Owner Compensation Ideas to Reconsider At Year-End

Year-end is approaching; CPA firms revisit the issue for owner compensation-especially this year, with all the shits in CPA firm practices and priorities.

Motivation:
§ "Your partner compensation system must reward owners for their total contribution
§ Serve as a management tool that motivates them to perform the fee-producing and non-billable
activities the firm needs to progress.
§ When you create, revise, and administer a compensation system or components of the system, you
must think carefully about what it will motivate your partner to do.

Motivation “Angle”
§ Firm management will be unable to move the organization in a particular direction unless the
compensation system points to that direction as well.
§ You must determine how to make it encourage hours, delegation to others, management, and so forth.
§ Compensation criteria and firm goals have to be mesh.
§ This mesh can make the tensions among partners when the compensation criteria you’ve design to
establish the firm’s directions and reinforce its culture to do the job.

Conflict can result from competing values when compensating partners for:
§ Delegation of work vs. revenue from personal working hours.
§ Credit for joint business development vs. individual origination.
§ Credit given for consequential non-billable time vs. time devoted to producing client work, etc.

Business origination from new clients
§ In today's climate, the firm that fails to recognize client origination won't prosper and may not survive.
§ The system must also reward partners for their efforts to retain clients and expand existing client
relationships.
§ Firms need a procedure to deal with the issue; in particular, you have to decide whether the origination
credit will be permanent or for a defined duration.

Permanent origination credit
§ This system will require adjustment for the winding down of a practice before a partner's retirement, as
the partner hands off the primary client relationship to others.
§ If a subjective compensation system is in place, new business may be considered comparable to the
retention of significant clients as long as the partner's efforts are apparent and consistent with the firm's
goals and objectives.

Origination credit for a defined period of time
§ This requires rainmakers to develop new clients.
§ At some point, the new-business credit-but not the cross-selling credit-ceases for a given client and that
client become a "firm" client.

Shared-origination credit
§ This gives credit to partners for their marketing efforts, acknowledges the importance of their initial
value to the client, or recognizes their immediate assumption of responsibility to retain and increase the
volume of profitable business from that client.

Means for allocating origination credit and the relationship between new-business credit and cross-selling:

Allocating business origination credit effectively
§ Your system must track the new business developed by each owner and should include information
called for on the new file opening form.
§ To limit misunderstandings between and among partners, the firm should define what constitutes a new
client.
§ When administering the tracking system, use a broad definition of "new" business to keep the partners'
level of interest in origination high.

Tactics for allocating credit for new business/ cross-selling
§ Your firm has to have a formula or a subjective compensation system.
§ With formula system, the percentage should be high enough to serve as an incentive to develop
business, but not so high that there is no incentive for others to work on the engagements.
§ Compensation systems must also address issues related to receivables, delegation, and credit for
management:

Billing and collections
§ Your compensation system must value these because the systems that reward hours billed and
collected lead to more work being delegated.
§ If origination credit and client satisfaction are measures of value for compensation, delegation is more
likely to fulfill both criteria.

Partner delegation
Although partners in most firms recognize the importance of delegating work to others, such delegation will only take place under one or more of these conditions:
§ The delegator has more than enough work to do.
§ The delegator has more important/profitable work to do.
§ The delegator has additional responsibilities that require others to do the work.
§ For the economic efficiency of the client, it is appropriate for certain work to be done by others.
§ The work in question falls within a defined area of concentration that necessitates its transfer.
§ Partners must establish guidelines to ensure that work is assigned within the appropriate area of the firm
and that supervision is available for compliance

Credit for management
§ Defined responsibilities (e.g., managing partner, partner in charge of a department) so as to be able to
identify quantitative and qualitative goals by which to measure management performance
§ Results from management responsibilities must count as well
§ If the management task assigned and ultimately evaluated results in heightened efficiency, cultural
betterment, and/or increased profitability, the firm should include this in the compensation of the
responsible partner(s).
§ Remembering that leadership of high quality is harder to replace than to retain, firms must reward it
appropriately.

Firms generally acknowledge devotion of time to management by:
§ Reducing the targeted billable hour goals for managers. Paying a fixed stipend for management roles.