Your Piece of the Pie

On the one hand, you can argue that AC and other firms are simply playing catch-up in compensation and trying to stem the tide of defections to e-consultancies like Viant and tech start-ups. "What these firms are really doing is responding to the competitive forces of stock options and their wealth accumulation potential," says Ken Abosch, a compensation consultant with Hewitt Associates in Lincolnshire, IL. "The question is whether it will work."

But, on the other hand, plans like AC's eUnits may have permanently raised the bar on compensation expectations in the consulting industry. According to numbers provided by Andersen Consulting, a top-performing manager who has been with the firm for three years or more could receive approximately 41,000 eUnits through the plan's first payout. Given a potential return of between 6 and 50 times the original par value of $1 per eUnit, that manager's share of the pie could have a potential cash-out value of anywhere from $250,000 to $2 million.

Other firms are already on the cusp of rolling out new compensation plans to share more wealth with consultants. Deloitte Consulting is planning to announce a plan similar to AC's eUnits this summer. Although the firm was unwilling to provide specifics before communicating the plan to its consultants, payouts will be performance-based. The funding for the plan will come "from the income generated by traditional operations and the increase in valuation from investments made in Deloitte Ventures," according to Stephen Sprinkle, the firm's managing director, service lines and marketing. Overall, the firm's goal is to keep its total compensation offering for talent up there among the top 25% of those in its peer/competitor group.
To get a glimpse of the potential future of consultancy compensation, it makes sense to take a closer look at plans being offered at both ends of the consulting spectrum. AC's eUnits plan sets the stage for compensation solutions among large partnership firms, while fast-growing and publicly traded e-consultancy Viant Corp. provides a glimpse of a stock option–centric approach to pay that purports to award three times the industry average in stock options.

Assessing your options

At Viant Corp., stock options rule.
Joining the firm? You'll get your first of potentially many stock option grants. New-hire referrals will get you options on another 250 shares. Being willing to travel "on loan" for a year will earn you a stock option grant equal to 25% to 50% (depending on the location of travel) of a new hire's option grant. There are also annual performance-based grants, additional grants for outstanding performers, grants for the "staffing captains" in each firm's office, and a "DNA transfer" stock option award for consultants who open new offices for the firm. Add this up, and it comes as no surprise that "we give away three times the industry average," says Hall. "Stock options are what employees want. They can't get enough of them right now."
But could stock options become too much of a good thing? Although the firm turned a profit last year on revenues that tripled from $20 million to $61 million, in early April the stock was trading at about $30 per share, well below its 52-week high of $63-9/16. Recognizing that and the potential to lose key talent who find themselves with underwater options, Viant does not rule out repricing options. If the firm chooses to do so, it would be following the somewhat controversial example set by Cambridge Technology Partners, which repriced its options during the stock market correction of 1998 to head off an exodus of talent.

To make stock price volatility a little less worrisome for consultants, Viant has also made a concerted effort to increase cash compensation, even as stock options remain the centerpiece of its overall pay package. Like employees of many start-ups, the consultants who joined Viant at its beginning had to be willing to take a lower salary in the short term in favor of the potential long-term gains from significant stock option grants. Overall, Hall estimates that those starting salaries were 40% to 50% of the going market rate. Many of the firm's senior people "took pretty significant cash compensation cuts for the equity," she says. To make up for that, the firm promised that it would raise cash compensation to the going market rate within three years, a promise the firm has kept by increasing cash compensation 25% to 35% in the past year to bring both base salaries and cash bonus opportunity on par with the firm's competitors.

So far at least, this stock option–centric approach seems to be working. "We have a very low attrition rate — about 15% last year," says Hall. "And we are only losing people to start-ups and the mentality of 'I want to do it all again. I want to be part of the five-person team that builds a company.'"

eUnits: selective wealth-sharing

Nothing should be taken for granted when it comes to AC's eUnits plan. Although the firm is investing $200 million in its venture capital fund this year and $100 million in each subsequent year to fund eUnits, it has structured the plan carefully with regard to how those awards will be made. For one thing, entry-level consultants ("analysts" in AC-speak) are not eligible for the plan. Second, loyalty awards, which provide 500 eUnits per year, are available only to consultants who have been with the firm for at least three years. And, finally, performance-based awards will only be made to "top-performing" consultants, as determined by a new, yet-to-be-announced, performance assessment process.

The eUnits themselves have been likened to shares in a closed-end mutual fund that rise and fall in value over time, but with an overall trend toward growth. The firm also plans periodic "cash" distributions of eUnits whenever Andersen Consulting Ventures sells any of its holdings.
So far, at least, Singleton says he and his colleagues view the eUnits plan as an opportunity for top performers to separate themselves from others in the firm in a compensation sense. "I definitely plan on staying with AC to see where the eUnits plan takes me and other top performers," says Singleton, who has had high performance rankings during his three years with the firm.

At the same time, however, he recognizes that the eUnits plan provides no guarantees and that several things have to happen for him to receive an eUnits windfall. "The performance assessment process needs to work flawlessly. AC Ventures will need to continue to invest in companies that create tremendous value for their investors, and, most importantly, I need to continue to be considered a top performer to receive as many eUnits as possible," he says.
If there is a fly in this ointment for Singleton, it is in the potential process for determining performance-based eUnits awards. "I think there will be a strange mix of those who receive merit-based eUnits because they truly deserve them, and those who will receive them because they are golfing buddies with a partner," he says. Like many consultants hedging on the question of approval for these New Economy pay schemes, Singleton needs more time before giving his final answer.

Sidebar: PowerPoints:

• Typically, entry-level consultants are not eligible for the new equity pay plans, and performance-based awards are normally made to "top-performing" consultants, as determined by new performance assessment plans.
• To make stock price volatility a little less worrisome for consultants, certain consultancies are making a concerted effort to increase cash compensation, even as stock options remain the centerpiece of their overall pay package.
• Outstanding performers are not the only consultants enjoying additional stock grants. Consultancies are granting stock to "staffing captains" in different offices, and to consultants who open new offices for the firm.

Sidebar: BCG takes a venture capital approach

Not all firms are revamping compensation programs for all employees. Although Boston Consulting Group has worked out a way to share some of the gains from its ventures with all employees, it is reserving a total compensation overhaul for those individuals working directly on venture funding and consulting-for-equity deals.
For these individuals, "we realize that we need to move more toward a venture capital–style compensation structure" with less base salary and more at-risk pay, with a higher upside potential, says George Stalk, a BCG senior vice president. In addition to base salary, such a program would also allow individuals to earn a carry that can range from 1% to 5% of the deal, depending on their role in putting the deal together. "The attraction in that kind of pay is that if you hit a home run out of the park, you can walk away a multimillionaire," he says.
Stalk was unsure when the program would be ready for launch, because there are still a couple of kinks to be worked out. "We haven't quite worked out the mechanics of accounting for people's time inside the ventures — when they're in, how long they're there, and what their share of the return should be," he says.