process are critical in ensuring fair compensation and encouraging continued growth.

Conclusion

The consulting industry recognizes the importance of balancing short-term performance with long-term development. By implementing effective performance metrics and aligning goals with strategic plans, consulting firms can drive sustainable growth while promoting the well-being of their stakeholders. The deliberate differentiation of goals for C-Suite members and the use of compounding multi-year averages contribute to enhanced performance and discussions. As the industry evolves, a comprehensive and balanced approach to setting KPIs and compensating C-Suite executives will be crucial for long-term success.

We would be happy to assist your company in defining the compensation components for your company’s C-suite, as well as the dimensions and correlations that determine pay-out of compensation (e.g., bonus) based on target achievement. Please contact our Advisory Team for more information.

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