“If you pick the right people and give them the opportunity to spread their wings — and put compensation as a carrier behind it — you don’t have to manage them …… This whole game of business revolves around one thing. You build the best team, you win.”
— Jack Welch
As CEO of a midsized or small CPA firm, ask yourself this tough question: “Why would someone want to be a partner in this firm?”
Do you have a good answer? Here’s our take: “Rising stars” and laterals need a quality firm that has two major things going for it: (1) a track record of achieving sustained success and continually improved average partner earnings; and (2) a strategic plan that will enable the firm to transition from a merely good firm to a mid-market sustainable brand. Unless the firm exhibits these two key ingredients, a CEO truly doesn’t have a good answer as to why the firm will be attractive to potential partners.
In Our Opinion, to attract new quality partners, including laterals, a firm needs to demonstrate that it has a path to grow professionally and monetarily. This is usually accomplished by:
Many firms have developed a partner-in-training process that they use to evaluate and develop their partner candidates. It generally covers a two- or three-year span.
The candidate is invited to attend partner meetings and interactions with the CEO, managing partners, and other senior partners. He or she (1) is given goals specific to the program; (2) is exposed to firm financial and other partner-level information; (3) is provided with leadership training and other education, and (4) is mentored through the process by senior management. This process aims to allow both the candidate and management the opportunity to observe the other and make sure that there is a good fit. Presented below is an example of the process and timeline required for a partner-in-training program.
“What does the firm need to do to develop existing partners?” Here is where we find so many CEOs, managing partners, and other senior partners falling short. Firms appoint new partners with plenty of excitement about their future prospects, but many firms do little, if anything, to develop those new partners. Four or five years later, firm leaders start mumbling — “John is a dud”, “Mary has fallen way short of our expectations” or “Making Ari a partner was a mistake”. And they may be right in their assessments; but which came first, the chicken or the egg?
We ask because many firms expect new partners to continuously build enterprise value and consistently help perpetuate the firm with new business originations, cross-sells, and client retention. Unfortunately, life in a CPA firm doesn’t work that way. As partners gain experience, they need to be nurtured and developed. The best way to accomplish this is by using a performance management and compensation plan as addressed below:
In our judgment, a partner performance management and compensation plan must be performance-based (comparing actual performance to goals and objectives). This will enable you to consistently reach the right outcome, i.e., to fairly reward your high performers and make meaningful progress with your rising stars. It is not a formula-based system. Rather, it involves a good amount of judgment and interpretation.
Regardless of the components of your performance management and compensation plan, several themes should be adhered to:
With performance-based compensation, the firm needs to consider:
What is your process? Here are some of the more important components we usually find:
Many firms tend to avoid confrontation regarding partner performance issues for an extended period of time, which allows for complacency and enhancement of the “comfort zone” culture. Unfortunately, as the need for more capable and innovative partners has heightened, the talent pool has shrunk, increasing the urgency and pressure to act quickly. CEOs need to manage at warp speed when implementing their short-term goals and objectives while securing a successful strategy for the longer term.
We have always believed that a partner performance management and compensation plan has to make sure that the firm is generously rewarding the highest performing partners and the rising stars
An important aspect of overcoming the CPA firm succession concern is the necessity for firms to quickly attract and retain game-changing talent concurrently with executing a cultural shift toward implementation.
Recruiting the right experienced talent for the right succession roles is the key differentiator for timely succession planning. Firms no longer can rely solely on the traditional entry-level recruiting model and developing people over a period of more than ten years to fill key partner positions. Nor can they resort to the old model of taking highly talented partners and providing them with largely average staff, hoping that the partners’ talents will sustain the firm.
A talent war is taking place as competition intensifies for quality high-level positions. The time to react to this marketplace crisis has become significantly shorter, especially for baby boomer partner firms. Talented, creative, and innovative professionals are in high demand for pivotal positions, for not only replacing the “old guard” and delivering new and more innovative services. The new game rules dictate that CPA firms seeking to remain independent must attract game-changer types of partners and move quickly to bring them aboard.
Not every CPA firm will be fortunate enough to attract the multifaceted game-changer. Firms may have to revise the multi-faceted, traditional one-partner-per-client approach and more frequently use multiple, hyper-specialized partners who perform small aspects of client service on firm engagements extremely well. Consequently, this modified approach means that succession planning strategies will need to cultivate and recruit not just brilliant individuals, but brilliant teams of specialists. The partner-team structure requires a cultural and organizational change from traditional approaches normally associated with succession planning. Whether it’s a partner-team approach or other innovative strategies, the traditional methods of succession planning may no longer be achievable in the current and foreseeable future.
What is your performance-based compensation process? Here are some of the more important components:
Many firms are to avoid confrontation regarding partner performance issues for an extended period of time, which allows for complacency and enhancement of the “comfort zone” culture. Unfortunately, as the need for more capable and innovative partners has heightened, the talent pool has shrunk, increasing the urgency and pressure to act quickly. CEOs need to manage at warp speed when implementing their short-term goals and objectives while securing a successful strategy for the longer term.
What made a CPA firm successful in the past will not guarantee success in the future, especially in regard to succession planning. To survive the succession crisis, a firm must initiate a strategic transformation that takes the firm quickly out of an antiquated and traditional state to a more realistic and market-driven approach as solutions to succession problems become more limited. Firms must develop and institute a plan to change and adapt their succession plans. The updated plans should focus on accelerating transformation of the existing partners and staff in terms of adapting quickly to the firm’s succession needs and the evolving future marketplace so that they’re prepared to step in and fill those needs. CPA firms of all sizes are facing this challenge.