Pay for Performance

he goal of a partner compensation plan is to inspire each principal’s most profitable performance—and make a firm grow. When a CPA firm’s success depends on partner contributions other than accounting expertise—such as bringing in business, developing a specialty or being a good manager—its compensation plan has to encourage those qualities, for both fairness and firm health. A program of written goals and evaluations that links pay to accountability is a strong motivator. Firms that have clear communication with principals about their progress help partners stay focused on practice development as well as the bottom line. The catch: There’s no one-size-fits-all formula for accomplishing this. This article describes a couple of approaches to keep track of—and reward—partner productivity.

DO USE DILIGENCE
Although formal yearly performance reviews are common at staff level, firms use highly structured documentation less frequently at the partner level, several CPAs say. Some partnership agreements specify what’s expected in terms of leadership, dedication, cooperation with other partners, work quality and quantity, responsibilities for training and managing staff, and standards for servicing and keeping clients as well as attracting new ones. Others do not. At some firms, partners still set their own goals to align with firm goals and write self-evaluations at year-end (see “You Want to Minimize the Pain,”at the end of this article), while other firms use a more buffered goal-setting and evaluation process.

In 2001 CPA firm partner bonuses averaged $44,000, compared with $53,800 in 2000. Average compensation, however, rose to $244,000 from $224,000.
Source: Accounting Office Management and Administration Report, Institute of Management Accounting, New York City.

Strictly linking desirable partner qualities to measurable outcomes can be hard to do. Good judgment, efficiency, diligence, timeliness, a knowledge of applicable laws and accounting pronouncements, the ability to analyze quickly and accurately, to write and speak effectively, to plan and implement legal strategies and to handle the unexpected are the underpinnings of outstanding partner performance. They’re important to encourage, as is how well partners support personnel development, niche development, image building, public relations, firm growth and their own—and others’—personal growth, says Richard Kretz, CPA and managing partner of Kostin, Ruffkess, a 13-partner, 130-person, Farmington, Connecticut, firm. When the managing partner or compensation committee decides what to reward and puts the firm’s partner productivity criteria in writing, it results in a more evenhanded, growth-focused process, as the following examples show.

Stambaugh Ness PC—a 12-partner Pennsylvania firm with about 80 employees and offices in York, Hanover and Gettysburg and niche subsidiaries SN Business Solutions LLP (technology and management consulting) and SN Advisors LLP (investment and financial advisory services)—tracks and rewards partner performance using a “principal scorecard” compensation system. It was the highest-rated practice management suggestion from a 50-tip roundup offered at a recent CPA conference. The firm’s three-person executive committee—Steven H. Klunk, CPA, president and CEO; Steven L. Hake, CPA, secretary and COO; and Thomas J. Moul, CPA, treasurer and CFO—last year engaged management consultant Robert L. Bowersox to help them develop the plan. It is a tiered reward system that focuses on seven performance areas. Partners who score well share an incentive allocation pool in addition to their salary distribution. The highest scoring partners also share a bonus pool. Exhibit 1, below, shows a scorecard comparing five hypothetical partners, who each earn a base salary of $80,000 per year and share an incentive allocation pool of $150,000.

To start, the committee meets with each partner to discuss his or her skills as well as what the firm’s goals are. Depending on the shareholder’s experience and interests, they set out the partner’s objectives for a range of three to six practice areas. Accountabilities are “weighted” (something like a golf handicap), but each partner’s total weighting is 40—no matter how it’s spread across categories. A principal who scored perfectly in all applicable categories would get 400, which encourages partners to compete with themselves instead of each other, the firm says. The firm monitors a partner’s progress over the year, using the most objective data available. Quarterly performance feedback is part of the process, which includes suggested adjustments as needed.

Business development. The firm gives rainmakers the flexibility to hunt for business. It has two of them on board and measures their success in developing new contacts and cross-selling business, including work that goes to other partners.

Book production. Each principal increases his or her own roster of clients (“book of business”), provides additional services to existing clients or obtains referrals for the subsidiaries.

Billable hours. The executive committee and partners agree on a goal for billable hours. Weighting encourages highly productive principals with strong technical skills to work on business others bring in.

Hours managed. Every engagement has a principal designated as “owner,” who is credited with the total number of billable hours. The plan tracks how efficiently partners with large books of business delegate to other principals and staff, and it encourages partners to do high-level work that others can’t.

Realization. The executive committee takes stock of whether partners have delegated work profitably, whether they’ve billed aggressively and whether they’ve brought in remunerative clients.

Managing the firm. This category primarily applies to partners of the executive committee, who must answer for firm profitability, growth and overall culture. It’s the most subjective area to gauge and it chiefly measures net profits vs. budget.

Process improvement. This tracks partners’ efforts to develop more efficient systems and infrastructure and to grow niche services. For example, for audits, reviews and compilations, the measurement criteria are cycle time, realization and hours vs. budget. The firm asks for grades from clients as well as staff.

After tabulating the positive scores, the firm addresses other factors it terms “hygiene” issues. Because the responsibilities that fall within this category are considered basic, partners aren’t rewarded for them, but failing to attend to them carries a penalty. Hygiene issues have a total weight of negative 20 and can cost a partner up to 200 points. They are

Account management. Partners are measured on whether they bill regularly and assist in collections.

Personal planning. Partners are rated on their personal involvement in working with the executive committee or its designees to carry out specific business-development and process-improvement goals and on assisting others.

Recording time. To keep the firm’s work in process and billing up to date, principals are expected to keep accurate, daily time records.

SOCs (situations, opportunities, concerns). Another partner responsibility involves logging all new-business or expanded-service opportunities for the business-development tracking system so they can be flagged for follow-up. The information is shared weekly with the entire staff.

Firm support. Partners are expected to be a positive force with other principals and staff. This includes furthering firm initiatives and processes and bringing concerns to the executive committee in a timely manner.

The annual partner compensation is made up of two main components. The first—an equal amount for all partners—is multiplied by the number of partners there are. The firm compares that base-salary total with the firm’s partner-compensation budget. The difference becomes the firm’s incentive and bonus pools, which the executive committee allocates after it ranks the partners’ scorecard results from highest to lowest. Partners have to get a minimum score of 250 to be included in the bonus pool. “It’s our intention to reduce the base salary each year and allocate more and more based on scorecard results,” says Moul.

DEFINE PARTNER ROLES…AND TALK OFTEN
George Cumpata, CPA and managing partner of the 20-partner, 150-person Chicago-based Gleeson, Sklar, Sawyers & Cumpata—a full-service firm with niches in litigation, business valuation, real estate development and disaster planning—places a high value on communication. It helps keep everyone in tune with the firm’s goals, he says. “The key to a workable compensation system is to have clearly defined roles for all your partners,” says Cumpata. After that, “you really have to find ways to communicate. The biggest downfall firms encounter stems from lack of communication—and it gets tougher as your firm gets bigger.” (See “Say It Again, Sam,” right.)

Cumpata, who was on the five-partner compensation committee for several years prior to becoming managing partner (and head of the committee) six years ago, says a firm needs to adjust as it grows. “We’re three to four times the size we were six years ago. Growth is a good thing, but along with the increase in size you have to build processes that accommodate it. A firm with 150 people operates very differently from a firm with 45,” he says. Small practices can keep their compensation systems simple and egalitarian; midsize and fast-track firms need plans that allow for growth; and large firms—where management can’t know every partner personally—need to rely more on objective data, he says.

The firm has three levels of partners: equity, income and associate, with a slightly different base pay by group. They span all ages—from CPAs approaching retirement to those in their forties and early fifties to an “aggressive” group of younger partners. The firm’s compensation program must marshal the group’s diverse abilities and help partners meet development goals. “At our firm we redefine our roles every year, a process that takes about three weeks for 20 partners,” he says. The exercise is the baseline for each partner’s yearly performance.

Say It Again, Sam
At profitable firms with high levels of growth, it’s not uncommon for partners to be supportive, work as a team and refer clients to one another. The key is partner relationships, and strengthening them helps ensure a firm’s future success. Where conflicts could drain energies and drag down profitability, a firm must create avenues for clear and frequent communication. To encourage a free flow of information that supports meeting firm targets, the partners should

Take time for a spontaneous face-to-face chat or lunch at least once a week.

Tell other partners what’s going on in their area of the business.

Be clear with each other about what they expect.

Hold monthly partner meetings.

Use meetings to tackle major issues before turning to the little ones.

Consider conflict an opportunity to resolve problems.

Hold annual retreats—with enough lead time to develop an effective agenda for them.

To set out accountabilities and track how partners meet them, the firm uses three forms. The first form lists objectives, and the principals specify their annual goals on it. Exhibit 2, below, shows how a hypothetical partner, John Smith, might fill it out. The first column presents a “menu” in four categories, and from it Smith chooses 1A as a goal (engagement referrals). In the second column, he has written down a specific objective of getting two referrals worth a total of $25,000. He continues down the list and enters other objectives as appropriate. The executive committee and partner give each one a “weight,” entered in the third column. An objective’s weight depends on subjective factors that include the partner’s opportunities and aptitude and the firm’s development aims.

Exhibit 3, below, shows the “report card” for gauging the partners’ performance. At yearend, each partner enters a self-evaluation in the first column. (The numbers and capital letters in exhibits 3 and 4 refer to corresponding accountability items in exhibit 1.) The firm’s compensation committee uses column two to do its own evaluation. Then it meets with each partner individually, after which it calculates the performance-based portion of compensation. Exhibit 4, below, records the dollar value of the partner’s work for the year and whether he or she achieved the goals set out at the beginning of the year. “Each committee member calculates a little differently, but they’re never too far apart in their judgments about what a partner should get,” Cumpata says.

There are no absolutes—except that there are as many different types of compensation packages as there are CPA firms, and business is always in flux, says Cumpata. A smaller firm must adjust its partner rewards to targets as it grows, he advises. Partners have to understand the “big objectives” and work closely with other partners. “As our organization grew, I came to the conclusion I needed partners with a broader view. We look for partners who are entrepreneurs—who can build a business presence as well as bring in work. You have to be able to do the technical work competently and be a businessperson today,” says Cumpata.