Many professional services firms have traditionally leveraged a "partner model" in which a partner (or "practice lead") in the firm is responsible for overseeing both sales and delivery for a set of clients. In a partner model, the partners "manage their book of business" and are typically compensated on P&L performance (often a profit-sharing plan). The problem with the partner model though is that partners rarely have the time to fully execute the distinct disciplines of new customer prospecting, relationship management, and delivery oversight. Once a partner has a book of clients, the partner tends to focus on the health of that portfolio and spends little time prospecting for new clients. This ultimately limits the growth rate of the firm.

To combat the drag on revenue growth caused by the partner model, leading firms often split marketing, sales, and delivery into distinct teams. This division of labor allows for improved performance in each area through specialization. But, this split introduces a new problem - the firm must now compensate both the sales team and the partners. It usually doesn't make economic sense for the partners to keep their original compensation plan when there is now a sales organization getting paid commission on those same projects. A new compensation approach is needed.

Charlie Munger, the vice chairman of Berkshire Hathaway, once said, "Show me the incentive and I'll show you the outcome". Munger's point was that incentives drive employee behavior, and behavior may or may not create optimal outcomes for the company. In order to develop a compensation model for the sales team and partners, we have to start with the desired outcomes and then work backward to behaviors and incentives. For example, a set of desired and measurable outcomes for the firm may be:

• Grow revenue 20% to $100M for the year
• Drive 70% of the revenue from existing clients
• Drive 30% of the revenue from new clients
• Deliver the portfolio of work at a 42% target gross margin

When the firm achieves these outcomes, it enjoys consistent and profitable growth. So, what are the ideal behaviors that will produce the desired outcomes above? The behaviors for the sales persona and the partner persona are different.

Desired sales team behaviors:

• Hunting for new prospects through various tactics (events, cold calling, email, etc.)
• Building and leveraging partner channels for new leads
• Continually nurturing existing prospects until they are in a buying cycle
• Networking within existing clients to identify new sponsors within the client

Desired partner behaviors:

• Effectively pitching and winning new prospects
• Selling ongoing engagements to existing clients
• Ensuring high client satisfaction by meeting or exceeding expectations
• Carefully overseeing the delivery of engagements
• Ensuring high team satisfaction

Assuming these are the right behaviors to produce our desired outcomes, we then create the incentive structure via compensation plans for both the sales team and the partners. While there is no "one size fits all" compensation plan, below are some useful guidelines for each role:

Sales team compensation guidelines:

• Have a formal plan with a stated quota. When a compensation plan is in writing, it is unlikely to be misunderstood, misconstrued, or forgotten. The goals are in black-and-white. Written plans with clear objectives and quotas will create clarity and focus for the salesperson.
• On-Target Earnings ("OTE") should be roughly 50/50. You don't want a salesperson's base salary to be too high or too low. If it is too high, there is no real penalty for missing quota. If it is too low, the salesperson may struggle to meet basic financial needs. A good model is to pay roughly 50% of the OTE via base salary and the other 50% via commission.
• Pay commission on proposed gross profit and not on delivered gross profit or top-line revenue. In most firms, the salespeople do not control the rate card or pricing of the firm's services. They may have some flexibility to adjust rates up or down within an established range, but they usually cannot arbitrarily set rates. Also, salespeople are rarely involved in the estimation or delivery of the engagement. Thus, it doesn't make sense to compensate salespeople on the eventual delivered gross profit of the project. If the project goes off the rails, it isn't the salesperson's fault. But, it also doesn't make sense to compensate the salesperson on top line revenue. Why? Because of "loss leaders" and severe rate discounting. Some firms will discount an initial engagement in order to win the favor of a new prospect. If a project is quoted at a significant discount to normal rates, the gross margin is already depressed and it is punitive for the company to pay commission on the top line revenue.
• Step down the commission over time. The goal of the sales team is to create net new clients for the firm. The sales team should not be responsible for nurturing the ongoing client relationship and certainly should not be overseeing the delivery of projects. Generally speaking, delivery leaders can more easily become trusted advisors than salespeople. While this may not seem fair, it is often the case. The commission the salesperson earns should diminish over time because their primary goal is to create net new client relationships. For example, the salesperson might make 10% commission on proposed gross profit (not on top line revenue) for the first 12 months, 7% for the second 12 months, and then 4% in perpetuity after that. You'll need to model out the percentages that fit your firm, but the point is that the commission percentage should decay over time and then reach a steady-state. The salesperson should likely never be entirely "cut out" of the future incentive compensation.
• Include claw backs in the plan. There may be situations where you will unfortunately need to claw back (or recover) some of the commission that has been paid to a salesperson. For example, if commissions are paid on contract execution (and not on actual payment receipt), you may need to claw back commission if the client doesn't fulfill its obligations under the contract. Claw backs should be done over time and not within one pay cycle.
• Add one or more SPIFs. A SPIF (or "sales performance incentive fund") can be used to incentivize very specific type of behavior that is of long-term strategic value to the firm. For example, if your firm is trying to enter a new vertical industry, you might pay a bonus for a new client in that industry. Or, if the firm is trying to increase the sales of a certain solution type, you could similarly create a SPIF around that solution. SPIFs can be paid in cash but sometimes are more effective when they involve an award or recognition, a vacation/trip, etc.

Partner compensation guidelines:

• Have a formal plan. Just as with the sales team, partners should have formal plans with clear objectives and compensation information.
• Reduce the compensation on existing accounts. If the firm is transitioning to sales team model from a partner model, then partners should be able to drive additional compensation through increased client volume. In order to fund the sales team incentive compensation, partners will need to take less cash out of each project. The additional volume driven by the sales team should allow the partner to ultimately make more money.
• Partners should be on a bonus plan and not straight commission. Since partners need to ensure successful project outcomes over the long term, they shouldn't be paid a monthly commission. Partners need to think longer-term and should be trying to hit annual goals (or potentially quarterly goals). When partners are paid on commission, it causes them to operate in a short-term transactional manner. The firm needs partners operating with a long-term mindset. If the partner is on an annual plan, it is still possible to pay a portion of the projected annual bonus on a quarterly basis. But, at least 50% of the overall bonus should not be paid until the year is closed.
• Compensate on delivered gross profit with variable percentages based on the gross margin range. Delivery leaders should not be compensated on top line revenue nor on proposed gross profit. Delivery leaders should be compensated on the ultimate financial outcome of the project as well as the satisfaction of the client and team. The best way to evaluate the financial success of a project is to consider the project's gross profit as well as its gross margin (which is a percentage). The gross profit is the revenue minus the cost of delivering the revenue (usually the labor costs of the project team). The gross margin is the gross profit divided by the total revenue. The partner's bonus plan should have tiers based on the gross margin percentage. So, the partner's bonus will be maximized when the partner achieves the target gross profit for the year and the highest gross margin tier.
• Objectively measure client satisfaction. Client satisfaction is the single-largest indicator of the firm's future success. If clients are thrilled, the firm is almost certain to do well in the coming years. It is a good idea to attribute roughly 25% of the partner's bonus to an overall client satisfaction score.
• Objectively measure team satisfaction. It is possible to have a happy client but a very unhappy project team. The client may love the fact that the project was delivered on-time and on-budget, but in order to do that the partner may have worked the team 12 hours per day for weeks on end. Voluntary attrition of high-quality personnel is the death knell of the professional services company. The partner should be intensely focused on team satisfaction and it is a good idea to tie roughly 25% of the partner's bonus to the team satisfaction score.

There are hundreds (if not thousands) of compensation models for professional services companies. The key for firm leaders is to think about the desired outcomes and then identify the types of behaviors that are likely to create those outcomes. And finally, structure compensation models that will incentivize those behaviors.