TECHNICAL FEATURE

This article was published in ASHRAE Journal, February 2016. Copyright 2016 ASHRAE. Posted at www.ashrae.org. This article may not be copied and/or
distributed electronically or in paper form without permission of ASHRAE. For more information about ASHRAE Journal, visit www.ashrae.org.

Financial Performance
Impacts Compensation Options
BY KATE ALLEN, P.E.

The past two years Ive written articles using financial benchmarking data as a
window into the overall financial condition of the A/E industry and its impact on
compensation. This year, Id like to add to the discussion by highlighting firms that
are considered to be high performing (HP), based on their financial performance. HP
firms reported nearly twice the profit, 28.4% on net revenues, compared to the overall
industry, which reported a median profit of 14.3% in 2015.
Firms of all sizes and in all practice areas were in this
high-performing group. When asked what the high-
performing firms do differently, the answer was always
the same: nothing special, but they block and tackle
well. This means they have strong basic business skills.
These firms consistently monitor and measure their
firms performance, keeping their eye on key results,
which has resulted in a level of profitability that gives
them opportunities related to compensation that arent
afforded to the average firm.
Overall Financial Performance Impacts Compensation Options
Financial metrics, calculated from information found
in the income statement, tell the story of how opera-
tional decisions impact the overall performance of a
firm. With profit, all things are possible. A more profit-
able firm simply has more options. For instance, options
include offering a higher cash compensation strategy,
which can help attract and retain talent; investing in the
firm whether it be toward growth or internal ownership/
leadership transition; developing a performance bonus
system because the funds are available to make the pay-
outs; and/or offering atypical benefits above and beyond
the average firm.
Profit is one of the factors that gives firm owners the
most latitude in creating the firm that supports their
vision. But, because profitability is often influenced
by the condition of the economy, it can seem elusive
to firms struggling or maintaining middle-of-the road
results. Therefore, its important to get the big picture by
looking back to where the economy stood a few years ago
and how that relates to where we are today.
Where We Stood in 2013: Financial, Compensation Trends
To get started, lets go back to our original find-
ings. In the February 2014 issue of ASHRAE Journal,
Understanding Salaries in the A/E Industry presented
a discussion on cash compensation as it related to the

Kate Allen, P.E., is director of A/E Benchmark Surveys, for PSMJ Resources, Inc., Boston.

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 TECHNICAL FEATURE

TABLE 1 
Comparison of key financial indicators 2013 to 2015 + PSMJs 2015 high-performing firms.
2015 PSMJ HP 2015 OVERALL 2014 OVERALL PERCENT CHANGE 2013 OVERALL PERCENT CHANGE
KEY METRICS (MEDIANS) FIRMS* RESULTS RESULTS 2014/2015 RESULTS 2013/2014
Net Revenues per Total Staff $156,003 $134,839 $127,607 5.7% $125,589 1.6%
Net Revenues per Direct Labor Hour $112.40 $107.78 $103.95 3.7% $101.66 2.3%
Direct Labor Costs per Direct Labor Hour $33.81 $34.68 $33.84 2.5% $31.90 6.1%
Total Costs per Direct Labor Hour $82.24 $89.55 $87.91 1.9% $86.50 1.6%
Equity per Total Staff $46,219 $33,363 $31,659 5.4% $21,666 46.1%
Operating Profit (Net Revenues) 28.4% 14.3% 12.97% 10.3% 11.42% 13.6%
Overhead Rate (Before Incentive/Bonus) 144.6% 160.7% 160.59% 0.1% 159.56% 0.6%
Utilization (Payroll Dollars) 63.6% 58.8% 59.6% 1.3% 59.69% 0.2%
Backlog Change 15.0% 9.00% 9.00% 0.0% 7.00% 28.6%
Gross Revenues Change 18.5% 10.00% 7.00% 42.9% 8.00% 12.5%
Staff Size Change 11.83% 3.71% 3.57% 3.9% 2.70% 32.2%
Net Direct Labor Multiplier Achieved 3.38 3.09 3.07 0.7% 3.02 1.7%
Average Work-in-Process Days 15 16.10 18.00 10.6% 25.51 29.4%
Average Collection Days 58 67.01 66.55 0.7% 70.12 5.1%
*HP Firms represent the top 20% of participating firms in PSMJs Financial Performance Benchmark Survey, based on 13 different performance metrics. Each year, these firms are inducted into PSMJs
elite Circle of Excellence. (Source: PSMJs 2013, 2014, and 2015 Financial Performance Benchmark Survey Reports.)

overall financial health of the A/E industry, following
the economic downturn of 2009. The intent was to help
both engineer and employer better understand the cur-
rent financial position of the industry and how that was
impacting compensation options, using A/E industry-
specific benchmarking data. The 2013 benchmarking
data revealed net revenues were rising slightly faster
than expenses, and while overall profitability as a per-
centage of net revenues had improved (to a median of
11.4%), it still remained significantly below the 2007 high
of 15.2% (median). The industry was improving but had
not fully recovered from the recession in terms of profit
and compensation rates. Overall, it appeared the A/E
industry was poised for growth as the economy contin-
ued to improve.
Where We Stood in 2014: Financial, Compensation Trends
The 2014 results in the February 2015 follow-up article,
Engineers Pay and Financial Performance, were
encouraging: net revenues and profits rose faster than
expenses and labor costs. Overhead, as a percentage of
direct labor costs, held steady near 160%; and profits
(earnings before bonuses, discretionary distributions,
and taxes = EBBT) increased by 10%, to a new median
of 13.0% (still short of the 2007 high of 15.2%). Balance
Please note that throughout this article financial metrics reflect data reported from the prior year-end (for example, analysis regarding the year 2015 refers to 2014 year-end financial data). Compensation
metrics reflect data reported in January/February of that year (for example, the year 2015 refers to compensation rates in place as of January/February 2015).
sheets were stronger, as evidenced by the substantial
amount of equity firms were carrying per total staff,
which increased from approximately $22,000 per staff
to $32,000 per staff.
While total direct compensation for the majority of the
senior-level roles (chairman of the board, CEO, COO,
etc.) had yet to recover to 2009 numbers, more produc-
tion-focused positions/roles had generally increased
and exceeded 2009 amounts (department head, senior
project manager, and project manager). Overall, we
saw improvement in both financial performance and
compensation.
Where We Stand for 2015: An Update On the Big Picture
With another year behind us and new data available,
lets look at the latest numbers to see where we stand
and how much improvement the industry actually
experienced in the past year. The tables and figures that
follow report the median for each metric, which is the
midpoint of a set of data (not the average). Many suc-
cessful firms outperform the industry medians, and this
year their median results have been provided as well
(see 2015 PSMJ HP Firms in Table 1).
The 2015 overall results for the industry are encourag-
ing! Net revenues per staff are up, profit is up, overhead

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TECHNICAL FEATURE

costs held steady, and staff growth was positive. However, $120
the HP firms are achieving substantially higher net rev- Profit
$100
enues per total staff and per direct labor hour (DLH),
their overhead rate is 16 percentage points lower than $80
Overhead
the industry median, and as a result their profitability is $60
nearly twice that of the overall industryplus they grew
$40
their firms in terms of revenue and staff, providing new
opportunities in the process for staff and new hires. $20
Direct Labor
For both groups, revenues and profits are continuing $0

2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
2000
to rise faster than expenses and labor costs, while still
experiencing growth, which is great news. Net Revenue Direct Labor Costs Break-Even
A detailed historical comparison of several of these key Per DLH Per DLH Costs
financial indicators is provided in Figure 1 and Table 2.
FIGURE 1Historical direct labor benchmark trendsOverall industry (includes HP
More great news is the gap has nearly closed between firms). (Source: PSMJs 2015 Financial Performance Benchmark Survey Report.)
the target and the achieved direct labor multiplier
(Figure 2). If the achieved is less than
the target direct labor multiplier, TABLE 2 
Comparison of key financial indicators, 2010 to 2015.
the result is a net revenue defi- (MEDIANS) 2015 2014 2013 2012 2011 2010

citless profit than expected. If the Net Revenues per Direct Labor Hour $107.78 $103.95 $101.66 $100.32 $94.69 $86.63
achieved is greater than the target Direct Labor Costs per Direct Labor Hour $34.68 $33.84 $31.90 $31.31 $30.99 $30.99
direct labor multiplier, the result is Total Costs per Direct Labor Hour
(Overhead + Direct Labor) $89.55 $87.91 $86.50 $88.73 $86.06 $87.78
a net revenue surplushigher prof-
Operating Profit (Net Revenues) 14.28% 12.97% 11.42% 9.31% 9.86% 9.49%
its than expected. The improved
results in Figure 2 generally indicate Source: PSMJs 2015 Financial Performance Benchmark Survey Report.
firms are achieving better fees for
projects and/or those projects are being more effi- 3.20
ciently managed, reducing the net revenue deficit. 3.10
Unfortunately, the A/E industry is still struggling to 3.00
earn a reasonable profit, but its headed in the right 2.90 Net Revenue Deficit
direction (Figures 3 and 4) and has seen a gain of 5 2.80
percentage points since the low point in 2010. Figure 2.70
4 takes a look at overhead costs and profitability for 2.60
the overall industry, comparing the results of the 1993 2.50
1980
1985
1988

1991

1994

1997

2000

2003

2006

2009

2012

2015
downturn, the 2015 results, and PSMJs 2015 HP Firms.
Increased pricing, as evidenced by increased achieved
net fee multipliers, drives higher net revenues per Actual Net Fee Multiplier Target Net Fee Multiplier
staff, which can be the result of the market accept-
FIGURE 2Target vs. achieved direct labor multiplier. (Source: PSMJs 2015 Financial
ing increased billing rates, capturing change orders, Performance Benchmark Survey Report.)
or higher project efficienciesand, if overhead can
remain steady or decline, then profitability will con-
tinue to improve. them to manage their firms in a way that results in high
Every firm has the opportunity to be a high-perform- profitability, which provides the key ingredient for
ing firm with consistent monitoring and measuring of compensationcash.
key performance indicators that allow management
teams to be proactive versus reactive. There is no secret Compensation Trends
sauce, as weve learned from these firms time after Annually, for the past 33 years, PSMJ Resources, Inc.,
time; they have solid business processes that allow has conducted a management compensation survey

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TECHNICAL FEATURE

18
EBBT (Percent of Net Revenue)

16 $3.50
14 $3.00
12 $0.48 $0.94
10 $2.50 $0.22
8
6 $2.00
$1.53 $1.61 $1.44
4 $1.50
2
0 $1.00
1990
1992
1994
1996
1998
2000
2002
2004
2006
2008
2010
2012
2014
2015
$0.50 $1.00 $1.00 $1.00
FIGURE 3Operating profits as a percentage of net revenues. (Source: PSMJs 2015 $0.00
Financial Performance Benchmark Survey Report.) 1993 2015 2015 HP Firms
Operating Profit Operating Overhead Direct Labor

that solicits data from both engineering and architec- FIGURE 4Actual margin comparison.
tural firms for 17 management positions, from chair-
man of the board to project manager. Historical total
compensation is presented in Table 3 for the past seven be needed. The compensation rates for the HP Firms
years. Compensation rates generally increase with firm are not reported separately; however, notice that their
size, so use the information in Table 3 with caution. The direct labor costs per direct labor hour, as well as their
table is presented to demonstrate trends only; for more total costs per direct labor hour are less than the 2015
detailed information, a full compensation study that overall mediancompensation is not the key to their
analyzes data by firm size and other peer groups would success (Table 1).
Total compensation reached a five-year high in
2009/2010 just before the recent recession and profit
was at an all-time high as well, at 15.2% of net revenue.
Total compensation fell to a five-year low in 2011/2012
for most positions/roles and profit was less than 10%
from 2010 through 2012. The results are holding steady
between 2014 and 2015. Total direct compensation for
the majority of the senior-level roles (chairman of the
board, CEO, COO, etc.) still has yet to recover to 2009
numbers. More production-focused positions/roles con-
tinue to increase and exceeded prerecession total com-
pensation amounts as early as 2012 (department head,
senior project manager, and project manager).

Billing Rate Trends

Compensation is directly related to hourly billing rates,
which are intended to recover all design firm costs (includ-
ing direct labor and overhead) and provide for profit. For
example, if a highly billable senior project manager is
paid $50 per hour (excludes labor burden or fringes), and
the firms overhead rate is 160% on direct labor, then the
break-even billing rate would be $50 (1+1.6) = $130 per
hour. A billing rate of $150 provides for about 13% profit
(3.02.6)/3.0 = 0.13). Reimbursable expenses are recovered
from the client directly and not included in these billing
rates. If compensation rates exceed what can be recovered
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TECHNICAL FEATURE

TABLE 3 
Historical total direct compensation results.
(MEDIANS) 2015 2014 2013 2012 2011 2010 2009
Chairman of the Board $191,772 $201,392 $215,000 $212,066 $233,589 $250,000 $240,144
Chief Executive Officer 235,812 236,700 265,342 233,000 233,216 247,500 250,000
COO/Executive VP 206,845 206,560 203,913 221,933 224,133 246,500 231,061
Senior VP/Senior Principal 183,748 185,645 198,674 200,000 178,092 210,137 200,500
Other Principals/Partners 146,750 144,000 145,000 143,415 150,000 146,641 149,327
CFO/Director of Finance 176,250 159,968 175,000 184,538 175,905 170,226 171,290
Controller 100,060 100,000 100,807 101,109 96,000 97,000 100,500
Business Manager 80,986 64,745 78,972 78,630 82,994 95,000 77,845
Director of Administration 103,500 83,500 140,246 128,750 80,528 123,668 85,280
Director of Operations 163,500 137,750 146,000 137,510 149,740 154,686 150,000
Director of BD 133,000 119,000 135,229 120,800 108,768 119,724 130,523
Director of Human Resources 97,500 97,314 102,231 100,000 91,655 92,867 99,309
Director of Computer Operations 104,001 104,257 104,589 97,000 96,000 100,000 105,500
Branch Office Manager 130,115 123,513 125,521 125,377 118,000 128,608 130,742
Department Head 124,163 123,355 120,000 120,560 112,677 114,000 115,752
Senior Project Manager 106,823 103,537 102,000 98,315 98,000 95,554 97,500
Project Manager 86,000 82,035 78,285 77,000 76,000 75,000 73,883
Source: PSMJs 2015 Financial Performance Benchmark Survey Report.

in billing rates, then profits may be TABLE 4 

Historical billing rates by position/role for billable staff ($/hr).
negatively impacted. (MEDIANS) 2015 2014 2013 2012 2011 2010 2009
In the 2015 results, billing rates Chairman of the Board 203 205 197 195 200 191 190
continue to track with total compen- Chief Executive Officer 200 198 200 195 191 190 200
sation. Many of the senior-level roles COO/Executive VP 185 180 185 185 185 185 200
(COO and senior VP) still have yet to Senior VP/Senior Principal 195 190 195 190 186 182 200
fully recover to prerecession rates, Other Principals/Partners 180 180 186 172 172 175 170
while more production-oriented Director of Computer Operations 125 130 117 125 115 138 120
positions (senior project manager, Branch Office Manager 165 165 164 154 150 139 145
project manager) exceeded prereces- Department Head 159 165 157 155 150 147 140
sion rates as early as 2012, see Table 4. Senior Project Manager 150 150 144 140 135 135 135
Project Manager 130 126 122 120 112 117 114
Conclusion
Source: PSMJs 2015 Management Compensation Benchmark Survey Report.
The numbers tell the story: the
achieved direct labor multiplier
is on the rise and closer to target than ever, net rev- A/E industry (at the median level of performance), you
enues are increasing, and expenses are holding steady. can use that knowledge as you consider your firms com-
Compensation is seeing mixed results between man- pensation strategy. Cash compensation is only one spoke
agement and production positions and has essentially in the wheel when it comes to employee engagement
caught back up to prerecession rates. The financial posi- and attracting and retaining staff; however, making
tion of the A/E industry, as interpreted through various sure staff is paid adequately and fairly is fundamental to
financial metrics, is positive and High-Performing Firms keeping your firm in the running for talent.
demonstrate whats possible in the A/E marketsdont Note: If you are interested in participating in PSMJs 2016 sur-
settle for being median. veys you can find out more about the benefits of participation at:
By understanding the overall financial position of the www.psmj.com/surveys-research/participation.cfm.

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