Emerging new realities in the evaluation and compensation of professional practice executives

We need to become increasingly conscious of the whole real estate economy of which we are a part, as design professionals, so that we may function fully and in a healthier way as an element of the whole.

That is why we break down barriers, blend new realities of service delivery, and talk about culture and context for design and business success.

Part of our purpose is to advance design management, innovation and the shape of the future leadership and management of firms. Thus, here at DesignIntelligence we have been chronicling executive compensation along with bonus, benefits, and equity plans for architects, engineers and designers of all types. We have approached this responsibility in light of the need for a systematized way of seeing leadership rewarded and to put in place processes and actions that stress meritocracy. We believe that without meritocracy, evolution in the design professions is stifled.

Leadership today is enmeshed in the process of rapid change and is being challenged to be ever better. This includes the compensation of leaders in a broader and more holistic design and construction context.

Change and the demands upon leadership are happening on a global scale. We can now imagine possibilities that have been heretofore outside our range of vision. This is why there is a sense of concern and eagerness for true meritocracy in the design professions. Whenever we ignore the principles of meritocracy, performance  often slows to a pace that can bring sub-performance status quo and/or mediocrity. Gradually, underperforming firms can fall into decline and they risk devolving — sometimes rapidly.  

The good news is that the design professions are in a time of rapid transformation which introduces a wide range of options for further successful evolution. A key component to this is leadership. This is the reason Greenway Group seeks to understand the behavior patterns of leaders and also how they are compensated, evaluated, and motivated to achieve the massive potential of our time. Professional compensation can be an important way to keep score as achievement and relevance are evaluated.

We are in a long period  of economic uncertainty which tempts the visions of both optimists and pessimists. Being grounded in design, architects, engineers and interior designers often gravitate toward the position of the optimists.  However we must also seek to understand darker realities and to balance our visions between the needs of the present with those of the future, as indeed, there are hard realities to be confronted. A typical design firm today achieves a net profit of 10.2% (pre-bonus, pre-tax) but they aspire to have earnings of at least 15%. According to our new research, profits per partner in firms of all sizes are $148,952 (including even those with fractions of ownership) and profits per staff are $20,638. All are year-end 2012 calculations from a large subset of responding firms. Most professional practices are recovering from the great recession and now look forward to building better projects and being compensated commensurate with the inherent risks in architecture, engineering and design today.

One theme of our work here at the Design Futures Council is to stay informed about what is happening given the myriad options available to us (often more than we think). We do this to find the most advantageous pathways forward. Professionals work hardest to achieve ideas they believe in and for people they respect. Some professional practices overlook this principle (or treat it too lightly) when it regards selecting their leadership.

A few years back I wrote a blog on leadership at DI.net. It focused on the process of change and how organizations and professional practices can determine who the best leaders will most likely be. Here are the essential foundational characteristics:

1.     Leaders act as both visionaries and key day-to-day resources for overcoming difficulties. They set the tone for the can-do culture of the firm.

2.     Leaders develop and conceptualize the organization’s tactical plans to accomplish strategic ambitions. They develop and keep clarity around goals, developing a culture of authentic strategic optimism.

3.     Communication style is sincere, open and energized. Leaders are not intimidating, have good humor, the wisdom of perspective and agility to work with a diversity of situations.

4.     Leaders are able to manage demanding schedules, and their agenda is always focused on what matters most.

5.     Leaders listen as they coach every situation they find themselves in.

6.     Financial matters are monitored, measured, and communicated, and leaders consistently bring in the bottom line — no matter the excuses of the day.

7.     There is an ambassadorial quality about them. They are sought out to problem-solve and inspire along the way, all the while building bridges.

8.     Today’s issues are never ignored, and there is a sense that the longer-term plans can be realized through today’s actions — no matter how painful.

9.     Resilience is manifest in the language of the leader who is prepared for inevitable surprises.

10. Accountability is never shirked and the leader takes final responsibility for results and outcomes.  This is a stand-and-be-counted attitude that becomes contagious in the life of the organization.

Leadership is demanding. Great leaders are rare. These characteristics are framed by lifestyle and attitude. Leaders are not perfect, but they have an uncanny knack for applying sensible, inspired, day-to-day actions that make all the difference.  

And so you may ask: How much should a good managing partner be paid?

To begin to answer this question we have organized tables in this issue that follow Greenway Group’s findings on the compensation of various leadership positions by quintiles. This is done primarily to help our clients whose firms operate as meritocracies. In our work with successful organizations we typically recommend that only the top forty percent — the top two quintiles — be used for organizations wanting to select comparables that include the most successful organizations in North America and to reward their leadership based on performance as calculated by a meritocracy dashboard.

Aspirational organizations measure and chronicle the achievement of top performance. This includes both financial and non-financial benchmarks. There are many correct ways to evaluate, negotiate, and fix leader compensation, some of which are better than others. Our own proprietary system is the Greenway LEAP® Executive Compensation Program which has become a time proven adjunct to the Greenway LEAP® system that evaluates the total culture and performance of a professional practice.  This of course includes both financial and cultural performance characteristics.

Let’s take a closer look at just one example, which is a composite fictional firm. The President/CEO of this professional practice of just under 200 employees will likely have a base compensation of $229,313 according to the latest canvassing of firms in North America.  The typical performance bonus (unrelated to equity) would likely be 54%. This adds up to $353,142 pre-equity distribution.

Taken alone, this information can be misleading, because in the top quintile of firms the base compensation would more likely be in the range of $344,727. With a typical performance bonus this becomes a sum of $530,880 (plus benefits).

Additionally, keep in mind that the great majority of CEOs and managing partners also have equity in their organizations. This means that their total taxable cash compensation will likely be significantly higher than the above number. For example, if this fictional managing partner owns 10% of the enterprise of just under 200 employees, they may be collecting gross fees of approximately $37,000,000. Their net fees could quite likely be in the zone of $31,619,000 (based on $158,095 net fees per employee). The net pre-tax, pre-bonus profit target would then be in the zone of $4,426,000. Equity distributions will then be considered, along with those of staff performance bonus, profit sharing, and retained earnings.

Most professional practices will put in place policies on performance goals, executive compensation, retained earnings and distributions. 

One rule of thumb is to set aside one third of net profits for retained earnings. While this may not be an optimized tax strategy, it is still a plan open to timely adjustment. There are numerous policy guides that can work for a firm, depending on the context of partner/corporate structures, ownership requirements, and philosophy of cash management and investments.  For professionals in leading practices in design, today’s executive compensation is respectable and growing in line with the most successful professionals in other fields.

There are emerging new realities in the evaluation and compensation of professional practice executives who are drawn together by the forces of achievement and evolution. These factors have reshaped the mind of professional services firms. Thus, alternative futures are unfolding for professional practices; futures that can be exciting and full of potential. What is needed now is a state of mind that is creative rather than defensive — and that can combine the wisdom of design and that of sound business leadership.

James P. Cramer is chairman and CEO of the Greenway Group, a foresight management consultancy. Cramer is president of the Design Futures Council, the publisher and founding editor of DesignIntelligence, and former chief executive of the American Institute of Architects.