The world’s three most famous consulting firms, Bain & Company, the Boston Consulting Group (BCG), and McKinsey, have recently made a number of compensation market adjustments – their largest in years. In particular, these firms have continued a distinctive pattern of adjusting their compensation to match one another as part of their ongoing war for talent.
What’s going on here?
A number of factors are likely driving this shift towards compensation convergence.
- The US continues to see elevated levels of inflation, adding more pressure to increase pay.
- Additionally, despite the recent stock market downturn and looming recession risks, the hiring environment remains hot for many of the highly pedigreed candidates that these consulting firms recruit from.
- Finally, these firms tend to hire from a highly competitive hiring pool and are increasingly competing with notoriously high compensators, such as the finance and tech industries
This compensation matching among consulting firms matches a similar pattern among the top law firms, in which many of the top firms effectively match compensation to one another. This pattern is so consistent and predictable that websites exist to benchmark “Big Law” compensation.
There’s a lesson here for companies who are seeking to acquire the best talent and remain competitive in their markets. When the following factors are all true, industries tend to see sharp convergence in their compensation:
- Cross-company differentiation in terms of job experience and culture is relatively low. For example, one would expect that many candidates receiving offers from Bain will also interview with (and will receive offers from) BCG and McKinsey.
- Candidate pools are relatively small. For example, top law firms recruit from a constrained pool of law school graduates.
- Candidate pools are very similar. For example, consulting firms typically recruit the majority of their employees in two cohorts: one directly out of undergrad, and another for new MBA graduates.
- Employers follow an “up-or-out” career model. Law and consulting firms both hire large initial classes, expecting high attrition over subsequent years. Ultimately, only a smaller percentage (say, 5-20%) of employees will stick around and make it to a terminal Partner role.
- Employers are in geographies with relatively similar cost-of-living. For example, most top law firms are located in large cities such as New York and Los Angeles. Historically this was the biggest blocker to compensation convergence, but with the rise of remote work that is changing rapidly.
When these factors align, it’s very typical to see compensation convergence as firms seek to differentiate based upon their pay, or at least meet the market expectations of their immediate, relatively undifferentiated recruiting rivals. Employers meeting the criteria above should pay extra attention to their peers’ compensation packages in order to remain competitive.
We’re interested to see if this pattern will continue, and whether we’ll see additional compensation convergence in other industries, particularly as remote and hybrid work flattens geographic differences in compensation. Will we see compensation standardize further among big tech companies as the market matures? Will we see further convergence of compensation among roles that can be done remotely, such as recruiting or sales? Time will tell!