By Andy Klose - Associate Partner at Vencon Research in Berlin, Germany
Management consulting firms frequently face a critical challenge: balancing competitive partner compensation with sustainable growth and profitability. Many firms set their target on compensating partners at the market median but often fall short. This misalignment leads to partner dissatisfaction and increased pressure on leadership. Addressing the issue requires a strategic, data-driven approach that not only ensures fair compensation but also fosters performance-driven growth.
Performance and Financial Outcomes Are Interdependent
At its core, the challenge stems from a direct but complex link between partner compensation and firm profitability. Unlike salaried employees, partners derive their income largely from the firm’s profits, which in turn depend on their own ability to generate revenue and control costs. If partners underperform, firm-wide profitability suffers, making it financially unfeasible to pay them at target market levels. Therefore, increasing partner compensation requires a dual focus: boosting individual partner performance and improving overall firm profitability.
Understanding the Compensation Gap
Vencon Research regularly benchmarks partner compensation across consulting firms, comparing actual earnings to market norms and the firm’s target market percentile. A common scenario we come across involves consulting firms aspiring to pay their partners at the market median but operating closer to the 25th percentile (lower quartile). At the same time, these firms aim for ambitious double-digit revenue growth while maintaining or improving profitability.
A deeper analysis often reveals a fundamental issue: underperformance among partners, with a significant proportion failing to meet their sales targets. This raises an essential question: How can the firm enhance both partner compensation and financial sustainability?
Growth Strategies: Expanding Revenue Potential
To meet revenue growth targets, firms typically consider three strategic options:
- Increase sales targets for existing partners: While raising revenue expectations seems like a logical solution, it is often impractical if partners are already struggling to meet current targets. Without structural changes, higher sales goals would likely intensify the firm’s revenue attainment challenges.
- Increase the number of partners: Promoting internal talent or hiring externally can drive additional revenue. However, this approach is hindered if the firm’s partner compensation is not competitive, making it difficult to attract and retain top talent.
- Pursue “inorganic” growth: Acquiring smaller consulting firms can provide an immediate revenue boost, assuming the financial backing is available. Yet, without addressing underlying performance and profitability issues, mergers and acquisitions merely delay—but do not solve—the fundamental problem.
Given these challenges, what practical steps can firms take to improve both financial performance and partner satisfaction?
Rethinking Partner Compensation: Pay-for-Performance
While increasing partner pay to the target market percentile is a straightforward solution, it is rarely feasible without increasing profitability. Unlike consultant levels (below partner), where competitive compensation is often mandatory to reduce attrition, partner pay must align with contributions to the firm’s financial health.
Most consulting firms adopt a meritocratic “pay-for-performance” model. To ensure consistency, we advocate for a structured approach that integrates profit, goals, and pay within defined frameworks such as partner levels or career groups. This approach, which we refer to as the Trinity Model, links partner compensation directly to revenue and profit contributions.
Addressing Partner Underperformance
One of the key hurdles to increasing partner compensation is underperformance. Firms must take a systematic approach to improve productivity and effectiveness at the partner level. A crucial first step is conducting a book of business review to assess individual contributions and identify areas for growth. Additionally, firms should evaluate:
- Role clarity and expectations: Many underperforming partners prioritize project delivery over business development. Clarifying expectations through role definitions and accountability frameworks is essential.
- Training and development: Equipping partners with business development skills can enhance revenue generation capabilities.
- Structural realignment: Refining the firm’s partner model, including job descriptions and performance benchmarks, ensures a stronger alignment between roles and firm strategy.
Improving Profitability to Sustain Growth
Beyond individual partner performance, firms should optimize their broader business structure to enhance profitability. Key areas for evaluation include:
- Project team composition: Ensuring an optimal balance of senior and junior consulting staff improves cost efficiency.
- Firm-wide organizational structure: Adjusting the overall staffing pyramid and staff-to-partner ratios can drive margin improvements.
- Operational efficiency: Identifying cost-saving measures and optimizing service delivery models contribute to higher profits.
By strengthening both individual performance and overall firm profitability, consulting firms can create a sustainable foundation for increasing partner compensation.
A Holistic Approach to Sustainable Growth
Aligning partner compensation with market expectations requires a holistic strategy that addresses both revenue generation and profitability. By improving partner performance, optimizing the firm’s organizational structure, and reinforcing a merit-based pay model, consulting firms can create a sustainable path toward higher earnings and growth.
Additionally, enhancing compensation competitiveness will improve the firm’s ability to attract top-tier partner candidates, further accelerating growth. In the long run, improved profitability may also open doors for external financing, enabling both organic and inorganic expansion.
Ultimately, firms that successfully integrate these elements will be well-positioned to achieve their financial targets while ensuring partner satisfaction and long-term success.
We would be pleased to assist you with any additional inquiries and provide recommendations to enhance performance and financial sustainability in your organization. Contact us to learn more.
Andy Klose is an Associate Partner at Vencon Research International and heads the firm’s consulting unit.
Vencon Research International is a leading provider of compensation benchmarking and research as well as of compensation and performance-related consulting services for professional service firms, especially for audit and tax, management consulting, and IT services firms. Vencon Research International provides services to a full range of clients in more than 75 countries worldwide and is proud to name more than 85% of the world’s major consulting and/or professional services firm its clients.