PR firms: Time to align your financial goals with incentive compensation plans

Long-term incentive plans should be designed to reflect the financial goals of a firm, as well as the financial goals that the firm may have for an individual employee or group of staff

At Davis & Gilbert, we recently conducted a confidential survey of PR firms asking about their current incentive compensation programs. What the results demonstrate is that these programs can drive a firm toward growth and success.

Here are three key findings: First, the results demonstrate a significant, and somewhat unsettling, decree of economic disparity among firms as 24% reported their top-line revenue had increased by more than 20% over the prior year.

The same percentage of firms said their revenues were either flat or had declined by 5% or more. These results reflect a growing chasm between the fastest- and slowest-growing agencies – the most significant gap in the three years since this study has been conducted.

Another area of widening disparity this year was the ratio of employee compensation as a percentage of firm fee income as 22% of firms indicate they spend more than 60% of their fee income on employee compensation. However, none of the firms that grew top-line revenue by more than 20% this year spent 60% or more of their fee income on compensation.

Second, results show that many PR firms were still relying on the same basic, and arguably unimaginative, method of annual discretionary cash compensation to incentivize and retain talent. Sixty percent of firms compensate employees using cash other than traditional annual base salary and discretionary bonuses. However, more than half (54%) use commission on new business as the only "non-traditional" method of cash compensation, and 30% of the firms reward employees using an annual "non-discretionary" bonus based upon pre-determined objective criteria.

An even smaller percentage (15%) use a long-term incentive compensation plan, based upon set criteria over a period of years.

Third, the survey showed an astonishingly high correlation between those firms that grew revenue by 20% or more this year, and the firms that had established a long-term incentive program. Specifically, 93% of the fastest-growing firms had moved away from paying employees traditional discretionary bonus.

Instead, these firms were now incentivizing employees through either an annual bonus based upon pre-determined objective criteria, or a long-term incentive plan (with performance and payments based on a multi-year period) or both. Equally interesting is that this finding was true for all fast growing firms and regardless of the specialty, location, or size of the firms.

So is it time to design your 2016 long-term incentive plan?

These are plans that pay employees incentive compensation based upon an objective and measurable performance goal and rewards employees over a multi-year period. As an incentive tool, it drives the behavior of employees toward achieving the stated goals. It also helps with retention because the employee forfeits any unvested amounts in the event she leaves the firm prior to the dates the payments vest.

These plans should be designed to reflect the financial goals of a firm, as well as the financial goals that the firm may have for an individual employee or group of staff. PR firm CEOs should ask themselves what is the behavior they want to encourage and then "work backward," consulting with legal counsel to design an incentive plan with those goals in mind.

For example, a firm might establish a plan for 2016 in which some or all employees would receive a specified amount of money, if the agency met a specified revenue target, with payments to the employees vesting over a three-year period. Well-run firms recognize that economics drive behavior and should design a plan to incentivize the behavior they wish to encourage.

The survey confirmed this. For those firms using a long-term incentive plan, 60% structure these plans with a performance period of three years or more, and use a variety of criteria to determine the amount of the payments under the plan.

The most common performance criteria that comms agencies are using to design their long-term incentive plans are the firm’s net income (43%), individual goals for specific employees (29%), and the firm’s profit margin (12%).

Finally, the survey demonstrates that PR firms should align their financial goals with their incentive compensation system. Doing this is one of the best ways for a firm to achieve success in 2016.

Additional survey result highlights can be found by clicking here.

Michael Lasky is a senior partner at the law firm of Davis & Gilbert LLP, where he heads the PR practice group and co-chairs the litigation department. He can be reached at mlasky@dglaw.com.

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