Why Compensation Planning Matters for Professional Services Firms

In the professional services world, compensation planning takes on a higher level of importance. A diverse group of professionals looking happy with their roles within their company.

Why Compensation Planning Matters for Professional Services Firms

In the professional services world, compensation planning takes on a higher level of importance. A diverse group of professionals looking happy with their roles within their company.

All employers need a compensation plan that sets compensation policies, guidelines, and incentives that ensure equity, competitiveness, and legal compliance. But, in the professional services world, compensation planning takes on a higher level of importance. Your firm isn’t developing, improving, marketing, and selling a physical product; your employees are your asset of focus because they drive your success and bottom line. 

When it comes down to it, what professional services firms sell is time and knowledge. 

The firms that manage time most effectively are able to capture and invoice as much billable time as possible. According to a study by Linkedin, on average, an employee spends 2.5 hours a day on email; however, nearly 40% of employees admit they never track time spent reading and answering client emails, 15% admit they rarely do, and 33% report they often or always do. If your firm is billing $150 an hour, that’s a loss of $50,000 per employee per year.

Firms that manage human capital efficiently can attract high-quality talent and retain key employees. Human capital is the economic value of the skills, experience, and knowledge your workforce brings to your business. Human Capital Management (HCM) is more than human resources. It’s also the way you onboard, train, recruit, hire, compensate, incentivize, evaluate, develop, and empower your team to build your business and rise above the competition.

Your workforce is an investment, and investing in your key team players is less costly than hiring new employees. 

An investment is an asset that increases in value over time. When employee turnover is high, so are the costs to recruit, hire, onboard, and train new staff. According to a benchmarking study by SHRM, the average cost of a new hire is $4,425, and if the new hire is an executive, that rises to $14,936. Professional services firms generally have some of the highest turnover rates. The average turnover rate for associates at law firms from 2012 to 2018 was 18%. While the average voluntary turnover rate for staff of architectural firms in 2020 was 4.3%, the average rate for full-service engineering and multi-discipline engineering firms was more than 11%. For marketing roles, the average turnover rate in 2017 was 17%. 

Key employees are responsible for boosting your cash flow, maintaining day-to-day operations, and strengthening customer relationships. Your clients often grow accustomed to working with a particular person and choose to stay with a firm because of the person’s experience and skills. When a client is often reassigned, your clients may lose confidence in your firm’s ability to provide their services.

Time-tracking software greatly improves accuracy, accountability, efficiency, and profitability. 

While only about 25% of companies employ time-tracking software, using timekeeping and payroll software reduces errors by about 44%. It also provides more accurate billing, which improves profitability. When you improve profitability on a per-project basis, you have more freedom to leverage competitive pricing to win new bids. And improved overall efficiency can, in turn, improve scheduling and the distribution of employee workload. 

Compensation, benefits, and incentive plans attract talent and keep employees motivated and productive, but employee satisfaction is also about opportunities and culture. 

Compensation, benefits, and incentives are significant factors in attracting and retaining talent. Competitive salaries, performance bonuses, and long-term incentive plans, such as 401(k) benefit plans, often keep key employees happy and productive. Consider basing a benefit on employee demographics. If your workforce is primarily in the 20-40 age range, you could consider setting up a 529 plan that allows them to set aside money to pay for their children’s college. You want your employees to recognize the ultimate benefit as a substantial, helpful one worth sticking around for the long haul. 

But it’s not all about money. Firm culture, work/life balance, communication, and management style are essential parts of the overall employee experience. Employees are just as much shoppers as sellers. They want the right fit too, and often won’t hesitate to search elsewhere when something feels off. Don’t lose sight of your mission and values and how intertwined they are with the happiness and fulfillment of your team.

Partnership buy/sell agreements help you with compensation and succession planning. 

A buy/sell agreement allows you to contractually plot out percentages of ownership, the length of the partnership, division of profit and loss, how you resolve disputes, authority, and what happens to the ownership equity after a partner exits the company. Salary arrangements or guaranteed payments are written out and understood by all parties. The document also supports the claim that the payments to the salaried partner were not distributions of profits when the partner reduces their taxes based on those salary payments.

Contact ARB

From one professional services firm to another – it takes one to know one. Our Professional Services Firm Advisory Team understands the push and pull of your responsibilities to client services and your business operations. ARB provides tax, accounting, and advisory services to architecture firms, engineering firms, law firms, marketing agencies, and consulting firms so that they can shift the primary focus back to client service. 

My goal is to work creatively with you to develop savvy solutions to meet your business goals, now and in the future. If you’d like to discuss your compensation strategy, contact me today.

Check out our COVID-19 Financial Resource and Tax Center for related information and resources.

by Jason LeBlanc, CPA

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Jason LeBlanc joined ARB in 1997 and has been a principal for the firm since 2016. He is the Practice Leader for both ARB’s M&A Advisory Group and Nonprofit Advisory Services Group. Throughout his career in public accounting, Jason’s focus has been on M&A advisory services and providing accounting, compliance, and consulting services to clients in the professional services firms, nonprofit, and automotive sectors. He works extensively with organizations subject to Single Audit reporting requirements.