By David Rhoads, Stuart Sadick and Alex Zabrosky
In healthy economic times, base compensation for partners in professional service firms creeps upward. This is because recruiting talent to build practices can require paying premiums to attract successful new partners and key players. Special salary adjustments and "one-off" deals are frequently used to keep key contributors. Overall salary structures can become bloated to preserve the relationship between base pay for senior, mid-tier and newly promoted partners and to keep everybody happy.
But when the economy turns weak, too much "fixed" (base) compensation can overwhelm the bottom line and make a difficult situation worse. When fixed pay is high, consultant and staff reductions must happen sooner and go deeper. And then there is little room to pay bonuses to reflect firm profitability or individual contribution to the firm, or to reinforce desired behaviors such as teamwork and strong client relationships. If client revenue dries up further, salaries are cut, and partners are asked to fund staff payroll. Lean times erode morale and undermine efforts to retain top performers when business eventually picks up: a lag effect.
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