Latest InSights

Between April and June 2020 Vencon Research conducted the first Pulse Survey in the light of the unseen and unknown economic, financial, and personal impact of the COVID-19 crisis.

This Update to the Pulse Survey is a result of many requests from our clients over the past months wanting to find out how other professional services firms have adjusted to the crisis. Not just questions about the near and long-term future but also about the measures taken to react to COVID-19 and which may be sustainable and/or change the future of work and business in the consulting industry.

Most participating firms operated in strategy consulting, followed by IT consulting/services and operations consulting. 51% of responses came from firms located in Western Europe, followed by North America (20%) and AsiaPac (13%); ROW responses were 16%. Responses were well distributed with regards to firm size; slightly more responses came from firms employing 50-249 consultants (27%).

Here are some of the “highlights” from the key findings of the survey:

Business Situation and Prospects

The outlook for the coming year was fairly positive: More than half of the firms (54%) expected COVID-19 to positively impact their business. Generally, the consulting industry was surprisingly optimistic: A total of 82% of the firms expected better business prospects, despite COVID-19.

Effects on Workforce

During the previous 12 months more than half of respondents (52%) stated they reduced hiring; Interestingly, 31% reported increasing hiring. More than half of firms (56%) expected to increase hiring in the coming 12 months based on largely positive expectations regarding their business situation. Most firms (78%) expected either no adjustment or a slight increase in their existing workforce after COVID-19; only 17% of firms expected a significant increase. The problems mentioned resulted from staff working too long, a lack of “down time” and/or “switching off”; “virtual” onboarding/training was also difficult.

Promotion, Compensation & Place of Work

Most firms (82%) provided the necessary support to allow employees to work remotely and/or work from home, including for example computer/laptop, high-speed broad-band internet access, headphones, video camera equipment, etc., as well as other benefits.

The mental health of employees was considered a major challenge during the COVID-19 crisis. Hence, almost all firms provided additional training (93%) and self-management assistance (88%) to ensure employees are not over-worked and do not face “burnout” or the like. However, only 34% actually tracked home office working time.

Firms reacted differently regarding compensation adjustments: “merit” based pay increases continued to be offered; however, bonuses were reduced or suspended.

The majority of firms (75%) expected office usage to be reduced in the future and expected “work from home” to be continued (to a degree). In particular firms implemented “work from home”, which has become a standard way of operating for many firms; at least partly.

Long-term Changes and Challenges

Flexibility of place of work is expected to increase as most respondents (89%) expected “work from home” to be permanently implemented, but at lower than current levels (min. 1 to max. 3 days p/w). With regards to the difficulties arising from the increased usage of “work from home” or “remote work” and other permanent changes in business operations most firms mentioned the “soft” factors (e.g. self-management, continued health and well-being, culture) that were and will be challenges faced by “work from home” policies.

Many firms (59% of respondents) expected Business Development (i.e. sales) to become more “virtualised”.

The Long-term Outlook

Interestingly, almost half of the firms (49%) expected things to get back to “normal” within a given time, i.e. to the conditions before COVID-19. On the other hand, 39% of the respondents stated that there will be no return to a “before”.

Should you have any further questions or would like to receive more detailed information on this topic, please reach out to us at info@venconresearch.com.

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

Erwin Harbauer is a Partner at and co-founder of Vencon Research International.

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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COVID-19 currently influences all of our lives and its constraints will have continued effects on the consulting industry, especially with regards to communication within firms and with clients and on how work for clients is delivered. Our survey’s results show operational changes are expected, as, for example, “working from home” has become and will continue to be an alternative “modus operandi”. All this is also expected to have a positive impact on the attractiveness of consulting as a job, especially with regards to the work-life-balance of consultants with families. At the same time, none of our survey’s respondents indicated reducing or planning to reduce consultants’ pay.

Starting in early 2020, the COVID-19 crisis has become a drastic influence on our lives. In the light of the potential economic, financial, and other impacts of this world-wide crisis Vencon Research initiated a “Pulse Survey” in September 2020 to gather information on how the consulting industry has reacted to the crisis. We were particularly interested in finding out if the measures taken and implemented by firms also had an effect on job descriptions and on remuneration, especially for client-facing staff. We furthermore wanted to find out whether these changes represented temporary solutions or a “paradigm shift” in how the consulting industry operates.

The key findings of the survey can be summarised as follows:

• Three-quarters of respondents reported “travelling” to have been a “normal” part of the existing job profile of their consultants / client-facing staff.
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• Meanwhile, all responding firms have largely eliminated the day-to-day travel typically required of their client-facing staff, for example for project delivery.
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• Many firms have furthermore significantly reduced face-to-face time spent with their clients.
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• All respondents had invested to ensure their client-facing staff can work efficiently from home.
• -In this respect, client data confidentiality and data security have come to the forefront and may be a matter that requires additional review and improvement.
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• Most respondents signalled a significant change in how their business was being conducted and delivered. For example:
• -Communication with clients was previously often completed face-to-face and has now been forcedly changed to being conducted primarily via online tools.
• -The delivery of client work would normally be completed on client premises or from the contracted firm’s office. Today instead, consulting work is often organised and completed from the consultant’s “home office”.
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• Clients seem to accept these changes in how consulting work is delivered.
• -However, during the feedback of the survey results, some clients mentioned that “selling on” into existing projects has become more difficult as a direct result of the lack of “face-to-face” time (i.e. coffee, lunch and dinner time) with key client representatives.
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• Almost 2/3rds of respondents were additionally considering operational changes, such as a reduction in office space.
• -During feedback discussions with respondents, a potential move of office space to less prominent (and less expensive) areas of the city, due to limited in-house client meetings and the introduction and use of working from home alternatives, was also mentioned.
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• The measures mentioned above have a radical influence on the work-life-balance generally offered by and associated with the consulting industry, whereby:
• -Close to 60% of respondents expect to see a positive impact on the intrinsic “attractiveness” of the consulting job.
• -Furthermore, more than half of respondents expect to be able to offer a better work-life balance to their client-facing staff, especially due to reduced travel requirements, working from home, etc.
• -They also expect to be able to more successfully hire and retain female consultants and thus anticipate an improved gender-split, especially at the more senior levels.
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• Most respondents expect these changes to be longer term, i.e. to continue to strongly influence the job of consulting even after the COVID-19 crisis and well into the future.
• -Interestingly, while discussing these results with clients, we also heard another point of view, namely that although reduced travel was seen as an attractive benefit for staff with families (mostly more senior), junior staff (i.e. those without families) actually complained about the lack of travel during COVID times. These anecdotal responses seem to confirm what 15% of respondents stated in the survey: due to the aforementioned changes, the job of consulting will become less attractive, especially for those more junior employees who actually like and prefer the travel aspect of the job.
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• Although a number of firms experienced a significant reduction in business and have put at least some of their consultants on furlough, none of the participants reported actually reducing remuneration. Neither the base salaries nor targeted bonuses of their client-facing staff were reduced, even when considering a potential change in the consultant job profile (for example due to less travel, more time at home or the like).
• -This result however does not reflect any potential short-term reductions in remuneration e.g. due to an introduction of furlough.
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• This is partly confirmed by our 2020 salary surveys which continue to show increases in the remuneration offered to consulting staff in many countries. These increases may however result from the timing of salary reviews as most firms had completed and in part already implemented changes in remuneration before the COVID crisis hit their markets.
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• Although increases in target remuneration were seen, unfortunately most firms will not be in the position to pay out the targeted bonuses in full in 2020 (or at a similar level as for 2019).

Should you have any further questions or would like to receive more detailed information on this topic, please reach out to us at info@venconresearch.com.

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

Erwin Harbauer is a Partner at and co-founder of Vencon Research International.

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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This article, Part 1 of 4 of an InSights series, demonstrates why the pay mix is often the key differentiator when it comes to recruitment and retention from the applicants’ perspective. The upcoming Part 2 analyses the effect pay mix may have on the firm’s financials, especially with regards to personnel costs.  In 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.

‍Pay Mix as the Key Differentiator

Synopsis: One aspect of remuneration strategy is the ratio of variable to fixed pay (also called “pay mix”). Together they often make up the total pay of consultants. Unfortunately, the importance of pay mix is often underestimated or even overlooked.

When pay packages of competing firms are considered to be largely similar, the pay mix can become the key differentiator when comparing compensation, especially from the applicants’ perspective. Thus, when reviewing remuneration, firms should not focus on a single component of compensation (e.g. fixed or variable pay) as these alone will often not be the deciding factors. Firms should instead focus on the pay mix, i.e. the ratio of variable to fixed pay, as this ratio strongly influences an applicants’ choice. Depending on the risk-profile of the applicant, a lower level of total pay with a higher absolute level of fixed pay may be the better offer for many risk-averse applicants; conversely a higher level of total pay with a significantly higher variable component in the pay mix may be more attractive to risk-friendly applicants.

For professional services firms in particular, employee compensation is crucial to both successful recruitment and retention, i.e. hiring the right employees, continually motivating them to perform at their best, and retaining employees. Thus, together with firm culture, the importance of offering a competitive compensation package cannot be overstated.

In this InSights article we will take an in-depth look at the pay mix (i.e. the ratio of variable to fixed pay) within total pay, an aspect of compensation package design often underestimated. However, we will demonstrate that it can be as relevant as or even more relevant than the absolute amount of total pay (e.g. total cash compensation), especially from the perspective of new applicants.

To illustrate our arguments, the following Base-Case example will be applied:

An applicant for an entry and/or more junior-level consulting position receives offers from two comparable companies with similar status in the market. The two firms also offer comparable future development prospects to the applicant. For simplicity, the offers of employment made by the two firms are essentially the same to all applicants with the only differentiating factor being the pay mix of the compensation package offered (Exhibit 1):

Exhibit 1: Original offers of two competing firms with different pay mix

Both of the competing compensation packages offered total to USD 100k and from an economic point of view the upside potential of the two firms’ offering is the same (at USD 100k). However, while Firm 2’s offer provides the same total pay, it also offers the higher fixed pay component, which guarantees greater annualised financial security (65k vs 60k). Since Firm 2’s offer also provides the higher intra-year fixed pay (+8%) it would be considered “safer”. It would thus seem reasonable to assume that applicants will prefer Firm 2’s offer.

Assuming furthermore that the compensation packages being offered are transparent to all applicants, the result of this example would likely be that Firm 2 is able to hire all of the applicants it requires. Only when all of Firm 2’s vacancies have been filled, would the remaining applicants be forced to take the offer from Firm 1. Thus, Firm 1 would only be able to hire the applicants not needed by Firm 2 and would lose the competition for talent.

How could Firm 1 adapt their compensation model in order to be more attractive to potential applicants and be in a position to compete with or better Firm 2’s offer in the war for talent? Three alternative options stand out for Firm 1:

·        Alternative 1: Changing the pay mix;

·        Alternative 2: Increasing total pay (with the same pay mix);

·        Alternative 3: Both of the above.

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Alternative 1 – Changing the pay mix

Increasing the fixed component of pay at the expense of variable pay will provide applicants an even safer offer without the need to change the total pay of USD 100k (Exhibit 2). In our example, Alternative 1 increases Firm 1’s fixed pay from USD 60k to 66k at the expense of the variable pay (reduced to USD 34k from 40k). From the applicant’s perspective, changing the pay mix as suggested in Alternative 1 now makes Firm 1’s offer even safer and thus more attractive than Firm 2’s offer. Thus, following the arguments used in the Base-Case, Firm 2 would now only be able to hire the applicants not needed by Firm 1 and would lose the competition for talent. 

Exhibit 2: Alternative 1 - Changing Firm 1’s Pay Mix

It is important to keep in mind, however, that this alternative also changes the financials for Firm 1: Firm 1 would now incur higher fixed costs due to the change in Firm 1’s pay mix, i.e. they now offer a higher fixed pay component in their total pay. The implications of such a change will be examined in Part 2 of this series.

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‍Alternative 2 – Increasing total pay (with the same pay mix)

The result of an increase in total pay by increasing the fixed pay component with the same pay mix is shown in Alternative 2. In this alternative Firm 1’s total pay is increased to 105k, while the pay mix remains the same with variable pay equal to 67% of fixed pay (Exhibit 3):

Exhibit 3: Alternative 2 – Increasing the Total Pay Offered by Firm 1 with same Pay Mix

Increasing Firm 1’s total pay offering to USD 105k whilst maintaining the ratio between variable and fixed pay may make Firm 1’s “Alternative 2” offer more attractive than Firm 2’s offer of USD 100k. However, whether applicants prefer this offer over that made by Firm 2 will depend in part on the risk profile of the applicant: The more risk-taking or self-confident applicants will probably prefer this alternative offer since they can potentially earn more although a greater portion of pay is at risk. Conversely, the more risk-averse applicants may still prefer Firm 2’s safer offer with a fixed pay of USD 65k versus the alternative of USD 63k offered by Firm 1.

Alternative 2 again has implications on the financials for Firm 1: Firm 1 would now have to manage both higher fixed costs due to the increase in fixed pay (USD 63k versus 60k), as well as potentially higher variable costs due to the increase in variable pay (USD 43k versus 40k).

Alternative 3 – Increasing total pay and changing the pay mix

When considering the possibility of changing both the pay mix and at the same time increasing total pay, a number of alternatives are possible. A representative sample of these are examined in Exhibit 4.

Exhibit 4: Alternatives 3a to 3b for Firm 1 by increasing Total Pay and adjusting Pay Mix

From the applicants’ perspective, Alternatives 3a to 3b are both better than Firm 1’s original offer in that they offer a higher total pay (USD 105k versus 100k). Alternatives 3a and 3b may also be better than the offer being made by Firm 2. However, here the situation should be further examined by considering the differentiated pay mix:

·        Although at USD 105k Firm 1’s Alternative 3a offers a higher total pay it remains riskier than Firm 2’s offer because at USD 60k the fixed pay portion is still lower than Firm 2’s offer of USD 65k. Hence, whether applicants prefer Firm 1’s Alternative 3a over that made by Firm 2 will again depend in part on the risk profile of the applicant. Some more risk-averse candidates may not be inclined to go for the higher total pay being offered by Firm 1’s Alternative 3a since in case of under or non-performance, the higher fixed pay offered by Firm 2 continues to be the safer harbour.

·        Firm 1’s Alternative 3b again offers a higher total pay (USD 105k) but also offers the higher fixed pay at USD 69k versus Firm’s USD 65k. It is thus per definition the safer offer. Alternative 3b furthermore offers the higher variable pay at USD 36k versus the USD 35k of Firm 2. In essence, this is a win-win situation for the applicant: Less risk, as well as higher upside potential. Independent of any applicant’s risk profile, it is the more attractive offer.

In practice we often observe that some applicants are not attracted by the marginally higher total pay packages that come with a riskier pay mix (i.e. higher percentage of variable pay). In addition, in some countries and with some firms, the targeted variable pay may not be considered realistically achievable. Thus, the only value that counts, especially from the perspective of the applicant, is fixed pay (i.e. the “bird in the hand” argument).

In this respect, the solution in an ideal world would be very simple: Companies offer applicants the highest fixed pay compared to all other “competitors for talent” (which can be market participants within the same industry, but also in other sectors) hoping to attract and to retain the best performing employees in the market. In the real world, however, the interests of other stakeholders, such as the firm’s owners often stand in the way: Owners (or stockholders) are interested in sustainable profits and above-average growth rates and are therefore generally only prepared to accept above-average pay for employees if these also perform exceptionally well. Or to put it another way: “In the world of consulting, there is no free lunch”.

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

Andy Klose is an Associate Partner at Vencon Research International and leads the firm’s advisory service. Erwin Harbauer is Vencon Research International’s Managing Partner.

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 companies, especially for audit and tax, management consulting, and IT services companies. Vencon Research International provides services to a full range of clients in more than 70 countries worldwide and is proud to name more than 85% of the world’s major consulting and/or professional services companies as its clients.

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