With the financial reporting season in full swing and firms releasing their profit per equity partner (PEP) figures, questions are often raised over the optimum partner reward strategy and how this impacts on PEP. The lockstep versus performance-related debate runs on. However, one key factor is often overlooked: most firms fail to realise the benefits of their reward strategies because they fail to measure performance correctly.
Performance measurement is often just focused on highlighting under-performers. The bigger picture is that a properly implemented performance management process will raise the bar for all partners, thereby improving the overall quality of a firm’s partners.
Designing a performance review process
There is not a generic blueprint for designing a review process, but there are some fundamental guidelines: be clear, be transparent, be consistent.
Best practice is to review performance formally once a year, but to also schedule interim reviews so that any slippage against targets can be identified and discussed. Do not let the process become an annual form-filling exercise – bring it to life. Look forward as well as back. Looking at performance over a two or three-year cycle is also a good idea as it allows a wider view of the individual’s progress.
Key performance measures
Performance measures should be clearly aligned with the firm’s strategy. Spend some time identifying the firm’s key performance measures (KPMs): What will be measured? How will targets be set? And how will achievement be judged? Remember, you will get the behaviour you measure: if it is important that partners display certain characteristics or perform certain tasks then these must be measured. The following are some common KPMs:
Profitability and growth
Profitability reflects the net contribution of the partner. It include billings managed by the partner, recovery and working capital management. Objective figures should be readily available from the firm’s finance system to set targets and record performance.
Measuring contribution to the growth of the firm is also important. This should recognise partners who generate revenues for the firm outside their own practice area by being ambassadors for their firm’s wider services. Sales and marketing teams often track referrals and introductions.
Partners should embody the values that define your firm. They are role models for their teams. Their effectiveness in harnessing the skills and enthusiasm of your people and coaching them will make a major contribution to the success of the firm.
Upward feedback and staff surveys will provide much of the data you need to assess performance. Staff turnover numbers by practice area will also help, as they may indicate either good or poor performance in this area.
Client feedback is essential in order to monitor the quality of work performed and satisfaction levels. Most firms now have a well-established client care programme and scores from client surveys provide an independent assessment.
Quality is now generally widened to include risk management – are your partners adequately aware of the risks involved in their engagements and do they follow the firm’s guidelines on client acceptance and review processes?
This is perhaps the most difficult area to set benchmarks. Interpretations of what constitutes leadership vary enormously and require subjective review. The important thing is to articulate what leadership means in the context of your firm and the challenges it faces, agree some values that reflect this style of leadership and then measure performance against those values.
The environment in which we operate changes over time and equity partners must be able to adapt to meet those changes. This requires development throughout their career. Agreeing personal development plans that are adapted on an ongoing basis to reflect new challenges will help keep partners on a continuum of self-assessment and development.
Once KPMs have been identified, performance goals and levels must be set in advance. One of the key failure points for performance reviews is the timing and clarity of objectives and measurements. Partners need to know where the goalposts are.
Keep it simple and aim to set some mandatory goals with pre-agreed performance levels for all partners. Then enhance this with a manageable number of personal objectives – say no more than four for each partner.
Be clear on the performance level required for each measure. Keeping minimum levels high, but still achievable, will provide a degree of stretch for partners and will drive improvements. Publicise expectations by seniority or practice area so that a year-two partner will know what is expected of them in year four.
Think about sharing objectives within the partner group – or even on a wider basis – and encourage partners to support each other in meeting their goals.
If you follow the process above then assessing performance becomes easier. The benchmarks and objectives have been set and processes have been put in place to gather information objectively. While a degree of subjectivity cannot be eliminated, it has been minimised, thus reducing the scope for disagreement and dispute.
Actual performance against targets can then be reviewed, which provides a starting point for a meaningful discussion on development and change. Feeding the results of these discussions into partner development plans provides a positive output from the discussion for most partners. Partners are likely to fall into bands: the superstars, the high performers, the average performers and the under-performers. The distribution of partners across the bands will provide a useful insight for management and is likely to trigger discussions with under-performers that lead to resolution, in one way or another, of the impact of their reduced contribution to the firm.
The implementation of an effective performance management system requires time and effort. It may also call into question the reward system you use – partners may come to expect their performance to be adequately reflected in their reward. There are no shortcuts unless you revert back to a ‘tick the box’ system.
Is it worthwhile? Undoubtedly. The investment you make in continuous development of your partners will pay off – they will become smarter, better and more distinguishable from their competitors. In short, when it comes to performance management, you get the partners you deserve.
Julie Walker is director of proffessional partnership services at Ernst & Young