Consultant Compensation Traps: 4 Ways to Avoid Them

Last Updated Sep 27, 2011 4:41 PM EDT

Someone recently asked me about profit sharing, stock, and options as forms of compensation for consulting work. Here's how I responded:
Warning! Warning! Danger, Will Robinson!" 
I get asked all of the time if I'll get a percentage of the profits as pay. Here is my condition that I give to companies who ask for this: 
"Sure, I'll be happy to. However, I will need the following authorities:
  • All hire/fire/compensation authority for your people.
  • All vendor selection and materials negotiation authority.
  • Need to review and have executive decision discretion on your overhead, treasury function, and banking relationships.
  • Final say on sales and pricing as well as go/no-go on any contracts over a certain threshold size or length.
Without the ability to completely control every element of the business, what real impact can you make on your own compensation if it is a percentage of profits? When you agree to a share in the profits you are actually taking a position as a minority, non-voting shareholder with no power to make the necessary leadership changes, like removing the CEO. 
I am against profit-sharing compensation in any business in which I am a minority shareholder.
So, clearly I have serious reservations about this type of pay-for-play approach to compensation. That does not mean that I am against a skin-in-the-game approach; I just want it clearly focused on the areas over which I have the necessary control to change the performance outcomes.

Let's take this a little further. How should you get paid?

1) Outcomes not hours - I have written on this in the past. What are the things that you are trying to change for the company? In my case, large account sales are what I am hired to help the company to land. This means a change not just in the number of deals, but also the ability of the company to do this as a part of a regular, manageable and predictable process. For companies who are "enterprise accounts," and committed to implement our full system, we often take a portion of our compensation as a performance bonus. Read on to understand some of the necessary stipulations.

2) Balance - If you are going to go into the performance-based compensation model for your services, I encourage a structure that has some components at risk and some that are fixed fee in nature. When you work with a company and they truly embrace what you bring in the nature of cultural change, there are benefits that are not going to be immediately measurable. It is hard to get paid for the culture change, so make certain that you are charging a fixed fee for the training and materials that will affect the business long term. Look at the implementation and results production as the areas for performance compensation.

3) Expenses - Never front the expenses. And make certain that there is a pre-approval process for agreed upon expenses. Remember, you are a consultant, not an investor.

4) Stock, options, phantom stock, SARs, and so on - No. I'm serious -- no. OK, if it is a publicly traded company, maybe. Look, unless you are Bain, Boston or Accenture... you are not in the position of being an investor in a company over which you have limited control. You are a consultant who gets paid for your expertise, but who only has influence over the implementation. Do not be fooled by the siren song of stock. I see so many newer consultants who take stock and have some Silicon Valley starry-eyed set of expectations as to the return. Look, if you want to be an investor, write a check. If you want to be a consultant, get paid.

Remember, as a consultant, often our biggest opportunity to impact results is just to make recommendations. You don't control the people, the quality of the execution, the completeness of the implementation, or the market in which your customer is working. You can sell your expertise, but you can't get paid on their implementation.

Image courtesy of flickr lalunablanca cc

Tom Searcy is a nationally recognized author, speaker, and the foremost expert in large account sales.