Discover the one simple change you can make to boost your architecture firm's profits. In today's episode, we discuss the tips for successful architecture firm management, including accountability, employee retention, and how to calculate an hourly billing rate. Steve L. Wintner AIA Emeritus is the founder and principal of Management Consulting Services, a professional consulting firm, located in the Austin, TX area and focused on enhancing the productivity and profitability of professional design firms. He is the co-author of the book Financial Management for Design Professionals: The Path to Profitability.
In today's episode we discuss:
- The one secret to effective time management
- The powerful formula for effective delegation
- How to determine your proper hourly rate as an architect
- What is a profit plan and annual budget?
- The number one trick to improving architecture firm profitablity
- What? Accountability for architecture firm principals?
- Connect with Steve Wintner, AIA Emeritus on LinkedIn.
- Book: The 7 Habits of Highly Effective People: Powerful Lessons in Personal Change
- Book: Financial Management for Design Professionals: The Path to Profitability
This interview is on iTunes. Subscribe above, and be a hero! If you know another architect who would benefit from watching this video, share away using the social share buttons.
Interview Transcript and Members Only Resources:
Enoch: Welcome back, Architect Nation. This is Enoch Bartlett Sears. This is the show where we talk about what they didn’t teach us in school – how to run a great business.
Today’s segment is our second interview with Steve L. Wintner, AIA Emeritus. He’s the founder and principal of Management Consulting Services, a professional consulting firm located in the Austin, Texas area, and focused on enhancing the productivity and profitability of professional design firms.
He’s the co-author of the book Financial Management for Design Professionals: The Path to Profitability, which by the way, if you remember in my first episode, Oscia Wilson talked about this book and recommended it as a necessary book if you’re planning on moving in to a management position or running your own firm.
So, Steve is currently working on a new and updated version of this with his co-author Michael Tardif. I just want to welcome Mr. Wintner back to the show.
Steve: Hi, Enoch. Thanks.
Enoch: Absolutely. It’s good to have you back. I personally really enjoyed our conversation last week. I could tell that you have a very, very deep, deep knowledge of the business side of architecture. It fits perfectly in what we’re trying to do here in this program which is spread that information and make sure that people have the resources and the knowledge they need to make the correct decisions that can, as a whole, help architects be more prolific, flourish, and create better designs.
So, thank you for what you’re doing and what you’ve devoted your life to.
Steve: Well, thank you. That’s very kind of you.
Enoch: Well, it’s true, and I mean it.
Last week, just to give a summary, we talked a little bit about some of the common management problems or, I guess, deficiencies that happen in architecture firms and your suggestions for how things could be improved. We had a great conversation about an employee retention policy – how to retain and keep the best talent. Of course, that’s a big investment. We also talked about communicating and accountability within firms.
Now, I know, Steve that you’re working on two books now. Sounds like a lot. You’re working on the rewrite for your book “Financial Management for Design Professionals: The Path to Profitability.” Then, also, another book about the culture of accountability in professional design firms. Can you tell us just quickly about those two books?
Steve: Well, Yes. As I have mentioned last week. The first book, it was published in 2006. Now that Michael Tardif, my co-author, and I now have the copyright ownership of the book. We’re doing a rewrite to publish it electronically as an e-book, or a Kindle book, or whatever forms we might find in the electronic digital media, and that will be some time later this year.
It’s really nothing more than taking the book and enhancing what was already published. We’re finding things that needed to be clarified further, expanded a little bit further. We’re finding things that need to be added that weren’t in there that would be more helpful in expanding the things that we’re talking about that weren’t mentioned in the first place, and perhaps shortening some of the things that weren’t nearly as important. So, it’s just basically a cleanup and a better version of the first printing without making wholesale changes to it.
The accountability book is something that I’m just beginning the process of developing. I am going to work again with my co-author Michael Tardif. We have agreed that we’ll work together in developing it as we did for our first book because we’ve had such a successful process working this thing out and doing the things that we’ve done to create the book. We’ve enjoyed the process. It’s been beneficial to both of us and it’s rewarded us handsomely. So, we’re going to do that again, but it’s going to take a lot of data gathering, and understanding, and trying to pull together the things that I think will be beneficial in including in a book that I don’t really know if there’s anything out there in the marketplace that is specifically addresses that subject, relative to our particular profession.
Enoch: Absolutely. I mean, not that I know of or that I have run across. It sounds like an absolutely wonderful asset and it’s going to be another great contribution to the library of Business of Architecture.
So, last week we did talk a little bit about time management. I was impressed, Steve, to be honest the first time I talked to you. Normally, I do these video interviews, I record them with Skype, and we put them on YouTube so people can see the video as well.
You just explained that, you know what? That’s a newer technology, and your time is valuable to you. You have this interesting philosophy about how you approach your time. Can you tell me a little bit about how you do that? What suggestions do you have for managing time more efficiently and maybe some insight to how you personally have decided to manage your time and make priorities?
Steve: Sure. I think that last week when we talked about this in some respects., I touched on the area of understanding how best to utilize a person’s time in the sense of giving them the information they need, clarifying for them what they need to know about their actual day to day work.
In other words, what are you going to do? Not how are you going to do what you’re going to do, but what are you going to do and what are the results that are expected for what you do? How would you properly and effectively function within that role that you’re particularly working on in that particular time?
I refer to small firms who have less of the kind of luxury of having one thing to do, one project to work on, and not being able to keep themselves focused on a single target,. Whereas, in those small firms you have to do a myriad number of things. The Owners themselves, the Principal themselves wear a multitude of hats because of the size of the firm. There’s a lot to be done in the running of such an operation.
So, the clarifying of each position and what’s expected of them, the description of that position, the description of each role and its responsibilities. Then, specific to the projects: What is the project goal, what are the fee budgets? What are the outcomes that we’re striving for? What are the scheduling limitations that we have? All those things become a part of it.
The best way that you can do that is to understand what it is that’s expected of you. Then, just focus on doing that, and only do that which is expected of you and that which only you can do. If you have the luxury of being able to delegate to someone else, which is in small firms there’s very precious little time for or the ability to do that, then it’s best to go ahead and delegate.
I did refer to Stephen Covey’s book “The 7 Habits of Highly Effective People” and his outline of what is his best way to delegate. There are only two methods, from his perspective, how to properly delegate, to effective delegate so that it’s carried out and it’s done in an effective and efficient way.
Enoch: What are those two forms of delegation?
Steve: Well, one is called stewardship delegation, which is an environment in which you delegate to somebody, the right person, the absolute best optimum person to do that job that’s available to do that job. Then, give them all the information they need to succeed to carry out what’s expected of them, to accomplish the task at the best possible level as efficiently and as effectively as possible. Give them everything; support, information, resources, everything that’s needed.
The other one is gopher delegation which says “I’m going to give you this to do and then when you are done come back and ask me what to do next,” “Now, you can do this,” “Now, you can do this,” “Now, go to do this,” “Now, do this.” That’s a waste of time, that’s inefficient, and it’s a very expensive method of operating, and yet it happens because some people just don’t properly understand the art of delegation. It truly is an art.
So, Covey explains all of that. He does a great job of doing that. So, nothing that I could ever say about it could ever be improved upon from his perspective, in my opinion.
Enoch: For that we will refer people to “The 7 Habits of Highly Effective People.” That is very easy to get a hold of, unlike your book, Financial Management for Design Professionals.
Enoch: So, Steve, this is the moment that everyone has been waiting for – financial management for design professionals. Going to talk about some of the key things that firm Owners, or Principals, or people who are thinking about starting their own firms can do to increase their profitability and make the most of the existing money that’s already coming in to their firm.
Let’s get down to basics. How should a new firm owner or anyone… Let’s talk about computing the hourly rate. This is a question that many new architects have. How do I figure out what I’m worth? How do I figure out how much to charge for my time?
Steve: Okay. Well, it’s part of a linear process. So, it’s not just something that stands alone, it requires information that a firm may or may not have. Some of this information is readily available, some may not be, because of the way the firm’s accounting system gathers and stores information. It might depend on the way your financial management system is set up, or the way your chart of accounts is organized, or how the profit/loss statement is formatted. So some of these items may not be readily available.
There are five components that are part of an hourly billing rate.
- The hourly labor rate
- The payroll benefit expenses
- The general and administrative expenses
- The break-even rate
- The profit target.
These are the five components that you will need to identify, understand and know how to apply them to develop an hourly billing rate.
The first component relates to the cost of an employee’s hourly labor, based on their annual salary. For example, if you pay the employee an annual salary of $50,000, that calculates to an hourly rate of $24.04. So, that’s the hourly labor cost for that employee and for the sake of calculating the hourly billing rate, the labor cost is represented as a multiple of 1.00
The second component relates to the cost of a firm’s payroll benefit expenses, which includes a firm’s mandatory and customary payroll deductions, as a percentage of direct labor. These expenses include FICA, FUTA, SUTA, worker’s compensation, and other non-discretionary benefits like major medical insurance. These expenses are represented as a multiple of direct labor, somewhere in the 0.30 to 0.35 range.
The third component relates to a firm’s net overhead expense costs. This will include all of the indirect expenses, again, as a multiple of direct labor, somewhere in the 0.90 to 1.15 range. To determine the firm’s total overhead expense rate, add the multiples for the mandatory and customary payroll benefit expenses and the net overhead expenses. This total will be in the range of 1.20 (0.30+0.90) to 1.50 (0.35+1.15), as a multiple of direct labor. Some firms have a higher overhead rate and some firms have a lower overhead rate, depending on how well they manage their overhead expenses.
If you don’t know how to properly calculate these components, you can’t possibly do this exercise. And, if you don’t have the right information to calculate these components, you’re going to get misleading information, which could lead to problems.
Alright, if you add the first three multiples together, you would have: 1.00 for the labor rate, 0.35, for the payroll benefit expenses and 1.20 for the net overhead expenses, it will equal a total of 1.55 as the overhead rate. Adding the overhead rate and the labor rate equals a total of 2.55, which is the break-even rate. .
Steve: Now, that breakeven rate tells you that this is the cost for every dollar you spend in salary for an employee will costs me $2.55 just to have them here and pay them a $1 of salary every hour. So, obviously, to make profit you have to make more than a multiple of 2.55, right?
Steve: Okay, the next step is to calculate how much profit each hourly billing rate will include. . You actually can control the amount of profit that is included in the fee at the start of any project This is another thing that some of my colleagues are not aware of and that they have absolute control over in the negotiation of a project fee. Now,this does not ensure that amount of profit will have been made at the completion of the project. It’s just the targeted amount when they begin a project and set their fees because they can target a percentage of profit that gets built in to the billing rate for each hour that helps to establish a project fee budget.
In my opinion, I believe, that anything less than 20% profit is unacceptable. We have all spent too many years and dollars on our professional education, in our becoming experienced, and learning what we had to learn to get to the place where we are and not make at least 20% profit for our work. That’s a reasonable return on our investment in our firms.
So, anybody that makes less than 20%, I say, can improve upon their performance. There’s room for improvement. There are some firms that make a lot more than 20%, but the preponderance of firms don’t make anywhere near that, and that’s a well-known established statistic, according to the professional surveys.
Enoch: What would be the general amount that most firms are at?
Steve: Well, you can’t say that. I can only tell you that the AIA surveys over the years have continued to show an improvement. That has a lot to do with the new technologies that have made things much moiré effective and efficient in doing the things that need to be done…
Steve: … through technology. The overhead rate used to be higher. If a firm had a total overhead rate between1.50 to 1.75, then it was in the range of being where it needed to be to be competitive in the marketplace and make a profit. Now, the overhead rate has dropped down to somewhere between 1.20 and 1.50. I think it’s even lower than 1.20. for some firms. Some firms have a lower overhead which increases their profit. Those firms are likely better managers of their overhead expenses, and that’s the key to this thing. So, I say 20% is what you really need to have as a targeted profit margin.
Now, here’s what happens – this is the interesting thing that’s not known by so many of my colleagues except those that have gone to my workshop or read the book – and that is you don’t’ develop a profit of 20% by taking your 2.55 break-even rate and multiplying it by 20%. That will not give you 20% profit. That will give you a billing rate that has a 20% mark-up built-in to it, but it’s not 20% of your billing rate. It’s approximately 16.67%.
So, in order to get the billing rate to have a 20% profit, you must divide the 2.55 by the complement of the targeted profit amount. So, for a 20% profit, you would divide 2.55 by 80% . Have I lost you yet?
Enoch: Oh, absolutely, but I’m waiting for you to bring it home.
Steve: Okay. Well, I’m just using this as an example. If you had a break-even rate of 2.55, and you divided it by 0.8, which is 80%, you’ll come up with an answer of 3.1875.
Steve: …as a multiple for your billing rate.
Steve: So, for every dollar of labor you spend for the salary of an employee, you will need to have a billing rate that’s equal to 3.1875 to make a 20% profit.
Steve: On a $10 an hour employee, their billing rate would be $31.88. That would guarantee you starting out with a 20% profit, whereas if you just multiply the 2.55 by 20%, you’ll have eliminated almost 16% of the potential 20% profit, when you do math wrong.
Steve: So, that’s the best place to start and that’s the best place to do it. But, you can understand that if you don’t know how to develop your overhead rate, none of this works. The only thing that you absolutely know without a shadow of a doubt is how much you pay your people. You may be able to figure out how much you pay in payroll benefits, but if you don’t know what your true direct labor amount is, then you don’t know what the right multiple is.
Steve: So, all of these things are pieces that go in to this oversized puzzle, if you will, that creates this environment of a financial management system. They all work to complement each other. They all work to feed into each other and help the next thing to become known, to become developed, to become a process of bringing forth the information that’s needed to make some of these good business decisions.
Enoch: Excellent. Well, let’s move on. Let’s talk about planning, Steve.
Enoch: Let’s talk about, you know, if we’re looking at the year ahead. So, we’ve figured out our billing rate and that makes perfect sense. I totally get why multiplying it by 20% does not give you the full profit potential… If you think about it in a kind of elementary math, you’re looking at a part of a whole, so you have to divide by 80% because 80% is the part. It’s interesting math though once you look at the difference if you do it one way versus the other. Very interesting.
So, we’re planning for the future. We have an idea of – We maybe have some past records of how our firm is doing, but what do these firms need to think about when they’re looking ahead and they’re making either their annual profit plan or what other planning document should they be looking at?
Steve: Well, again, you’re not going to have any idea what the statistical data shows and I don’t even know if it exists as a statistic. How many architectural or professional design firm actually do an annual budget every year, and how many people even know how to do a profit plan to help build that annual budget.
So, there’s a level of missing information. There’s a level of not being engaged in a process that can be helpful in becoming more profitable, more effective, more efficient. Doing an annual budget is a no-brainer for me because it becomes the baseline for how you measure your performance during the course of the year. If you don’t do a budget to go by, you’ll never know whether you’re doing well or doing poorly in respect to what your budget is. Makes sense, right?
Steve: As Confucius said, “If you don’t know where you’re going, you can only wind up where you’re headed.” So, to me, doing an annual budget is something that you start to do at the end of the year each year for the next year.
Enoch: What steps go in to forming that annual budget? How do they go about crafting that?
Steve: Well, it has a lot to do with the firm itself. As I said out in the outset of my conversation last week, every firm is unique, so it depends on that firm. How long have they been in business? Is this a brand new startup? Well, if they are, then they have no data to go by to create a budget. They have no idea. It’s all a guess. It’s going to be just ‘swag’ at the best.
Steve: Most times it’s just going to be something that they grabbed out of the air and it’s not going to be worth very much. But, that’s okay. You have to start somewhere. It’s better than not doing anything.
If they’re a firm that has some kind of a history, a historical background, I don’t care how good or bad that is, I don’t care how correct or incorrect it might be, whatever their process has been, it’s something to build on. So, I suggest you start with at least the past three years of historical data about your finances for each of the past three years. How did you do in each of these categories that are going to be part of building this budget?
For me, you have to begin with the thing that means the most to the firm, which is the lifeblood of the firm, which is the revenue that the firm brings in each year. I’m not talking about dollars received, I’m talking about revenue earned. There’s real difference between the two.
For the sake of my approach, for the sake of the world that I live in, for the sake of the world that I do work in, I say in a general way of explaining it simply, accounting is the realm of dollars received and dollars paid out leaving you with tax liability to the government. Either you have one or you don’t have one. Whatever’s left over is something you’re going to have to pay taxes on unless you choose to distribute it all before you have to pay taxes and let someone else pay the taxes, meaning you give out money to yourself and your staff as bonuses.
The realm of financial management is only dealing with what you’ve earned. This is time you spent, and it’s what’s created the earned revenue for your firm. In financial parlance, the word “Net Operating Revenue” is the key term because it is those dollars that are left that your firm can spend and a certain amount of money we’re going to earn as a profit, which we hope will be at least 20% after paying all salaries and all expenses, and all consultants, and all vendors.
So, working on that front end is the most important part of it.
Steve: In that respect, the net operating revenue deals with three basic elements: that is: direct labor, overhead, and profit. Those are the three things that you’re going to need to know about. We’ll, those components of net operating revenue take on different forms, and they are distributed differently throughout the profit/loss statement.
Essentially, if you thought about it, when you look at a profit/loss statement, you can pick up these three categories really easily. They will show you that in an average firm across the board, the ratio between those three things looks like you spend 30% of it on direct labor, another 60% goes to go to paying overhead expenses. So, what does that leave you? That leaves you with a paltry 10% as a profit.
So, here, the goal is to enhance that 10%. Well, where do you think that’s going to come from? Well, there are two places. Those are the two things that we just talked about: direct labor and overhead expenses.
The direct labor can be controlled by establishing a project fee budget, which can be controlled by understanding what your overhead rate is. Then, creating a billing rate that has a built-in profitability to it and a schedule that makes sense to do these kinds of things that have to be done within the scope of services on the contract to deliver the project from beginning to end and make the product that you wanted.
If you spend more than 30%, if that’s what you budgeted, you’re going to lose money. Why? Because you’re spending more money to pay somebody to do the thing that wasn’t intended. It’s got to come from somewhere – it comes from your profitability.
So, if you can reduce your direct labor to less than 30%, you might create greater profitability. There’s not a whole lot of wiggle room in that number. The acceptable range for total direct labor, as a percentage of net operating revenue, is between 28% and 32%.
So, where’s the best place to earn more profit? It’s in that big hulk of money called 60% that goes for overhead expenses. Well, I can say this: If you can save a dollar of overhead expense, you’ll create a dollar of profit. It’s that simple. Find a way to reduce 60% and increase the profit to 20%, which means you’ve got to get your overhead down to 50% to get a 20% profit, if your direct labor stays at 30%.
Enoch: Got it. Just to refresh here, last time we did talk about, well, actually this time we just finished talking about what goes in to overhead. Some of the things were the payroll taxes, workers’ compensation, and then, of course, the indirect labor costs.
Steve: Right. Then, all of the operational costs of keeping a firm running – your rent, your telephone…
Enoch: Utilities, rent. Right.
Steve: Etc., etc., etc.
Enoch: Well, what’s the biggest one that you’ve seen in terms of reducing that big 60% number? What’s the first place to start hacking at the limbs?
Steve: Well, become aware of what you’re spending.
Steve: If you don’t know what you’re spending, you can’t reduce it. So, the first place is where I almost always begin with my clients… My work, when I get started with a new client, I have one goal in mind: My goal is primarily to work with the client and help them achieve their actual goals for their firms, so they’ll attain the success that they perceived and have a vision for. If I can accomplish that, then I will consider my efforts to be successful.
Steve: Well, over the last twenty-nine years my work has encompassed the broadest range of any kind of business operations within a firm, except for design management and marketing strategy. I don’t do either one of those things.
So, in this process over this long twenty-nine year journey, without exception, I have found that my initial work will always relate to somehow identifying the optimum financial management system for the firm and the resources that are required to get the best results from it. So, it almost always goes back to something to do with money and how to better control it, better manage it, and how to get an enhanced amount of money in the profit side of it.
Enoch: So, where do we look if we’re looking to reduce overhead – give me one or two examples of where we can start, or maybe examples of areas where you think there’s the low-hanging fruit?
Steve: Okay. I’m going to start with direct labor because even though there’s not a lot of margin to attack, I think it’s a key place. A lot of firms cannot attain this range of 28% to 32% of net operating revenue for their direct labor.
The reason they don’t have success in doing that is three-fold: One, many of them don’t even know that there’s such a range that they should be in. Two, they don’t know how to calculate that range because they don’t have the right tools to do so. Three, they don’t have any kind of a game plan for how to run a project called a “project fee budget.” If they do have a project fee budget, it gets set aside once the projects have started.
So, I’m going to go back to a very basic process that has to do with understanding when you receive a request for a proposal from a client, they’re asking you to come up with a fee proposal. Well, all too often – I’ve witnessed this, I’ve experienced this in my own career working for firms even in the large firm that I worked for eleven and a half years – The fee is develop on the basis of “Well, we did something like this last year or two years ago. It was in this ball park and we did really well with it, so let’s make the fee this.” That fee plus an increase of X%. They take the easy way out. They take what I call the lazy way out.
Okay, that’s a choice. That’s a business decision. I’m not going to be judgmental about that. I don’t think it’s the right way to go. I don’t think it’s in their best interest to do that, but that’s a decision that someone makes that’s in charge.
The best process is to every single project, sit down and do a project fee budget. That entails understanding what the scope of work is, how many kinds of tasks were involved in each piece of the scope of the work, and then assigning a number of hours to accomplish those tasks. Then, assigning an individual or individuals are required to be involved in those tasks and what their billing rate is, or basically their breakeven rate is, to establish what the cost will be to deliver that project that they’ve identified, and then put the 20% on top of that or take it, divide it by 80% and come up with a 20% built-in profit and that’s your fee.
Well, even those firms that may do all that, that absolutely are pristine, and deliberate, and right on target and doing all of that, some of them may send that fee proposal out and never look at it again during the course of the project. It doesn’t become the baseline for their operation. It was just a way for getting a fee. So, they don’t manage it well. They don’t monitor it in respect to that profit that project fee budget, so they wind up again getting what they get.
There is a place we can save money. That 28% to 32% is not some wild guess of what you ought to be at. It’s an efficient range. If you remain in that efficient range, you are able to get a project done, you’re your targeted profitability, and reduce the amount of expense it’s going to cost.
Therein lies a whole range of things that have to do with understanding your employees, and how they function, how they operate, and why I feel so strongly about this whole thing about employee retention, and investing the time to develop and build them up, and teach them how to do things properly give them the information they need to succeed instead of fail. Left to their own devices, they’ll do the best they can, no question about it. They’re all professionals, but they don’t understand.
They don’t understand some of the things they could be doing or what they shouldn’t be doing, so they go off rails and they spend money that was never intended to be spent. But, they don’t know what you told them. How many budgets are shared with the staff? How many budgets have been given to the staff whether it’s dollars or hours?
“You have this is your project. This is the number of hours you have to complete it for us to make the profit margin that we established for this project, which is 20%. Your job is to make this project come in at 20%. These are the hours you have to manage it. Now, that’s not a directive that’s locked in stone. Yes, but the fee is locked in stone. But at that point, if you haven’t already discussed the fee with your Project Manager and gotten their feedback to see if your number is realistic, in terms of your estimated hours of doing a project, you’re already at a loss, you’re already at a disadvantage.
Steve: Because you’re dealing with it after the fact. So, it’s inclusive. It’s a collaborative process with all of the right people involved in the decision-making process, and then one person makes the final decision about what it needs to be.
Steve: Then, that person who makes that decision should be held accountable for having made that decision, beneficial or not beneficial to the firm. So, that locks in to this whole culture of accountability. Each person becomes accountable for their performance under the game plan that’s been established, and carrying it out, managing it, and monitoring it so everybody succeeds.
Enoch: What suggestions do you have for encouraging stewardship or sense of ownership when we’re talking about the project fee budgets to give staff members incentive to meet that?
Steve: Well, again, in my world, if you’re living in a culture of accountability, then you already know because it has been established. It has been communicated clearly to everybody involved, openly so everybody understands that they are going to share in the profit of this firm, somehow some way.
Some firms set up profit-sharing plans. My problem with profit sharing plans is that not everybody should get the same amount of money because not everybody contributes to the same level. So, why would the highest performer be satisfied getting the same amount of money as the lowest performer as a profit share or as a bonus? But that’s what happens.
So, you’ve got to be able to let them know this is what’s going to happen in this program. “You contribute to this program. We will evaluate your contribution we will sit down with you and talk about it and we will come up with a reward, a compensation for you because you’ve contributed to it.” If I have the ability to control my financial destiny by working more effectively, more efficiently, working smarter instead of harder, understanding what’s expected of me, what the criteria are to work with, I’m going to do the best possible job I can so I can make the best possible return on my invested time. It works like a stimulator, a motivator, if you will, for those who see that as a well in which they will benefit.
I said some people are not motivated by money. Okay, maybe you do such a great job you’re now going to be promoted to the next level up. You’re no longer a Project Architect, now you’re going to be a Project Manager. You’re no longer a project manager, now you’re going to be a Project Director. You’re no longer a project director, now you’re going to be the next level up. You’re going to be appointed as an officer in the firm, you become a Principal, or you become a Partner, Junior Partner, I mean Associate Principal, whatever the titles are.
They’re incentives to doing a better job that’s clearly delineated and explained to you in advance. So, you’re creating an environment in which everybody wants to do the best possible job because you’ve answered the question: What’s in it for me?
Enoch: So, in a practical application, how would a firm go about structuring some sort of compensation plan? You mentioned that it should be individual and it you should have a dialog with the staff members to see what their hot buttons are, so you know what incentives they want. How do you translate that in to the process of then deciding who gets more and who gets less of the so-called profit shares? This is something that happens – the performance evaluations, and have you seen that applied successfully?
Steve: Okay. I want to make a distinction right now, Enoch. In my opinion, my way of thinking and seeing is that performance reviews do not automatically lead to salary increases or a sizeable bonus, or advancement.
Steve: They are simply there as a way of letting you know how you did in the last twelve months relative to the goals you set these last twelve months, and what are going to be the new goals we’re going to set for the next twelve months so you can do as well, better than you did the past twelve months. Once you have this performance review, the answer from those things will be a contribution to the decision making process about how this decision is made about who gets what and how much.
It isn’t necessarily discussed with the individual “Now, you’re going to get 15%,” or “You’re going to get X%…” That’s not discussed in a performance review. It has no place in a performance review. It could come from a discussion after the fact, once a decision was made to sit them down and explain to them, “This is the outcome of your performance in the last year. We are going to do a distribution of profit through bonuses. There are going to be performance bonuses, as you know that’s our policy, we do performance bonuses. Your performance has been rated as such, which means that you’re in the upper X% of the staff entitling you to, based on your salary, a percentage of bonus equal to X amount of dollars,” and the same thing through for the salary.
So, it’s policy. It’s a formula. It’s an absolute, established methodology for coming up with this. It’s decided by the key people in the firm and then maybe some of the key staff members as well as the Principal, not just the Principals.
Enoch: Excellent. It’s been a very good conversation, Steve.
Steve: Well, thanks.
Enoch: Do you have anything that you felt like you wanted to add to the conversation before we finish up? Something that maybe we didn’t hit on as much as you would like, or another topic that you feel is important?
Steve: I’ll tell you what I’d like to just say. I would hope that my comments are not taken as criticism of my colleagues. I don’t criticize my colleagues. I don’t judge my colleagues. I’m just aware of the things that I would like for them to learn and to know that would be beneficial to them. It’s what the focus of my consulting practice is all about. .
I come to my business with a servant’s heart to do whatever it takes to help my clients succeed and achieve the successes for their firm. But, I’m never going to tell a client something they want to hear, I’m only going to tell them what they need to know. What they do with that information is up to them, and I’ll accept their answer and I’ll accept their decision.
I’m not being critical in any way. I’m just simply so passionate about the reasons why we, as a profession, should be doing so much better than we are. It has to do with education about the things we’re engaged in or the things that we need to be engaged in that we’re not engaged in because we don’t know any better.
Enoch: Steve, if people want to find out more about how you work and how to get a hold of you, where should they go?
Steve: Well, that’s an interesting question. I’m in the process of creating a brand new website. My website is fifteen years old and it’s woefully out of date. A lot of information about me is out of date, even the contact information is out of date because I moved six months ago to the Austin area. So, if in your posting of this you might be able to include my information, I’m willing to have you do that. It’s just fine with me.
Enoch: Okay, I’ll do that.
Steve: You have that information and we can talk about this after the fact to make sure that you have the right information on where to go. But, I am delighted to hear from anybody that has comments, has a critique of these things, or has an alternate approach to the things I have discussed. I’m wide open. I’m flexible. I’m listening to whatever they have to say and I’m just delighted to be able to engage in a conversation about these subjects because it’s my passion.
Enoch: Well, I can tell. Thank you for spreading this knowledge and spreading this information. Your vast experience is apparent and you present it in a very succinct manner.
Steve: Well, thank you. That’s very kind of you.
Enoch: Steve, thank you for being on the Business of Architecture show.