Quality Partners – The Mother’s Milk Of CPA Firms

DEVELOPING EXISTING PARTNERS

“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:

• You are working with quantifiable and qualitative factors. Quantifiable factors can be measured (e.g., production, billings, business development). Qualitative factors, such as leadership and team development, are more difficult to measure.
• No two partners are alike. You should consider different performance measures and goals based on the individual’s particular contributions to the firm.

With performance-based compensation, the firm needs to consider:

• What target percentage of a partner’s compensation is salary (draw) vs. bonus.
• How much is at risk to performance criteria? Is total compensation at risk or just the bonus?
• Partner goal setting and results.
• Quantifiable vs. qualitative criteria. How much of both does your plan incorporate?
• Are firm goals for the year integrated with the performance management and compensation plan? Knowing what the firm goals are and how each partner makes a contribution is key.
• Is there a discretionary or non-assigned pool of money that you and your senior management team can use to reward exceptional performance, particularly with regard to the firm’s highest priorities?

IMPORTANT COMPONENTS OF PERFORMANCE-BASED COMPENSATION PROCESS

What is your process? Here are some of the more important components we usually find:

• The firm establishes overall goals for the year.
• In collaboration with the CEO and his/her senior management team, each partner establishes goals, integrated with the firm’s goals. Performance is monitored.
• The CEO and his/her senior management team meet with each partner at year-end to review achievements vs. goals.
• The CEO and his/her senior management team make a recommendation of the year-end bonus allocation to the Executive Board based on each partner’s performance and judgments.
• The Executive Board reviews and adjusts, if necessary, senior management’s recommendation.
• Salaries (draws) are set for the coming year by the Executive Board.
• The Executive Board is responsible for a similar process with the CEO.

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.

HIGHEST-PERFORMING PARTNERS

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.

ATTRACTING GAME-CHANGER TYPES

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.

“RISING STARS”

• Simply put, to retain your “rising stars” is to make sure you:
• Are helping them grow professionally, and
• Are compensating them on a path that demonstrates to them that you acknowledge they are doing special things and are beginning to demonstrate they are keepers.

PERFORMANCE-BASED COMPENSATION PROCESS

What is your performance-based compensation process? Here are some of the more important components:

• The firm establishes overall goals for the year.
• In collaboration with the CEO and his/her senior management team, each partner establishes goals, integrated with the firm’s goals. Performance is monitored.
• The CEO and senior management meet with each partner at year-end to review achievements vs. goals.
• The CEO and senior management make a recommendation of the year-end bonus allocation to the Executive Board based on each partner’s performance and judgments.
• The Executive Board reviews and adjusts, if necessary, senior management’s recommendation.
• Salaries (draws) are set for the coming year by the Executive Board.

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.