Partner Compensation

This approach is driven by the need to attain balance, accountability and promote teamwork.  It requires vision, strategy and time in order to properly implement.  When most firm owners hear about the approach they become excited (positive and negative) about the potential.  How is it going to affect my compensation is the first and expected reaction.  Few think about whether or not this is going to be good for the firm.  This is normal and should not deter a firm from striving to improve.  Change is always difficult, so expect it to take some time and require several meetings addressing questions and selling the vision.  It is important to understand the evolution of compensation systems in order to move to the next level.  Peer firm experiences can also be very valuable and save time.

Methods

First, let's quickly review the various compensation methods and a brief comment about each.  There are many variations so don't be alarmed if your firm's system is a combination of two or more of these methods.

Motives

In speaking with partners from many firms, there are many common motives.  While I understand the thinking behind them I don't always agree with the values some firms are placing on them and the results the systems are producing.  A good question to ask is, "Who is looking out for the firm?"  Some of the terms start to sound "bureaucratic" and subscribe to the "entitlement" philosophy. The following is a brief list of the most often stated motives:

• Fairness
• "Bottom line" driven
• Return on investment
• Recognize seniority/experience
• One-firm concept
• Goal oriented
• Objective versus subjective data (keep score with hard data)
• Leverage of resources
• Integration with the strategic plan
• Results based versus effort based

System – Usage – Tendencies

The following table shows where the various systems are typically used.

Most of these systems are associated with potential problems and firms tend to stay with a system too long because of the fear of the unknown and change.  Let's quickly look at the potential problems associated with each type of system.

Equal

This system tends to work in newly created firms and those that have three or fewer partners. The system tends to promote mediocrity as the firm grows.  You also should remember that inequality comes from equal treatment of unequal people.  This system can be very limiting to the growth of a firm.

Formula

The biggest risk behind the formula system is the fact it often promotes the concept of sole proprietors sharing overhead rather than the one-firm concept.  Partners may hoard work and not leverage properly.  This system also tends to overcompensate for technical skills and places little value on firm management, leadership, improved processes, vision and learning.

Spreadsheet

The spreadsheet system is very similar to the formula system with the exception that the spreadsheet allows for more complexity.  Accountants tend to like complex formulas that are difficult for the outsider to understand.  Perhaps this evolves from trying to get every owner's positive attributes included in the formula.  Firms need a strategic plan or shared vision in order to make this or any of the systems work properly.

Managing Partner Decision

In firms where there is a strong leader and visionary, the managing partner can successfully administer the owner compensation system.  However, very few firms are able to maintain this system.  Typically the managing partner does not have a book of business or chargeable hours when this system is utilized.

The Compensation Committee

This is an attempt at balance or the managing partner may not want the sole responsibility for administration of the system.  This system requires excellent communications and often comes into existence due to the perception there isn't any better system.  The compensation committee should be small and the managing partner should be a permanent member of the committee.  The other members should be elected.  Not all owners should expect to participate on the committee.

Points/Units

This is the system that most large firms use and is generally combined with the compensation committee.  While the system may work, it has a tendency to overvalue technical skills and managed book of business.  It can be the foundation for the balanced scorecard method which we will discuss in more detail later.

One of the most disruptive results of all of the systems appears to be regarding the differences in compensation levels among owners rather than the total amount of the compensation pool.  Therefore, many firms have gone or are moving toward closed systems where partners do not know other partners compensation.  Typically owners can calculate approximate amounts in small firms with a limited number of owners.

The Balanced Scorecard

While the newest system in the accounting profession, it is not a new system and has been employed in corporate American for over 10 years.  The purposes of the balance scorecard are:

• Communicates strategy throughout the firm
• Informs owners/employees of how they fit
• Teaches owners/employees to focus on what is important
• Creates control over life balance
• Links firm and owners/employees' success
• Provides feedback on a timely basis
• Rewards results rather than effort
• Provides opportunity for success at all levels within the firm

The scorecard is typically categorized into four categories: learning & growth, internal operations and processes, client development and satisfaction, and financial.  The tendency of all companies (firms) who implement the balanced scorecard approach is to over focus on the financial measures.  Accountants know how to measure financial results but have trouble with the other three categories.  Experts say the financial results will come if proper focus is give on employee learning and growth, improved processes and client development and satisfaction.  Financial success is a result.

What is the 'balanced scorecard'?

By now you probably have several questions about the balanced scorecard.  What is it?

Why are accounting firms interested?  How do they use it?  How do they implement it?  We will attempt to answer your questions as we proceed.

The concept was developed at Harvard Business School in the early 1990s by R.S. Kaplan and D.P. Norton.  It is an organizational performance measurement system that has received widespread acceptance and is now being introduced into professional service firms.  Some refer to it as a pay for performance system.

The steps to the process are:

1. Clearly define business objectives and strategy.
2. Communicate measure, motivate and reward.

The obstacles are numerous and accountants are notorious for being able to identify the obstacles; but generally they don't take the time to develop the necessary strategies to overcome the barriers.  Some of the more important obstacles are:

• Vision – inability to see and communicate what the future will look like.
• People – inability to attract and retain quality people.
• Management – inability to focus on the business rather than simply working in the business.
• Resources – with limited resources, firms must focus on a limited number of strategic objectives and initiates.   Often firms try to do too much and accomplish very little.

Vision

In most firms the employees fail to understand the business vision.  It must be clearly and consistently communicated both internally and externally.  Employees are the key asset in a knowledge based business.  Communication and understanding of the vision are the keys to successful execution.  Strategic goals must be translated into tasks, performance standards, and desired outcomes.  Do not assume anything.  It is much better for initiatives to be well-defined and consistently communicated.

People

In today's commoditized marketplace, quality people are becoming more difficult to attract and retain.  Compensation must be linked to performance and performance must be measured correctly.  Employees tend to focus on what is measured, particularly if it is tied to compensation. 

The key measurement in the accounting industry has been chargeable hours.  Some will still argue this is a key indicator.  However, a balance is needed among financial, training/learning, process improvement and client satisfaction related initiatives.  Compensation plans that reinforce the firm's strategic objectives are very important.  The scorecard should be cascaded down to the individual level.  Reward employees for creating value. 

Caution: start with the owner group before you apply the balanced scorecard to the staff.  Wait at least one year before taking the system to the staff level.  Get the problems at the owner level resolved first.

Management

Where is management focused?  What is being measured?  These are key questions in aligning management and the strategic plan.  The management team needs to focus beyond just financial results.  While financial results are important, so are investments in training/learning, processes, technology, and client satisfaction.  With firms only averaging around 50% chargeable, there appears to be adequate time for the important initiatives. Management's responsibility is to balance among conflicting priorities.  Someone must provide the necessary leadership and discipline.

Resources

Resources must be budgeted and allocated in accordance with firm strategy.  Without a firm strategic plan, firms often get caught in spreading too few resources across too many objectives and initiates.  Long-term goals must be balanced with short-term performance. 

Many firms get caught in the trap of maximizing current profits while avoiding the necessary long-term investments in technology, re-engineered processes and training/learning.  Unfunded retirement benefits based upon owner salaries can be a detriment to making the necessary investments. 

The firm should always come above any one partner's compensation or retirement plan.  Be careful not to allow senior partners to over commit the firm to unfunded retirement benefits that are dependent upon future earnings.  Everyone wants a great deal, but the firm must be able to excel and afford the benefits.

The Balanced Scorecard

A graphic of the balanced scorecard follows.  Note that vision and strategy are at the core with the four primary perspectives linked.

Each perspective can be valued differently depending upon the firm's valuation system.  As a word of caution, make sure you give internal business processes, learning and growth, and customer satisfaction adequate value.  In this example, we are assuming they are part of your firm's strategic plan.  If not, then you will simply substitute your firm's areas of strategic objectives.

Objectives and Measures

Establish what you are going to measure and then how you will measure.  Most accounting firm's are comfortable measuring lagging indicators (or dealing with history).  Leading indicators are just as important in managing a well run firm.  Indicators such as client contacts, number of proposals outstanding and absenteeism are leading indicators.  Cause and effect are most important when dealing with leading indicators.  If…., then…., (else).  Remember that goals are measurable while slogans are not measurable.

What Next

If you think the balance scorecard approach has value for your firm, you should get additional training and do some research.  Once this is complete, you will need to make the decision to take action and obtain the buy-in of your partner group.  This is never an easy task as partners tend to resist change.  Their biggest question, even though they may not want to admit it, will be what effect it will have on their own salary.  It will require a trial run to calculate what salaries would have been the past year if the system had been in place.  Getting everyone striving for the same firm goals and completing their individual 90-day game plans will ensure success.  Alignment and consensus are big factors in determining success.  It may require coaching from someone outside the firm.  It is generally very difficult for the managing partner (or any partner) to change a firm's compensation system.   The saying that if you are part of a system, it is impossible to change the system holds true.  It requires objectivity, education and confidence in order to ensure success.

Tips on Getting Started

1. Start with your strategic plan – without a plan you will have a weak foundation.
2. Don't start without the total commitment of the MP or CEO – leadership is a requirement.
3. Commitment is different than support – this is for all partners, not everyone but "me".
4. Use a facilitator/coach – it will reduce time and increase partner confidence.
5. Start with the partner group – do not include the staff the first year.
6. Use the progress reports and 90-day game plans to reduce time – (simple tools that will reduce management time).
7. Schedule quarterly meetings in advance – meetings scheduled in advance have more importance.
8. Insure performance funds – financial rewards will change behaviors.
9. Focus on limited objectives – maximize your return by focusing resources on priorities.
10. Use graphics for positive visuals around the office – communicate consistently and often.

Sample Scorecards

The following scorecards are provided as examples of how firm objectives become owner and staff objectives.  It is recommended that no more than five initiatives be measured under each perspective.  You will see in the example that we are only measuring three objectives.  The objectives are given different weights (importance) even though each perspective is given equal value.  In this example, a maximum of 25 total points is assigned to each perspective.  The score in each objective comes from quarterly evaluations.  Firm success is tied to owner and staff success.  The final score is reduced to a total value of 10 or less.  This is only an example and your firm may chose not to weigh values.  Most experts agree that each objective should not be equal in value; however, the perspectives should be valued equally.  The tendency of many owners will be to want to reduce the values on everything but the financial objectives.  Each firm will have to determine their perspectives, objectives and values based upon their strategic plan.  While this is only an example, you may find the objectives fit your firm with minor modification.

Conclusion

The balanced scorecard approach is new in the accounting industry.  Few accounting firms have used the approach for over two years.  The system requires management time and communication at all levels within the firm.  It will improve the alignment of firm and personal objectives.  If your current owner compensation system is not producing the results that promote the one-firm concept, you should consider the balanced scorecard approach.  It will hold owners accountable while focusing on priority objectives.  It will also increase confidence as the firm grows and improves.

Sample Firm Scorecard

Sample Partner Scorecard

Sample Staff Scorecard