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PARTNER COMPENSATION
FOR A NEW MILLENIUM
PRESENTED BY: MARC ROSENBERG, CPA
The Rosenberg AssociatesThe Rosenberg Associates
The Rosenberg AssociatesThe Rosenberg AssociatesMarc Rosenberg, CPAMarc Rosenberg, CPAPresidentPresident
Consultant, author and speaker to Consultant, author and speaker to the CPA professionthe CPA profession
Based in ChicagoBased in Chicago
Over 700 client firms from coast Over 700 client firms from coast to coastto coast
Top 100 Most Influential Person in Top 100 Most Influential Person in Accounting Profession – Accounting Profession – Accounting Today -Accounting Today -
- - 77 consecutive yearsconsecutive years
22 years consulting to firms22 years consulting to firms
The Rosenberg AssociatesThe Rosenberg Associates
Rosenberg is active with CPA firms:Rosenberg is active with CPA firms:
Facilitate retreatsFacilitate retreats Partner compensation & retirementPartner compensation & retirement Succession planningSuccession planning MergersMergers Strategic planning Strategic planning Practice management reviewsPractice management reviews Partner relations and conflictPartner relations and conflict Upward evaluation surveysUpward evaluation surveys
The Rosenberg AssociatesThe Rosenberg Associates
The Rosenberg AssociatesThe Rosenberg Associates
The Rosenberg MAP Survey – The Rosenberg MAP Survey – Accounting Today Accounting Today calls it “generally calls it “generally accepted as the barometer for CPA accepted as the barometer for CPA firm practice management.”firm practice management.”
The Management CatalystThe Management Catalyst – quarterly – quarterly newsletter sent to 3,000 CPA firms newsletter sent to 3,000 CPA firms nationwide, free of chargenationwide, free of charge
The Rosenberg AssociatesThe Rosenberg Associates
Where Marc goes in his free timeWhere Marc goes in his free time
Watch for MVP Slides
MVP
Final Groundrule
I take questions during the presentation
The Rosenberg AssociatesThe Rosenberg Associates
Best PracticesBest PracticesFrom RosenbergFrom Rosenberg
1.1. Performance - basedPerformance - based
2.2. Practice development plays a Practice development plays a meaningful rolemeaningful role
3.3. Integrate with strategic planning, Integrate with strategic planning, goal setting and performance goal setting and performance evaluationsevaluations
The Rosenberg AssociatesThe Rosenberg Associates
Best PracticesBest Practices
4. Teamwork rules: Partners do what 4. Teamwork rules: Partners do what the firm the firm needsneeds them to do them to do
5. Multi - tier:5. Multi - tier: Return on capitalReturn on capital BaseBase Incentive bonusIncentive bonus
The Rosenberg AssociatesThe Rosenberg Associates
Best PracticesBest Practices
6. MP has more impact than other 6. MP has more impact than other partnerspartners
7. Reward intangibles7. Reward intangibles
8. Flexible8. Flexible
The Rosenberg AssociatesThe Rosenberg Associates
9. Leadership vs. Management vs. Administration*9. Leadership vs. Management vs. Administration*
LeadLead
Identify challengesIdentify challengesFocus people on challengesFocus people on challengesBuild strong cultureBuild strong cultureFinding new thingsFinding new thingsGuarantees firm’s future valueGuarantees firm’s future value
Worth Worth MORE MORE than your billing than your billing raterate
ManageManage
Plan and implementPlan and implementImpact partner behaviorImpact partner behaviorEstablish partner accountabilityEstablish partner accountabilityP&L managementP&L managementSolve problems quicklySolve problems quickly
Worth your Worth your billing ratebilling rate
AdministerAdminister
Focus is on the day to dayFocus is on the day to dayMonitor/report on resultsMonitor/report on resultsOperate systemsOperate systemsPolicies and proceduresPolicies and proceduresSupport practice personnelSupport practice personnel
Worth Worth LESSLESS than your billing than your billing raterate
* Originally presented by Bob Bunting, modified by Rosenberg
The Rosenberg AssociatesThe Rosenberg Associates
Compensation SystemsCompensation Systems
1.1. EqualEqual
2.2.
Not
per
form
ance
-bas
ed
The Rosenberg AssociatesThe Rosenberg Associates
Are All Partners Created Equal?Are All Partners Created Equal?
AnnualAnnual
FeesFeesHigh To High To
Low RatioLow RatioIncome / Income / PartnerPartner
# Ptrs/# Ptrs/
Total Total
> $10 million> $10 million 3.23.2 $435,000$435,000 15/14015/140
$6-10 million$6-10 million 2.62.6 $369,000$369,000 7/537/53
$4-6 million$4-6 million 2.02.0 $363,000$363,000 5/325/32
$2-4 million$2-4 million 1.81.8 $272,000$272,000 4/224/22
Highest paid partners out-earned lowest paid by 2.3 to 1 ratio (Firms over $2M) .
From 2009 Rosenberg MAP Survey
The Rosenberg AssociatesThe Rosenberg Associates
Compensation SystemsCompensation Systems
1.1. EqualEqual
2.2. Ownership percentageOwnership percentage
Not
per
form
ance
-bas
ed
The Rosenberg AssociatesThe Rosenberg Associates
Compensation Systems:Compensation Systems:Performance-BasedPerformance-Based
3. Formulas3. Formulas
billings x 38.743% ÷ √billable hoursbillings x 38.743% ÷ √billable hours
x A/R² - (cash receipts on Thursdays)x A/R² - (cash receipts on Thursdays)
÷ (founding partner’s birthday) + billing ÷ (founding partner’s birthday) + billing raterate
x (1.732 x realization rate) + √IPP ≠ 50.9x (1.732 x realization rate) + √IPP ≠ 50.9
∏∑∑ ∏∑∑ book of business - ∫ gross fees ÷ book of business - ∫ gross fees ÷ 0.000.00
The Rosenberg AssociatesThe Rosenberg Associates
Compensation SystemsCompensation Systems
4. Paper and pencil4. Paper and pencil
5. Cumulative points5. Cumulative points
6. Profit center approach6. Profit center approach
The Rosenberg AssociatesThe Rosenberg Associates
Compensation SystemsCompensation Systems
7. MP decision7. MP decision
8. Compensation committee8. Compensation committee
9. All partners meet to decide9. All partners meet to decide
10. Combination of some of the above10. Combination of some of the above
Recap of Ptr Comp SystemsRecap of Ptr Comp SystemsSystem Best For: Greatest Advantage
Pay equal •Small firms•Just getting started
•“Appears” to avoid arguments
Ownership percentage
•No one •NEVER a fair way to reward performance
Formulas •“Eat what you kill” firm and/or •Low level of trust
•Natural appeal to CPAs
Paper & pencil •Firms that don’t like formulas but can’t make the leap to trusting one person or a committee
•What’s more fair than the collective wisdom of all the partners?
MP decides •Firms with a highly credible or dominating MP
•Credibility and fairness of MP
Comp committee
•8 or more partners •Embraces performance-based comp, recognizes intangibles
The Rosenberg AssociatesThe Rosenberg Associates
MVP
6 Things To Be Taken Into 6 Things To Be Taken Into Account in Allocating IncomeAccount in Allocating Income
1.1. FinderFinder
2.2. MinderMinder
3.3. GrinderGrinder
4.4. Capital investedCapital invested
5.5. Management (not administration)Management (not administration)
6.6. Intangibles including goal setting, Intangibles including goal setting, living core values, fulfilling your roleliving core values, fulfilling your role
The Rosenberg AssociatesThe Rosenberg Associates
MVP
Partner Compensation SystemsPartner Compensation Systems2 2
PtrsPtrs3-4 3-4
PtrsPtrs5-7 5-7
PtrsPtrs8-12 8-12 PtrsPtrs
13+ 13+ PtrsPtrs
20092009
TotalTotal20082008
TotalTotal
Comp Comp CommitteeCommittee
5%5% 10%10% 25%25% 49%49% 73%73% 32% 29%
FormulaFormula 20%20% 41%41% 38%38% 28%28% 14%14% 31% 33%
Paper & PencilPaper & Pencil 0%0% 3%3% 5%5% 1%1% 3%3% 3% 3%
Ownership PctOwnership Pct 5%5% 7%7% 4%4% 3%3% 2%2% 4% 5%
MP DecidesMP Decides 18%18% 11%11% 11%11% 12%12% 3%3% 11% 8%
Pay EqualPay Equal 30%30% 8%8% 4%4% 3%3% 2%2% 7% 9%
All DecideAll Decide 22%22% 20%20% 13%13% 4%4% 3%3% 12% 13%
OpenOpen 93%93% 83%83% 81%81% 69%69% 50%50% 75%
ClosedClosed 7%7% 17%17% 19%19% 31%31% 50%50% 25%
2010 Rosenberg MAP SurveyTHEROSENBERG ASSOCIATES LTD.www.rosenbergassoc.com
MVP
Partner Compensation SystemsPartner Compensation SystemsChanges in Past 4 yearsChanges in Past 4 years
5-7 Partners5-7 Partners 8-12 Partners8-12 Partners 13+ Partners13+ Partners
20092009 20072007 20052005 20092009 20072007 20052005 20092009 20072007 20052005
Comp Comp CommitteeCommittee
25%25% 21%21% 19%19% 49%49% 45%45% 39%39% 73%73% 72%72% 58%58%
FormulaFormula38%38% 40%40% 47%47% 28%28% 33%33% 39%39% 14%14% 19%19% 38%38%
All other All other systemssystems
37%37% 39%39% 34%34% 23%23% 22%22% 22%22% 13%13% 9%9% 4%4%
Per 2010 Rosenberg MAP Survey
The Rosenberg AssociatesThe Rosenberg Associates
Formula ComplicationsFormula Complications
Inherited Inherited wealthwealth
The Rosenberg AssociatesThe Rosenberg Associates
Formula ComplicationsFormula Complications
HoardingHoarding
The Rosenberg AssociatesThe Rosenberg Associates
Formula ComplicationsFormula Complications
Recognition of Recognition of technical technical specialties:specialties:
TaxTax A&A quality controlA&A quality control
The Rosenberg AssociatesThe Rosenberg Associates
Formula ComplicationsFormula Complications
Which criterion is Which criterion is most important?most important?
Who is to say?Who is to say?
The Rosenberg AssociatesThe Rosenberg Associates
Formula ComplicationsFormula Complications
How to value How to value management management
The Rosenberg AssociatesThe Rosenberg Associates
Formula ComplicationsFormula Complications
How to recognize How to recognize intangible intangible contributionscontributions
How long we get How long we get credit for credit for originationorigination
The Rosenberg AssociatesThe Rosenberg Associates
Formula ComplicationsFormula Complications
Bring a partner along Bring a partner along on a sales pitchon a sales pitch
The Rosenberg AssociatesThe Rosenberg Associates
Formula ComplicationsFormula Complications
Partners with lower billing rates or Partners with lower billing rates or who head up non - profit areawho head up non - profit area
Client on one partner’s book when Client on one partner’s book when another really manages the clientanother really manages the client
““I” vs “WE”I” vs “WE”
The Rosenberg AssociatesThe Rosenberg Associates
3 Formulas That Can Work3 Formulas That Can WorkReasonably WellReasonably Well
1.1. 20/50 20/50
2.2. Finder/Minder/Grinder Finder/Minder/Grinder
3.3. Formulas for both metrics and intangiblesFormulas for both metrics and intangibles
Carve-outs for interest, mgmt & bonusCarve-outs for interest, mgmt & bonus
#1 - 20/50 Method#1 - 20/50 Method
Pct. of Income Using 20/50
Number of Firms*
>120% 65
105 – 120% 64
95 – 105% 66
80-95% 88
< 80% 44
Overall avg. = 104% 324
The Rosenberg AssociatesThe Rosenberg Associates
Defined: 20% x client base50% x billable dollars (hours x rate x realization)
* 2009 Rosenberg MAP Survey
The Rosenberg AssociatesThe Rosenberg Associates
#2 - Finder Minder Grinder#2 - Finder Minder Grinder
Finder – who brings it inFinder – who brings it in
Minder – manages the client relationship Minder – manages the client relationship ANDAND the the engagementengagement
Grinder – doing billable workGrinder – doing billable work
The challenge is coming up with the weighting:The challenge is coming up with the weighting: 1/3 – 1/3 – 1/31/3 – 1/3 – 1/3 35-45-2035-45-20 Other?Other?
The Rosenberg AssociatesThe Rosenberg Associates
#3 - Another formula system I’ve seen#3 - Another formula system I’ve seen
OVERALL SYSTEMOVERALL SYSTEM INTANGIBLES BALLOTINTANGIBLES BALLOT
LeadershipLeadership 5 4 3 2 1 5 4 3 2 1
Mentoring staffMentoring staff 5 4 3 2 15 4 3 2 1
Pract developmentPract development5 4 3 2 15 4 3 2 1
Sharing clientsSharing clients 5 4 3 2 15 4 3 2 1
TeamworkTeamwork 5 4 3 2 15 4 3 2 1
Good citizenshipGood citizenship 5 4 3 2 15 4 3 2 1
Expertise & techn skillsExpertise & techn skills 5 4 3 2 15 4 3 2 1
Etc.Etc. 5 4 3 2 15 4 3 2 1
Etc.Etc. 5 4 3 2 15 4 3 2 1
TotalTotal
Interest on capital
Production measures
Mgmt stipends
Intangibles-paper-pencil
Incentive bonus
Mgmt’s discretion
Total
?%
?%
?%
?%
?%
?%
100%
The Rosenberg AssociatesThe Rosenberg Associates
Recent Significant TrendsRecent Significant TrendsIn Partner Compensation TechniquesIn Partner Compensation Techniques
1.1. More comp committees; fewer formulasMore comp committees; fewer formulas2.2. Link with strategic planningLink with strategic planning3.3. IntangiblesIntangibles4.4. TeamworkTeamwork5.5. Less emphasis on book of businessLess emphasis on book of business6.6. 7.7. 8.8.
The Rosenberg AssociatesThe Rosenberg Associates
The The decliningdeclining importance of importance of “book of business”“book of business”
44 Reasons Reasons
1. Stresses teamwork and the one-firm 1. Stresses teamwork and the one-firm conceptconcept
2. Intangible factors must be 2. Intangible factors must be considered alsoconsidered also
The Rosenberg AssociatesThe Rosenberg Associates
The declining importance of The declining importance of “book of business”“book of business”
3. Partners freely transferring clients 3. Partners freely transferring clients to others to others
4. I4. Institutionalizingnstitutionalizing clients; creating clients; creating “multiple touch points”“multiple touch points”
The Rosenberg AssociatesThe Rosenberg Associates
Recent Significant TrendsRecent Significant TrendsIn Partner Compensation TechniquesIn Partner Compensation Techniques
1.1. More comp committees; fewer formulasMore comp committees; fewer formulas2.2. Link with strategic planningLink with strategic planning3.3. IntangiblesIntangibles4.4. TeamworkTeamwork5.5. Less emphasis on book of businessLess emphasis on book of business6.6. Less emphasis on billable hoursLess emphasis on billable hours7.7. Generous to new partnersGenerous to new partners8.8. Closed vs. open (though most still open)Closed vs. open (though most still open)
MVP
The Rosenberg AssociatesThe Rosenberg Associates
Comp Committee:Comp Committee:Why Firms Use ItWhy Firms Use It
Formulas have big flawsFormulas have big flaws Balances rewards between Balances rewards between
production and intangiblesproduction and intangibles MP doesn’t want sole responsibilityMP doesn’t want sole responsibility Partners won’t give sole power to MP Partners won’t give sole power to MP
The Rosenberg AssociatesThe Rosenberg Associates
Comp Committee:Comp Committee:Keys to SuccessKeys to Success
1.1. IF THE PEOPLE IF THE PEOPLE BEING JUDGED BEING JUDGED DON’T TRUST DON’T TRUST THE JUDGES, THE JUDGES, THE SYSTEM THE SYSTEM WON’T WORK.WON’T WORK.
PERIOD.PERIOD.
The Rosenberg AssociatesThe Rosenberg Associates
Comp Committee:Comp Committee:Keys to SuccessKeys to Success
2. RULES GOVERNING THE DECISIONS 2. RULES GOVERNING THE DECISIONS MUST BE CONSISTENT AND WELL MUST BE CONSISTENT AND WELL UNDERSTOOD; PARTNERS MUST UNDERSTOOD; PARTNERS MUST UNDERSTAND WHAT BEHAVIORS AND UNDERSTAND WHAT BEHAVIORS AND RESULTS TRANSLATE THE MOST TO RESULTS TRANSLATE THE MOST TO BIGGER REWARDS.BIGGER REWARDS.
THINGS MUST BE CLEARTHINGS MUST BE CLEAR
The Rosenberg AssociatesThe Rosenberg Associates
Comp Committee:Comp Committee:Keys to SuccessKeys to Success
3. A SINCERE EFFORT MUST BE MADE 3. A SINCERE EFFORT MUST BE MADE BY THE JUDGES TO COLLECT ALL BY THE JUDGES TO COLLECT ALL PERTINENT INFORMATION AND PERTINENT INFORMATION AND STUDY IT. STUDY IT.
DON’T ALLOCATE COMPENSATION DON’T ALLOCATE COMPENSATION BASED ON REPUTATION, INTUITION, BASED ON REPUTATION, INTUITION, PERCEPTION, ETC.PERCEPTION, ETC.
The Rosenberg AssociatesThe Rosenberg Associates
Comp Committee:Comp Committee:Keys to SuccessKeys to Success
4. JUDGMENTS THAT ARE 4. JUDGMENTS THAT ARE EXPLAINEDEXPLAINED AND AND COMMUNICATEDCOMMUNICATED ARE MORE ARE MORE READILY ACCEPTED THAN THOSE READILY ACCEPTED THAN THOSE THAT ARE NOT.THAT ARE NOT.
MVP
The Rosenberg AssociatesThe Rosenberg Associates
Make-Up of CommitteeMake-Up of Committee
SmallSmall MP is permanent memberMP is permanent member Voted or appointedVoted or appointed All members must be credibleAll members must be credible Not everyone gets a turnNot everyone gets a turn
Data Reviewed by CommitteeData Reviewed by Committee
1.1. Partner evaluationsPartner evaluations
2.2. Self-evaluationsSelf-evaluations
3.3. Upward evaluation by the staffUpward evaluation by the staff
4.4. Achievement of goalsAchievement of goals
5.5. Production statisticsProduction statistics
6.6. Input from MP, PICs, dept. heads Input from MP, PICs, dept. heads
7.7. Paper and pencil (non-binding)Paper and pencil (non-binding)
The Rosenberg AssociatesThe Rosenberg Associates
Comp Committee:Comp Committee:Important DecisionsImportant Decisions
1.1. Determining the # of CC membersDetermining the # of CC members2.2. How long is a CC member’s term?How long is a CC member’s term?3.3. Should the CC be the same as or different Should the CC be the same as or different
from the MC/EC?from the MC/EC?4.4. Who evaluates partners: CC or MC/EC?Who evaluates partners: CC or MC/EC?5.5. Performance criteria:Performance criteria:
What will be looked at?What will be looked at? Will criteria be weighted or looked at subjectively?Will criteria be weighted or looked at subjectively?
The Rosenberg AssociatesThe Rosenberg Associates
Performance CriteriaPerformance Criteria
LeadershipLeadership People skills and People skills and
developmentdevelopment Practice Practice
developmentdevelopment Client serviceClient service
Client transitionClient transition Traditional Traditional
production measures production measures TeamworkTeamwork Good citizenshipGood citizenship
The Top 50 firms largely stay away from weighting one vs. the other.
MVP
The Rosenberg AssociatesThe Rosenberg Associates
Comp Committee Operation:Comp Committee Operation:Important DecisionsImportant Decisions
6. How will CC communicate with each partner? 6. How will CC communicate with each partner?
7. How the CC 7. How the CC actuallyactually allocates the $$$: allocates the $$$:• MP recommendations + group “tweaking”MP recommendations + group “tweaking”• CC does a paper and pencil exercise, then tweaksCC does a paper and pencil exercise, then tweaks• Some sort of ranking/performance gridSome sort of ranking/performance grid
The Rosenberg AssociatesThe Rosenberg Associates
Important Comp Committee Important Comp Committee DecisionsDecisions
8. Incentive bonus or Final Year-End Distribution? 8. Incentive bonus or Final Year-End Distribution?
INCENTIVE INCENTIVE
BONUSBONUS
Separate criteria from Separate criteria from basebase
Base is a “salary”Base is a “salary”
FINAL FINAL
DISTRIBUTIONDISTRIBUTION
Same or similar criteria Same or similar criteria as the baseas the base
Base is really a drawBase is really a draw
The Rosenberg AssociatesThe Rosenberg Associates
Incentive Bonus:Incentive Bonus:Major FactorsMajor Factors
1.1. What did partner do to enable the What did partner do to enable the firm to have a “good year?”firm to have a “good year?”
2.2. Exceeding Exceeding productionproduction goals goals3.3. AchievingAchieving qualitativequalitative goals goals4.4. IntangiblesIntangibles5.5. Hitting home runsHitting home runs6.6. Partner performance evaluationsPartner performance evaluations
Examples of IntangiblesExamples of Intangibles
Mentoring and development of staffMentoring and development of staff Earning respect and credibility of Earning respect and credibility of
personnel personnel A good delegatorA good delegator A team playerA team player Overall leadershipOverall leadership Adheres to firm policies and rulesAdheres to firm policies and rules
The Rosenberg AssociatesThe Rosenberg Associates
StrategicPlanning
andCore Values
Partner Evaluation
PartnerCompensation
The Convergence of 3 Aspects of Management
MVP
The Rosenberg AssociatesThe Rosenberg Associates
StrategicPlanning
andCore Values
Partner Evaluation
PartnerCompensation
The Convergence of 3 Aspects of Management
MVP
The Rosenberg AssociatesThe Rosenberg Associates
Closed vs.Closed vs. Open Systems Open Systems
““If people are concerned about their If people are concerned about their absolute level of compensation, then they absolute level of compensation, then they cancan be satisfied. However, if their focus is be satisfied. However, if their focus is on relative standing, then they can on relative standing, then they can nevernever be satisfied.”be satisfied.”
Andrew GroveAndrew Grove
Chairman of the BoardChairman of the Board
Intel Intel
The Rosenberg AssociatesThe Rosenberg Associates
Open Vs. Closed SystemOpen Vs. Closed System
OPENOPEN
Partners feel like “real” Partners feel like “real” partnerspartners
Avoids image of Avoids image of “smoke-filled room”“smoke-filled room”
See how you stack upSee how you stack up
Tough to take it awayTough to take it away
CLOSEDCLOSED
Andy Grove quoteAndy Grove quote
CC less likely to be CC less likely to be influenced by how influenced by how they think partners they think partners will reactwill react
Reduces unhealthy Reduces unhealthy competitioncompetition
What do you think?
There are several areas There are several areas where there STILL is where there STILL is
controversycontroversy
Sometimes, getting partners Sometimes, getting partners to agree on things is like to agree on things is like
herding cats.herding cats.
The Rosenberg AssociatesThe Rosenberg Associates
The Rosenberg AssociatesThe Rosenberg Associates
Areas where there STILL is Areas where there STILL is controversycontroversy
1.1. Partner charge hoursPartner charge hours2.2. Should business origination always Should business origination always
trump everything else?trump everything else?3.3. Interest on capitalInterest on capital4.4. Bonus vs. year-end distributionBonus vs. year-end distribution
The Rosenberg AssociatesThe Rosenberg Associates
Pearls of WisdomPearls of Wisdom
““If you’re weak at If you’re weak at client service and client service and good citizenship, good citizenship, you flunk and you flunk and you’re out.”you’re out.”
The Rosenberg AssociatesThe Rosenberg Associates
Pearls of WisdomPearls of Wisdom
““Don’t be a pig Don’t be a pig
and don’t do and don’t do
something stupid.”something stupid.”
The Rosenberg AssociatesThe Rosenberg Associates
Pearls of WisdomPearls of Wisdom
““If you’re a jerk, If you’re a jerk,
go find another go find another home.”home.”
The Rosenberg AssociatesThe Rosenberg Associates
QUESTIONS
The Rosenberg AssociatesThe Rosenberg Associates
The Rosenberg AssociatesThe Rosenberg Associates
1000 Skokie Blvd. Suite 5551000 Skokie Blvd. Suite 555
Wilmette, IL 60091Wilmette, IL 60091
Phone: 847-251-7100Phone: 847-251-7100
Fax: 847-251-4622Fax: 847-251-4622
[email protected]@rosenbergassoc.com