FIRST PERSON

Rewarding Individual performance is the way of the businessworld, but there are rare exceptions. At executive search firmEgon Zehnder International, seniority and companywideresults determine pay. The company's founder explains howthis unconventional compensation system works-and why.

A Simpler Way to

by Egon Zehnder THERE have been many changesin professional services since theday I first set up shop in 1964-not

the least of which has been a pro-nounced shift in the way professionalspay themselves. When ! started, com-pensation was strongly tied to seniority.After all, seniority was a proxy for expe-rience. Today, most consulting firms, lawfirms, and so forth consider seniorityirrelevant - and occasionally somethingmuch worse. They believe pay shouldbe based on performance and, morespecifically, individual performance.That's why at most professional firms,people are paid according to the size oftheir client billings and how good theyare at bringing in new clients. Indeed,firms invest considerable time and ef-fort to measure those results precisely.

At Egon Zehnder Internationa! (EZI),we prefer to stick with the old-fashionedway to pay. In addition to base salaries,the firm gives partners equal sharesof the profit and another set of profitshares that are adjusted only for lengthof tenure as partner. There is no formalprocedure fortracking the performanceof country offices, let alone individuals.At the close of a given year, for instance,a ten-year partner in any office will re-ceive a larger share of the firm's profitsthan a five-year partner in any other of-fice, even if the first office lost moneyand the second office broke billing rec-ords thanks entirely to the five-yearpartner's billings.

Our compensation system oftenprompts people to ask me how we man-age to hire "stars," let alone keep them.

APRIL 2001 53

FIRST PERSON • A Simpler Way to Pay

They are shocked to leam that not onlydo we attract outstanding consultantsyear after year, but our annual turnoveramong partners is only 2%. (The indus-try average is 30%.) The reasons are sim-ple, really. First, our approach to com-

Egon Zehnderbecame moreconvinced ofthe fairnessof rewardingseniority as hisexecutive searchfirm grew.

pensation forces us to hire consultantswho have little interest in self-aggran-dizetnent. We must hire people who aretrue team players, people who get morepleasure from the group's success thantheir own advancement. These individ-uals by nature tend to be highly collab-orative. They eagerly share informationand ideas about existing and potentialclients. Similarly, they pass aroundinformation about the executives whomight best meet a client's need. Afterail, if a consultant in Hamburg is paid ac-cording to overall firm performance, nother own billings, she will happily pickup the phone and call a colleague inNew York to say,"I just met a candidatewho isn't ideal for my client here. But hemight be just perfect for your client'sopen position there."

Second, our seniority-based systemrequires us to find people who want tostay with a company for the long haul,for whatever reasons. Believe it or not,even in the new economy, these menand women still exist. And thank good-ness for that. Nothing benefits a clientand its executive search firm more thana consultant with a well-developed net-work of executive contacts and a finely

Egor\ Zehnder is the founder and formerchairman ofEgon Zehnder International,an executive search firm with 57 officesand more than 300 management consul-tants worldwide.

honed intuition. By the time a consul-tant has worked more than a dozenyears - as have 90 of our partners world-wide - he not only knows thousands ofexecutives, he also knows the innerworkings of hundreds of companies.

In his brain and in his bones,he knows who should workwhere. He can make a matchquickly and correctly. Thatmakes clients very pleased in-deed, which is perhaps whymore than 60% of our assign-ments each year come fromrepeat clients.

That, then, is the businesscase for our simple approachto pay. We hire professionalswho are not only highly edu-

cated-two academic degrees are amust - but who are also trustworthy andhumble and wbo want to work for onecompany their entire careers. They nat-urally collaborate. The clients are de-lighted with the results, billings rise, andthe profit pool expands-as it has foreach of the 37 years since I founded thefirm. In the end, everyone wins, from

client to firm to individual professional.Call it a relic, but don't call it nonsense.It works.

Seniority RulesEZI's seniority-based system is as easyto administer as it is to understand. Forpartners, compensation comes in threeways; salary, equity stake in EZI, andprofit shares. There is some variationamong partner salaries across countriesbecause of variations in the cost of liv-ing; people don't expect to be paid thesame base salary in Kuala Lumpur, say,that they would be paid in New York.But the distribution of equity and prof-its among the partners is consistentacross the whole firm.

To begin with, each partner has anequal number of shares in the firm's eq-uity, whether he has been a partner for30 years or one year. The shares rise invalue each year, because we put 10% to20% of our profits back into the firm.When a partner retires or leaves thefirm, he sells back the shares, keepingthe difference between the value ofhis shares at the time of his election to

A Different Way of ChargingMost executive search firms charge a client a percentage of the first year's

salary of any person who is recruited through the firm. This creates pres-

sure to find people who can command high salaries because of their track

records but who may not be right for the positions involved.

At EZI, we avoid this conflict of interest by charging a flat fee agreed to

in advance for our searches. The fee is calculated according to both the im-

portance of the position and our best estimate of the difficulty of the work

involved. We look, for instance, at whether the industry is new to the coun-

try of search, at the numberof companies we can goto in order to find can-

didates for our client, and at the language skills candidates will need. We

don't always guess right,of course, and often we find ourselves undercharg-

ing because the job has proved more complex than it first seemed.

But our clients appreciate the efforts we make on their behalf, and they

recognize that our flat fee encourages EZI to find the right candidates-

people who will stay and be productive over the long term-rather than the

most expensive ones. So they will probably come back to us in the future

with assignments that will prove simpler than they first appear; when all is

said and done, that will leave us even.

54 HARVARD BUSINESS REVIEW

A Simpler Way to Pay • FIRST PERSON

APRIL 2001 55

FIRST PER5ON • A Simpler Way to Pay

partnership and their value at the timeof his departure. Obviously, the longeryou stay, the more valuable the shareshecome. If you stay for five years, yourshares will probably double in value.

The remaining 80% to 90% of theprofit is distributed among the partnersin two ways. Sixty percent is dividedequally among all the partners, and theremaining 40% is allocated accordingto years of seniority. Someone who hasbeen partner for one year has one se-niority year, a two-year partner has twoseniority years, and so on up to 15 years,

when a cap comes into effect The poolis divided by the total number of se-niority years to produce a base number;each partner receives an amount equalto that number multiplied by his se-niority years. So a 15-year partner gets15 times more from this portion of theprofit pool than a one-year partner. (Fora comparison ofthe compensations of aone-year and a i5-year partner, see theexhibif'Partners' Shares ofthe Profits.")

The seniority principle doesn't extendto consultants who are not yet partners,because they are still proving their part-

Part tiers'Shares ofthe ProfitsEZI doesn't divulge the compensation of partners. But the mechanism

for determining it is illustrated in this hypothetical example, which

compares a one-year partner's equity increase and profit share with

those of a 15-year partner.

Suppose EZI has a total of loo partners with an accumulated seniority

of75O years, each partner has an equal numberof shares in the firm, and

EZI's profit after paying base salaries is $75 million. Ten percent of the

profit is put back into the firm, increasing each partner's equity by one

one-hundredth {$75,000) of that amount. The remaining $67.5 million is

divided up: 60% is apportioned equally among the partners-each partner

gets one one-hundredth, or $405,000-and 40% is allocated according to

seniority. The 40% is divided by the total number of seniority years, 750, to

produce a base number, $36,000; each partner receives an amount equal

to the base number multiplied by his or her seniority years. The equity

returns and profit shares ofthe two hypothetical partners are as follows.

Equity increaseand profit share

Increase in equity valueOne one-hundredth of 10%ofthe $75 million profit

Share of equal-profit poolOne one-hundredth of 60%ofthe profit remaining after10% is put back into the firm

Share of seniority pool

A figure based on yearsof seniority

Total

1-year partner 15-year partner

$75,000

$405,000

$36,000

$516,000

$75,000

$405,000

$540,000

$1,020,000

56

nership qualifications on many levels.Here we do apply a kind of perfor-mance-based approach: nonpartner pro-fessionals get annual bonuses that arebased on how well they have supportedtheir colleagues and how they have con-tributed to the firm's reputation as awhole. But the performance we aremeasuring is not at all financial. For in-stance, if a consultant has published anarticle in a reputable business journal,it is marked to her credit because thecontribution has benefited the EgonZehnder reputation. At EZI, a consul-tant's annual bonus has nothing to dowith the billings she has been associ-ated with and everything to do withhow partnerlike she has proved herselfto be over the year.

The most immediate benefit of oursystem is that it is transparent and takesrelatively little time to manage. By con-trast, my closest friend is a senior part-ner at a large international law firm. Hetells me that his firm has hardly anytime for client work during the lastmonth of the year because people aretoo busy deciding who gets how muchbonus for which client. They have towork out who referred which projectto whom and who developed and con-tributed to each project. How awful!They're not working for clients any-more - they're working for the compen-sation system.

A Fairer Way

The seniority rule for partner compen-sation has been in place ever sinceI founded EZi. From the start, 1 paidmy first associate, Walter Siegenthaler,more than I paid my second associate,Hans Schaer, because I felt that Walterdeserved more - to refiect the extra timeand effort he had put into building theEgon Zehnder brand. That continued asthe firm expanded and opened offices inBelgium, France, Britain, and so on.

As we grew, I became more convincedof the fairness of rewarding seniority.Financial performance is very heavilydependent on the immediate environ-ment. Why should a hardworking part-ner in Sao Paulo be penalized becausea downturn in the local economy has

HARVARD BUSINESS REVFEW

FIRST PERSON - A Simpter Way to Pay

reduced the firm's billings in Brazil? Atthe same time, why should a partner inHong Kong eam more because he waslucky enough to be parked in the centerof the booming Asian economy?

The only exception to the seniorityrule has been myself, for I have neverbeen the highest earner in the firm. Peo-ple might think that rather odd-aft:erall, I am the founder. But 1 think it's fair.Initially at least, my associates had a farharder time than I did. It isn't easy fora consultant to work under a name thatnot only isn't his own but is hard to pro-nounce and has little recognition in themarketplace. Of course, that's changednow, and the firm has a global reputa-tion. But back in the 1960s and 1970s,when I opened offices in London, Brus-sels, and Paris, hardly anyone could spellthe name Egon Zehnder.

Making myself the exception has, inmy opinion, helped to sustain accep-tance of the system among my associ-ates. It's easy for partners, especially thenewer ones, to see seniority as a politeterm for cronyism. That may be one rea-son seniority has gone out of favor atother firms. But, along with the 15-yearcap on seniority benefits, my situationmakes it impossible for anyone to arguethat EZI's system is unfair.

Delivering Collaborationand Intuitionof course, simplicity isn't everything. Nomatter how much time and effort wesave by not measuring performance, nocompensation system can work unlessit promotes the right kind of behav-ior among professionals. Proponents ofpay-for-individuai-performance systemsargue that their plans encourage man-agers to generate more revenue, whichmore than compensates for any admin-istrative burdens the systems may im-pose. But those systems have one greatdrawback: they encourage people to fur-ther their own interests ahead of the in-terests of clients and the organization asa whole.

Picture this typical scenario. A NewYork conglomerate needs to find a man-ager for its Spanish subsidiary. At mostexecutive search firms-the ones that re-

ward individual performance-the con-sultant who gets the assignment willhang onto it tooth and nail. It doesn'tmatter if the consultant is based in NewYork. He will fiy to Madrid every week,if he has to, in order to locate the rightcandidate for the position. Yes, he maystop into the firm's Spanish office. He

time and energy in making sure thatthe Spanish office understood the newclient's interests and needs. At the endof the year, all would share equally inthe larger profit that resulted.

Or consider this story, which hap-pened just recently. The CEO of a Ger-man client that needed a manager for

No Ordinary InterviewAlthough there are probably few "experts" who would recommend it,

I ask very personal questions when I interview people. If an applicant is

married, for instance, I might ask her bow she met her husband and why

sbe decided to marry bim. t ask these questions partty because they are the

only ones left to ask-my colleagues have already asked all the technical

and professional questions. But t also ask them because the answers to

personal questions can often te(t me what a person's values are and how he

or she makes important choices.

There are no rigbt or wrong answers to my questions, and people can

give totally different answers to the ones t would give. And t'm not looking

for demonstrations of intellectual brilliance - my colteagues bave already

done that. What I am looking for is integrity I want answers that make me

feel tbat the person is warm, honest, and sincere. Those quatities are very

important in a collaborative partnership like EZI.

So wben t ask an appticant wby he went to a particular school, for

instance, t'd ratber hear him say that he went to Michigan State because

he thought he couldn't get into Harvard or Stanford tban that he picked

tVlichigan State because it was good in a particular field. When 1 ask why

he thinks he would be happy at EZt, t don't want to bear him say that be

thinks he can create morevatue in EZt than he can anywhere else. What

does "create more value" really mean? tt is so often an insincere c l ich l

Do people really change jobs because they can't add enough value?

Some people-particularly Americans-find my questions intrusive and

too personal (that's one reason t atways interview in Zurich). But I want to

look inside a person as deepty as t can because tbat person may well be in

tbe firm for the rest of his or her professional life.

may even cbat witb its consultantsabout leads. But be will take the time-billing hourly, in many cases-to com-plete the job himself

At EZI, no consultant would dreamof such hoarding. Contacted by the con-glomerate, he would immediately passthe assignment to the local office inSpain, where it could be completed withthe kind of speed and accuracy clientsseem to adore. He would also invest

a textile company in Bavaria came to apartner in our Zurich office whom hehad worked with before. Because of thepast relationship, the Swiss partnerwould have liked very much to help theclient, and if he had been concernedabout his individual billings, all themore so. But instead, the partner re-ferred the client to a person in ourMunich office who was much betterqualified to help. The Munich partner

58 HARVARD BUSINESS REVIEW

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knew the industry inside out, and hehad a feel for Bavaria's idiosyncrasies.The match was so successful that theclient ended up hiring not only the man-ager he wanted but also one of the othercandidates the Munich partner had putforward. The client is all the more likelyto come to EZI again, because he knowswe will give our very best.

Any firm in our profession that isserious about putting the client's needfirst has to be able to support the clientwith its whole network. Executive talentis a global resource: a company in NewYork might hire a Frenchman whoseprevious jobs were in Brazil and Japan.The firm should assign the most quali-fied people in the most qualified offices,regardless of whose contact the ciientInitially was.

Our system, by rewarding seniority,also helps us build the right kind ofhuman capital for our profession. Iknow that seniority is a very unfashion-able idea these days, especially in Amer-ica, which worships youth and energy.But in our profession, seniority is a keyasset: it is only through experience thatour consultants can hone the intuitionthey need to operate successfully ina people-intensive profession.

It is also through length of servicethat a consultant builds a strong net-work of contacts. Senior search consul-tants not only know a great many peo-ple, they also know them very well,which means that their hunches aretaken seriously. Let's say, for example,that 1 really believed that the ^migr^taxi driver who took me from the air-port yesterday was the right personto head P&G's operations in Russia. Iwould have no problem telling that tothe head of P&G Europe because 1 haveknown him for years and have foundmany of his key executives. He wouldtake me seriously. But 30 years ago, hewould have responded with no morethan a sarcastic smile.

Finding the Right People

Eor our system to work successfully, wehave to hire the right kind of people.But how? First, our interview process isextremely intensive. We see many hun-

dreds of people each year, mainly grad-uates of the leading business schools, ofwhom only a small fraction are hired.Each candidate sees between 25 and 30consultants during the process-old

Seniority is unfashionable,

especially in America,

which worships youth and

energy But our system

helps us build the right

kind of human capital for

our profession.

partners, young partners, and new asso-ciates. Our people have a good look atthe applicant, and if any of them ex-presses serious reservations, we usuallydo not make an offer. What's more, bythe time the interviews are over, poten-tial hires realize that they are hearingmore than a sales pitch about the firm.They know that the people in ourBoston office think and act the sameway as the people in our British andBrazilian offices, and that they them-selves must think and act that way ifthey are to be successful at EZI.

Until recently, when I retired, I inter-viewed every candidate myself. I usedto ask people bluntly: "Do you knowthat even if you have the highest bill-ings in the firm and are responsible for60% of the profits of your office, youwon't get an extra penny for it? Pictureyourself in that situation. Are you com-fortable with it? If you aren't, don't joinus. You'll be very unhappy." After morethan 40 years in the profession, I canusually tell if their answers are sincere.A really good actor can always fool me,of course, but I get it right 90% of thetime. (For more on my interview ap-proach, see the sidebar "No OrdinaryInterview.")

We also take much more time to pro-mote people to partner than do mostconsulting firms. At EZI, people workfor five or more years before they areconsidered for partnership. During thatperiod, we observe people very closely-

HARVARD BUSINESS REVIEW

not to see how many clients they arebringing in, but to make sure theyare hardv^orking, honest, collaborative,and entrepreneurial. We want to knowwhether the partners in a candidate'soffice believe that he or she should havethe same stake in the firm as they have.Has the prospect ever passed clients onto Copenhagen? Is he an active alumnusof his university? Does he publish arti-cles or give speeches? The decision onwhom to put up for partnership is madeby a group of partners drawn from allof our offices every three years. ThisPartnership Evaluation Group has theauthority to call on anyone who hashad contact with a candidate for part-nership: colleagues in the candidate'soffice, colleagues in other offices, evenclients.

Making partner at Egon Zehnder isnot an easy process, and it's expensivefor the firm. But we have become verygood at it: ofthe ten to 20 people put upfor partner each year, only one or twowill fail to make the grade. What's more,those partners will often stay for theirentire professional careers, to the bene-fit of both our clients and the firm, am-ply returning our investment in theirselection.

At the end of the day, I wouldn't rec-ommend that every company copy oursystem too closely. It is probably not ap-propriate in most industrial corpora-tions, where there can be big differencesin the types of work that people do. Youwould not expect to reward the head ofR&D,for instance,the same way you re-ward the head of sales.

But at professional services firms, thework is quite homogeneous-what alawyer does in Tokyo, for instance, isn'tall that different from what a lawyerdoes in Zurich, in these cases, I thinkthat a compensation system such asours, which reinforces common valuesand sets common expectations, hasmuch to recommend it EZI's record ofnearly 40 years of ever-increasing prof-its certainly suggests as much. ^

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