The recession will have a dramatic impact on CEO, partner, and principal compensation.
The recession will have a dramatic impact on CEO, partner, and principal compensation.
Salary and compensation issues can be difficult to discuss. And compensation policy is never easy. Furthermore, professional practices often fail to see the opportunities hidden in economic downturns for developing sharper pay-for-performance employment transitions.
In this issue of DesignIntelligence we focus on our annual compensation survey results, data that can help shape your firm’s policies. It will also provide you an opportunity to take a rapid assessment of your own compensation situation. We’ll share information to put your compensation, bonus, and benefits situation in perspective with what is happening at this time industry-wide. Then we’ll drill deeper, region by region and category by category, to equip you with definitive facts and ideas to position your organization to seize competitive advantage, whether it’s in the form of developing a new meritocracy system or a transformative benefits policy.
Underlying the need for scrutiny of compensation and executive compensation in design firms is that due diligence takes on even more importance in an economic slide. Employees in professional practices will not be at their best unless they trust the decisions of the firm’s leaders. They will not and cannot trust if they don’t get straight talk about economic issues that include compensation.
The most successful firms will be the ones that are able to attract, develop, and retain the most talented people. In addition to coaching staff, leaders need to convey to them that they are being fairly compensated and that there are opportunities ahead for advancement. Not only will wise compensation policies help build higher performing professionals and teams, but they will also keep the best staff in place and therefore maintain readiness for emerging opportunities on the mid-term and more distant horizon.
Riding Out the Recession?
Is this a time to ride out the recession? Yes and no. Inaction, paralysis, and slow-to-act leadership are unfortunate and unnecessary at any time but especially during a recession. This is the time to get more efficient, to clean house perhaps, and to be progressive in shaping timely compensation policies and systems. Even when layoffs are necessary, a strong system that is durable in good times and bad will give you resiliency and financial strength.
The purpose of this year’s annual DesignIntelligence Compensation and Benefits Survey is to determine trends in professional practice compensation as leaders prepare for economic downturn.
Survey respondents invoiced a collective total of $3.86 billion in 2008. They represent 460 professional practice locations employing 25,516 full-time staff. Only data from U.S. firm locations is included.
These professional practices offer a wide variety of services, including architecture, design-build, engineering, interior design, landscape architecture, urban design, and industrial design. The dominant services offered by participating firms are architecture (95.6 percent) and interior design (79.1 percent). Survey participation rates were strong, and there is statistical confidence above 94 percent.
Significant Changes Ahead
While growth was still robust a year ago, the brakes have now been applied by an economy that has slammed many firms regardless of their geographic location. In terms of growth, about 57 percent of firms expect a decline of up to 9 percent in 2009; 13 percent of firms expect no growth; and 31 percent expect to grow by as much as 21 percent. Somewhat surprisingly, 3 percent expect to grow between 19 percent and 21 percent. Based on Greenway Group’s analysis, the growth is expected to be in areas of infrastructure, health care facilities, higher education, government facilities, greening of schools, and transportation facilities. Most firms expect the recession to linger, with an economic rebound in perhaps three years. (There is 80 percent median agreement that the recession will be long and that a three-year recovery period is most likely.)
Looking closer at some of this year’s findings, we see a trend for more firms to pay for the expenses associated with preparing for and taking professional licensing exams. In fact, 84 percent of responding firms say they will participate in paying for some or all of the Architect Registration Exam. When asked how much base compensation increases upon licensure, 29 percent of firms said 5 percent to 9 percent. Last year, this 5 percent to 9 percent increase category had a response rate of 47 percent, so there is a downward trend in this category by approximately 18 percent. Nevertheless, 27 percent said they would provide for a base compensation increase of 10 percent to 14 percent upon licensure. This is encouraging. Given the economic conditions, we were somewhat surprised by this response and for the rapidly increasing support for licensing.
Upon graduation from architecture and design school, the average compensation figures continue to march upward. The mean salary for a graduate with a Bachelor of Architecture degree has risen from $39,333 in 2008 to $41,012 for 2009. The mean salary for a graduate with a Master of Architecture degree has risen from $42,985 to $47,263.
Compensation levels for first-year interns range from a mean of approximately $36,000 to $41,000 and for third-year interns from a mean of approximately $43,800 to $51,700. Most interns now record a 41-hour work week. There is a mean salary difference for a recent graduate with an M.Arch degree that is 15 percent higher than for a B.Arch graduate. This stratification is a good 5 percent higher than last year’s DesignIntelligence research. More than 80 percent of firms provide for performance bonuses in their compensation policies, and interns earn on average performance bonus of 3.2 percent in year one, 3.9 percent in year three.
In the pages that follow you will see compensation survey responses for a variety of positions, including architects, project managers, interior designers, landscape architects, graphic designers, engineers, and specialized and support staff. This year we have also added human resources officers, chief marketing officers, and chief information officers.
Now, let’s look in more detail at the survey results of an architect with 20 years’ experience and no ownership in the professional practice. This position is most likely to earn $100,723 in 2009; however, the top 20 percent in this category will earn $142,200.
An interior designer with 20 years’ experience and no ownership in the professional practice is most likely to earn $97,800; however, the top 20 percent in this category will earn $145,333.
Marketing directors in professional practices are compensated from a low mean compensation of $80,571 to a high mean of $104,556. Additionally, the average performance bonus for a marketing director is 9.6 percent. This brings the total cash compensation to a range of $88,205 to $114,593. Chief marketing officers earn an average of $118,483 plus a bonus of 18.2 percent, resulting in total cash compensation of $140,047.
In the ownership categories, professionals usually have titles of principal or partner in addition to any others that may include officer or specific categorical titles. In medium and large practices, principals are usually owners who have a less significant equity or stock position; in S or C corporations or LLCs, principals are not partners as no partnership exists. Often, the title principal is used by firms of all sizes to indicate some level of ownership — but not always. In the tables that follow, we present compensation results for equity and non-equity principals. We have learned that there is a trend in the largest firms to distinguish principals as those who have non-equity or low-equity positions and those who are partners with majority equity.
The average architect principal of a professional practice who is an owner (having some equity in the firm) is paid at a level of $147,452. The top 20 percent of such architect principals earn $205,778. There is typically an additional bonus, with the mean projected to be 45.6 percent. Thus, a non-owner principal will earn approximately $214,690 depending on his or her individual performance and the economic success of the firm.
For firms of all sizes, the average architect partner who is also an owner earns $179,594. The mean bonus for this position is 62.5 percent. The top 20 percent in this category earn $325,000 plus bonus. The median cash compensation is $291,840 for this overall level. However, a significant number of owner partners do make considerably more and can achieve seven figures. The most highly compensated (average per year over three years) can earn $2.2 million per year when their bonus is included in the total. This includes the elite or “starchitect” category as well as highly differentiated medium-size firms and some of the global giants.
The highest paid professional in a firm is typically the president/chief executive officer or the chairman/CEO. Some firms do not use officer titles. The president of a firm who is also the chief executive officer (in responsibility if not title) earns a median annual base cash compensation of $198,684. A typical target bonus in a firm’s compensation policy, according to Greenway Group is 100 percent, but last year’s results were actually lower at 82.2 percent. This brings total cash compensation of the CEO to $362,002. However, the top 20 percent of CEOs of firms of all sizes earn $354,286 plus bonus, for a total cash compensation of $645,509. The bonus can often run at 180 percent of base, with some consistently exceeding three times that amount.
However, the recession will have a dramatic impact on CEO, partner, and principal compensation to a far greater degree than on employee positions. Those who survive the layoffs will find some likely compensation increase to levels around 3.2 percent. This amount is down several percentage points from last year’s survey and significantly more conservative than two years ago. Based on follow-up interviews, there is high likelihood that the base compensation will decrease by 12 percent or more for those with equity, and bonuses will be at levels below target for the first time in six years.
Pay for Performance
In professional practices, compensation can sometimes be ridiculously out of line with actual performance or value. Deadwood happens. For instance, the baby boomer generation is currently dominant in professional practices today, yet this generation has a decidedly mixed performance record in terms of providing real value to serve clients. Technical abilities are varied, and some have not kept up with latest building information modeling, LEED, and integrated project delivery innovations. Others have behavioral idiosyncrasies that block effective teamwork. It often happens that when employees are paid for years of experience rather than on merit, a lack of high-performance environment gradually develops.
Firms may use different methods to address this phenomenon. One example is Greenway Group’s LEAP meritocracy system that quantifies leadership, empowerment, accountability, and processes. It is designed to equip professional services firm partners with the tools, frameworks, and concepts to create an effective pay-for-performance system. The system drives sought-after behaviors and enhances performance around the core values of the firm, going beyond financial performance to build holistic integrity into the culture. LEAP measures organizational, team, and individual performance, offering a standardized and custom system to implement a performance-related pay plan, including executive compensation bonuses. The system has been in place for nearly 10 years and is used by firms of all sizes that seek to be high-performance professional practices. The charts here show a typical range of principal compensation in a 300-person firm. Attention is given to the high performance end, where results will be rewarded by the meritocracy philosophy.
Many in the design professions believe that demographics is destiny. However, it need not be this way. Pay-for-performance policies and practices can reduce the negative impact of aging non-high-performers in a firm. And lower-performing professionals can be given opportunities to reinvent themselves. When high performance is rewarded, compensation becomes a strategic lever. There is a trend in professional practices toward pay-for-performance systems and over time, which tends to drive architecture, design, and engineering salaries to higher levels. This can result in compensation that is competitive with or even leads other professionals worldwide.
James P. Cramer is founding editor of DesignIntelligence and co-chair of the Design Futures Council. He is chairman of the Greenway Group, a foresight management consultancy that helps organizations navigate change to add value.