CHAPTER 8
DESIGNING A NEW COMPENSATION SYSTEM: IT’S ABOUT PEOPLE
“Yes, compensation and incentives are important, but for very different reasons in good-to-great companies. The purpose of a compensation system should not be to get the right behaviors from the wrong people, but to get the right people on the bus in the first place, and to keep them there.”
—Jim Collins
If you had the choice between the “right” compensation system and the “right” people, which would you choose? While we cannot answer for you, we can tell you we’d take the right people any day. In this chapter, we explain why a key to getting the right people is having a compensation system that attracts and retains them and to share ideas about how to get both. While the process we propose may not be perfect, it may increase your chances of making smart hiring decisions.
THE WAR FOR TALENT IS NOT OVER
Many would argue the war for talent is more intense than ever. Some would argue we are just now learning how to fight the war. According to the Bi-Annual PCPS MAP Top Five Issues Survey, finding and retaining top-quality staff is the most pressing obstacle for most firms. Ask any managing owner in any size CPA firm about his or her firm’s greatest business challenge. He or she will likely tell you the number one issue facing the firm is a shortage of staff. And it’s not just placing bodies at desks, but getting people who closely match the firm’s culture (or desired culture) at those desks.
In 1998, readers were asked by The McKinsey Quarterly to answer the following two questions regarding their hiring and retention:
▮ Why would someone really want to join your organization?
▮ How will you keep them for more than a few years?
How would you answer these two questions? How would your owners answer them? Would their responses be consistent? How would each employee in your firm respond to the questions and how consistent would their answers be with one another’s as well as your owners’ answers?
When it comes to recruitment and retention, some firms focus effort on recruitment, while others focus effort on retention. Sadly, some focus on neither. But it’s never really an either/or proposition. Firms, of course, need to focus on both! And individuals who are involved in recruitment and retention activities must be rewarded appropriately. In our consulting practices, we strive to help firms focus on retention by helping them develop programs in four areas:
▮ Creating a total compensation philosophy
▮ Becoming a great place to work
▮ Developing programs for growth opportunities
▮ Clarifying and working toward a compelling future
Creating a Total Compensation Philosophy
The key elements of a total compensation philosophy include the following issues:
▮ Fair pay
▮ Competitive benefits
▮ Incentives
▮ Rewards-for-results or pay-for-performance programs
▮ Recognition
Becoming a Great Place to Work
In many areas of the United States and Canada, public accounting firms are joining the lists of the “Best Places to Work.” Those firms that make the list incorporate the following into their work environments:
▮ Increasing personal respect from and influence with others
▮ Creating an accepting, supportive, and teaming environment
▮ Creating a culture of empowering leaders
▮ Getting employees involved in decision-making
▮ Improving lines of communication
▮ Working on issues of work-life balance
Developing Programs for Growth Opportunities
It goes without saying that each firm needs to develop a program that satisfies the needs of its owners and staff. Investing in the development of hard and soft skills of its people is crucial for a firm’s long-term success.
▮ Providing a learning environment (through workshops, coaching, or self-study, for example) at all levels of the firm that develops needed competencies
▮ Offering engaging and challenging work opportunities
▮ Providing a career progression path and career enhancement opportunities
▮ Establishing accountability mechanisms for both progress and results
Clarifying and Working Toward a Compelling Future
In the earlier chapters of this book we discussed mission, vision, and values. These are not just words written on a page. They are living elements that energize people in the firm and motivate them to do their best day-in and day-out:
▮ Instilling confidence in the firm’s growth and success
▮ Taking pride in the firm’s image and reputation
▮ Gaining confidence in the firm’s products and services
▮ Sharing excitement about performing work that makes a difference
▮ Gaining a sense of accomplishment and contribution
Each of the above areas is key when it comes to recruitment and retention. Why? One of the reasons firms often do not retain people is they fail to deliver what was promised during the recruitment process. For example, recruits are often told during the recruitment process that employees are valued above clients—because, after all, without satisfied and loyal employees there would be no clients—only to find out the firm allows clients to mistreat its employees. Recruits are promised they will receive lots of client contact and challenging client assignments only to discover owners who hold client relationships and client work close to the vest.
To motivate firm members to engage in the proper behaviors, activities, and initiatives, firms must design their compensation systems accordingly. The owner who allows clients to mistreat the firm’s employees and rarely provides employees the opportunity for client involvement should be given such feedback, and his or her compensation should be affected in light of other performance criteria. Likewise, the owner who involves team members regularly in client interaction and addresses inappropriate behavior on the part of a client toward employees should also be compensated accordingly.
One of the best tools to help you determine the ultimate systems and programs you should put into place is the book First, Break all the Rules: What the World’s Greatest Managers Do Differently, by Marcus Buckingham and Curt Coffman.1 In the book, the authors discuss the 12 things that matter to employees. The authors suggest the answer to the following questions should be positive. If not, employers should give consideration to the systems and programs that will nurture a “yes” response.
Do I know what is expected of me at work?
Do I have the materials and equipment I need to do my work right?
At work, do I have the opportunity to do what I do best everyday?
In the past seven days, have I received recognition or praise for doing good work?
Does my supervisor, or someone at work, seem to care about me as a person?
Is there someone at work who encourages my development?
At work, do my opinions seem to count?
Does the mission or purpose of my company make me feel my job is important?
Are my coworkers committed to doing quality work?
Do I have a best friend at work?
In the past six months, has someone at work talked to me about my progress?
This past year, have I had opportunities to learn and grow?
To retain employees, you must first recruit them—a topic of growing proportion these days as the war for talent rages on. Again, sadly, professional services firms are not doing the best job they can in this arena. Why? Because firms are generally not asking their leaders to get intimately involved in these activities, and even when they do, the firms are not compensating those leaders who do get involved and who do make a difference.
GET THE RIGHT PEOPLE ON THE BUS
In the bestseller, Good to Great: Why Some Companies Make the Leap . . . and Others Don’t, Jim Collins discusses the key factors that helped eleven Fortune 500 companies make the transformation from being merely good companies (average in terms of profits and stock performance) to great companies (on average, outperforming the market by seven times over a 15 year period).2 He and his team of researchers believed they’d find that a brilliant strategy or “superstar CEO” was responsible for the transformation. That’s not what they found. In contrast, they found that a critical first step in transforming a company from good to great is “getting the right people on the bus.” Great companies put people before strategy.
A large number of the executives in these companies believe that if you have the right people on the bus, you don’t need to spend a great deal of time aligning people to strategy or motivating the team—it just happens. On the other hand, if you don’t have the right people on the bus, the greatest strategy in the world cannot save you. Notice that the term compensation is nowhere to be found in the above paragraph. Generally, however, we think about compensation as a motivator. So, does that mean if we have the right people on the bus and we don’t need to spend a great deal of time motivating them, that compensation doesn’t matter? Not at all! It means the right compensation system will attract and retain great talent rather than improve mediocre talent.
The Recruiting Process
It’s really no secret that we all go to many of the same places to do recruit-ment—and that we’ve all thought about the really good ideas for recruitment (for example, campus recruiting, internships, schmoozing college professors, funding scholarships, attending job fairs, working with recruiters, and educating high school students about the profession). So, when it comes to recruitment, let’s not focus on who you’re going after and how you’re going after them (although we don’t mean to minimize its importance). You still need to think about who will do the recruiting, how many people from your firm will be involved, which colleges, and who your competitors are, for starters. Let’s focus on what you want . . . because the greatest indicator of retention is hiring the right people. So, let’s focus on “what” rather than “who.”
You really have two choices when interviewing: be interested or be interesting. When in doubt, be interested. Even for areas that are important to share (such as firm history, what you’re doing to preserve and improve the firm’s reputation, the type of services your firm offers, and the industries on which you focus), ask them questions that will lead you to discussions about the things you’d like to share. Most people will only talk in generalities about how they see themselves—so, it is up to you to ask questions that bring out information about their specific experiences. Summarize what you hear and clarify important points, but don’t just accept well-rehearsed answers and mere generalities.
Whether you’re at a campus recruiting event or in a formal interview at your firm, we cannot overemphasize the importance of the questions you ask. Remember Pareto’s Principle: You want them doing 80 percent of the talking. You do that by asking questions, but not just any questions. You need to be asking the types of questions that other firms don’t ask. If they do most of the talking and you do most of the listening, you’ll have lots of time to form an opinion. And that’s the purpose of the interview. And everyone they meet in the recruitment process must be on the same page. Now, of course, there are going to be a variety of technical questions that need to be asked, but it’s also important to ask questions that put them at ease while helping you get a sense of their values, their ability to relate to colleagues and clients, their desire for continuous learning, their problem-solving ability, their willingness to go the extra mile, and their ability to think on their feet.
Clearly you want to eliminate questions that can be answered with a yes or no. But also resist the temptation to “fill in the blanks” for the interviewee. After asking the questions, just listen! You may paraphrase or clarify for understanding, but resist the urge to add anything to their responses—in other words, get comfortable with the silence. We’ve created a large list of questions, many of them behavioral based, and we share some examples here:
How did you choose to go into this profession?
What did you enjoy most about your previous job?
What did you enjoy least about your previous job?
What was your favorite college course and why (if candidate is a college recruit)?
For what reasons should we hire you?
What would your previous or current supervisor (or one of your professors) say are your three greatest strengths? Three weaknesses?
What interests or excites you about working for our firm?
Describe the best supervisor relationship you have had. What made it work so well?
What are your career goals in 1 to 3 years? 5 to 10 years?
How would working for our firm help you to meet those goals?
Describe a situation in which you worked well on a team.
What motivates you? What is demotivating to you?
What are your expectations from the firm?
Describe a time you disagreed with someone at work. What were the circumstances and how did you handle it?
What is an accomplishment you are proud of and why?
What does excellent client service mean to you and how do you exhibit it?
Your process should help you identify and select people with the likelihood of having a strong showing in three categories of criteria: Character, competence, and performance (how both character and competence manifest themselves in production). Whether it’s for an intern position, a full-time position, or a position that will start at a future date, make your selection as quickly as possible. Then, let the person know why you’ve selected him or her and what to expect from this point forward.
There’s no doubt about it. Making a hiring decision can be like a roll of the dice. But if you spend adequate time establishing job criteria, preparing for the interview, and developing great interview questions, you’ll get great information from candidates. This method may not be infallible, but at least you’ll be able to make more informed decisions, increasing the likelihood of getting the right people on the bus and in the right seats.
Five Important Criteria for Getting the Right People on the Bus
Hiring decisions are some of the most important we’ll make as leaders in our firms. This is evidenced by the number of leaders who are willing to budget dollars for psychological or behavioral testing and assessment for prospective employees or who are willing to elongate the process to seek second opinions about potential employees.
Regardless of what a great leader others may think you are, you’re only as good as your weakest contributor. If you make a poor hiring decision, the impact of that decision can have serious costs throughout the firm. First, there are financial costs—both direct and indirect. Direct costs often include advertising, and time to recruit, interview, orient, and train. Indirect costs may include the loss of clients who were not well served by the new hire.
Then, there are hidden costs—losing mediocre (or even good) employees who simply were not “matches” for our firm’s mission, vision, and values; and losing great employees who become disgruntled when mediocre employees are treated in the same manner as great ones. Echoing the theme from Jim Collins that a key strategy for great performance is to “get the right people on the bus,” Michael Hudson from Everyday Leadership Network says, “Tolerating a subpar performer brings everyone else in the organization down. Worse than that, it cripples the individual by virtually eliminating any opportunity for growth and advancement.”
According to one of Jim Collins’ personal messages on the Web site, www.jimcollins.com, the five key criteria for knowing whether you have the right people on the right bus are as follows:
The person must already have a predisposition for or share the core values of the firm. If not, reject him or her!
It is not someone you need to manage.
In key positions, does he or she have exceptional capability? In the seat held, could that person potentially be one of the best in the industry in that particular seat? Doesn’t mean he or she is, but it’s possible.
The person understands the difference between having a job and having a responsibility. He or she worries three steps ahead and is “productively neurotic.” If there’s a hole to be filled, he or she fills it.
Ask yourself, “If it were a hiring decision all over again, given everything we now know, would we still hire him or her?”
The most important thing to keep in mind when evaluating these criteria, however, is to be fair. If there’s ever a doubt or if you’re wondering about someone, ask whether it’s a “best” problem or a “seat” problem.
FINAL THOUGHTS
Leaders should execute on the following key items when it comes to recruitment:
▮ Front load the people process: Each minute devoted to ensuring you have the right people on the bus will save you many more down the road.
▮ When evaluating candidates, focus more on character and competence (behavioral factors) than education and experience (unless mandatory for the job). Utilize testing and assessment as appropriate.
▮ Ask yourself periodically Collins’ five questions to determine if you have the right people in the right seats on the bus.
At the end of the day, it’s the people that will make a difference and distinguish your firm from the competition. As a result, please be sure to build into your compensation system the appropriate rewards for team members who develop effective recruiting systems, develop the skills and abilities to interview effectively, and who generate great results when it comes to attracting and hiring the right people.