THE ROSENBERG ASSOCIATES LTD. THE SECRETS OF GREAT PARTNER COMPENSATION SYSTEMS PRESENTED BY: MARC...

THEROSENBERG ASSOCIATES LTD.www.rosenbergassoc.com

THE SECRETS OF

GREAT PARTNER COMPENSATION SYSTEMS

PRESENTED BY: MARC ROSENBERG, CPA


The Rosenberg AssociatesThe Rosenberg Associates Marc Rosenberg, CPA, PresidentMarc Rosenberg, CPA, President

Over 20 years consulting to CPA firmsOver 20 years consulting to CPA firms

Consultant, author and speaker to CPAsConsultant, author and speaker to CPAs

700 client firms from coast to coast700 client firms from coast to coast

Named one of the most recommended CPA firm Named one of the most recommended CPA firm consultants by consultants by INSIDE Public AccountingINSIDE Public Accounting

Top 100 Most Influential People in Top 100 Most Influential People in Accounting Profession – Accounting Profession – Accounting TodayAccounting Today

- - 99 consecutive years consecutive years


TitlesTitles CPA Firm Management & Governance CPA Firm Management & Governance

CPA Firm Succession Planning: A Perfect StormCPA Firm Succession Planning: A Perfect Storm

Strategic Planning & Goal Setting for ResultsStrategic Planning & Goal Setting for Results

How to Negotiate a CPA Firm MergerHow to Negotiate a CPA Firm Merger

How to Operate a Compensation CommitteeHow to Operate a Compensation Committee

What What ReallyReally Makes a CPA Firm Profitable? Makes a CPA Firm Profitable?

Guide to Planning the Firm RetreatGuide to Planning the Firm Retreat

Effective Partner Relations & CommunicationEffective Partner Relations & Communication

How to Bring in New PartnersHow to Bring in New Partners

Our proprietary consulting Our proprietary consulting methods, handouts, checklists, methods, handouts, checklists, and intellectual capital are and intellectual capital are captured in each of these captured in each of these monographs.monographs.

Order monographs at:www.rosenbergassoc.com


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 MAP Survey – The Rosenberg MAP Survey – “Generally “Generally accepted as the barometer for CPA firm accepted as the barometer for CPA firm practice management” according to practice management” according to Accounting TodayAccounting Today

14th Year!


Where Marc goes in his free timeWhere Marc goes in his free time


Where Marc goes in his free timeWhere Marc goes in his free time

MVP


Final Groundrule

I take questions during the presentation


The Rosenberg Associates

Management of a CPA Firm: The Highest Level

VISION

FIRM GOALS

PARTNER GOALS

ENGINES

Leadership

Operations

Partner Comp

Accountability


Compensation SystemsCompensation Systems

1.1. EqualEqual

2.2. Ownership percentageOwnership percentage

Not performance-based


Performance-based Performance-based systemssystems


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



4. Paper and pencil4. Paper and pencil

5. Cumulative points5. Cumulative points

6. Profit center approach6. Profit center approach



7. MP decides7. MP decides

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


Partner Compensation SystemsPartner Compensation Systems2 2

PtrsPtrs3-4 3-4

PtrsPtrs5-7 5-7

PtrsPtrs8-12 8-12 PtrsPtrs

13+ 13+ PtrsPtrs

20112011

TotalTotal

Comp CommitteeComp Committee 0%0% 19%19% 23%23% 54%54% 70%70% 32%

FormulaFormula 23%23% 36%36% 36%36% 29%29% 11%11% 30%

Paper & PencilPaper & Pencil 3%3% 4%4% 5%5% 2%2% 2%2% 3%

Ownership PctOwnership Pct 10%10% 4%4% 6%6% 2%2% 8%8% 5%

MP DecidesMP Decides 12%12% 11%11% 12%12% 6%6% 9%9% 10%

Pay EqualPay Equal 32%32% 6%6% 4%4% 4%4% 0%0% 7%

All DecideAll Decide 20%20% 20%20% 14%14% 3%3% 0%0% 13%

OpenOpen 98%98% 82%82% 81%81% 65%65% 49%49% 77%

ClosedClosed 2%2% 18%18% 19%19% 35%35% 51%51% 23%

2012 Rosenberg MAP Survey2012 Rosenberg MAP Survey

MVP

2012 Rosenberg MAP Survey


Partner Compensation SystemsPartner Compensation SystemsChanges in Past 4 yearsChanges in Past 4 years

5-7 5-7 PartnersPartners

8-12 8-12 PartnersPartners

13+ 13+ PartnersPartners

20112011 20052005 20120111

20020055

20112011 20052005

Comp Comp CommitteeCommittee

23%23% 19%19% 54%54% 39%39% 70%70% 58%58%

FormulaFormula36%36% 47%47% 29%29% 39%39% 11%11% 38%38%

Per 2012 Rosenberg MAP Survey THEROSENBERG ASSOCIATES LTD.www.rosenbergassoc.com


Have any firms listening today Have any firms listening today changedchanged their compensation system their compensation system

in recent years?in recent years?

If yes, If yes, whywhy did you change? did you change?WhatWhat did you change? did you change?


Partner Comp Best PracticesPartner Comp Best Practices

Best Practice Smaller Firms Larger Firms

1. Should be performance based.

Common but not always.

Performance=metrics

Always.

Performance=metrics plus other factors

2. Practice development plays a big role.

Origination is king. Important but other factors have a role.

3. Multi-tier system:•Int on capital (5%)•Base (60-80%)•Bonus (10-30%)

• Interest less common• Base often a draw• Bonus trues up final

number

• Interest more common• More likely for base &

bonus to be separate

4. Comp linked to strategic plan.

Rare More common


Partner Comp Best PracticesPartner Comp Best Practices

Best Practice Smaller Firms Larger Firms

5. Teamwork rules! Rare. For comp, teamwork rarely considered

More common

6. Performance criteria made clear

Production is king. Little else matters.

• Production stats• Goals• Performed role well• Live core values• Intangibles

7. Intangibles are important

Virtually ignored. Important recognition; but they rarely trump production.

8. System selected should be fair.

Formulas most common until 7-8 partners.

Comp committee most common 7-8 partners


Partner Comp Best PracticesPartner Comp Best PracticesBest Practice Smaller Firms Larger Firms

9. How comp committee functions

Jury or Congress Management

10. Communication from CC to partners:•Onset of new year•Monitor during year•End of year

Very little More common but not great

11. Ptr evals and goal setting used to evaluate partners

Very rare More common

12. Ptr comp used to “manage” partners

Near-total reliance; no other method

Only one of several techniques

13. Open vs. closed Almost all open Open more common but closed on the rise


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.

Q


QUESTION FOR LISTENERSQUESTION FOR LISTENERS

Have any firms recently Have any firms recently reducedreduced the the weighting of weighting of BOOK OF BUSINESSBOOK OF BUSINESS in in their compensation systems?their compensation systems?

WHY did you do it?WHY did you do it?

HOW did you do?HOW did you do?


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


Drill down onDrill down on2 most common systems2 most common systems

• FormulasFormulas• Compensation CommitteeCompensation Committee


Formula ComplicationsFormula Complications

Inherited Inherited wealthwealth



HoardingHoarding



Recognition of technical Recognition of technical specialtiesspecialties::

TaxTax A&A quality controlA&A quality control



Which criterion is Which criterion is most important?most important?

Who is to say?Who is to say?



How to value How to value management management



How to recognize How to recognize intangible contributionsintangible contributions

How long we get credit How long we get credit for originationfor origination



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”Q


QUESTION TO LISTENERSQUESTION TO LISTENERS

For those who use a For those who use a formulaformula system… system…

……How do you avoid How do you avoid the inherent the inherent problems in formula problems in formula methods?methods?

HoardingHoarding

Excessive comp to Excessive comp to

those that those that

inheritedinherited their their

wealthwealth

Doesn’t value Doesn’t value

intangiblesintangibles


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

Defined: 20% x client base50% x billable dollars (hours x rate x realization)


#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?


#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%


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


Compensation Compensation CommitteeCommittee

Keys To SuccessKeys To Success


Comp Committee:Comp Committee:Keys to SuccessKeys to Success

1.1. IF THE PEOPLE IF THE PEOPLE BEING JUDGED BEING JUDGED DON’T TRUST THE DON’T TRUST THE JUDGES, THE JUDGES, THE SYSTEM WON’T SYSTEM WON’T WORK.WORK.

PERIOD.PERIOD.

MVP


Compensation CommitteeCompensation CommitteeKeys To SuccessKeys To Success

2.Make-Up of Committee:2.Make-Up of Committee: SmallSmall MP is permanent memberMP is permanent member Voted or appointed (ideally, CC Voted or appointed (ideally, CC

= management, not jury or Congress)= management, not jury or Congress) All members must be credibleAll members must be credible Not everyone gets a turnNot everyone gets a turn


Compensation CommitteeCompensation CommitteeKeys To SuccessKeys To Success

3. 3. CC has full mandate to decide methods, CC has full mandate to decide methods, techniques, values, weighting, size of tiers, etc.techniques, values, weighting, size of tiers, etc.

4. 4. Link of comp to strategic plan and vision. Link of comp to strategic plan and vision. Partners do what the firm Partners do what the firm needsneeds them to do. them to do.


Comp Committee:Comp Committee:Keys to SuccessKeys to Success

LeadershipLeadership People skills and People skills and

developmentdevelopment Practice Practice

developmentdevelopment Client serviceClient service

Client transitionClient transition Traditional Traditional

production production measures measures

TeamworkTeamwork Good citizenshipGood citizenship

MVP

Q

5. Performance Criteria


QUESTION FOR LISTENERSQUESTION FOR LISTENERS

Firms certainly use Firms certainly use OTHER criteria to OTHER criteria to evaluate partners evaluate partners than these listed. than these listed.

What do YOU use What do YOU use that I missed?that I missed?

Keep it high level.Keep it high level.

1.1. LeadershipLeadership

2.2. People skillsPeople skills

3.3. Pract. developmentPract. development

4.4. Client serviceClient service

5.5. Client transitionClient transition

6.6. Traditional productionTraditional production

7.7. TeamworkTeamwork

8.8. Good citizenshipGood citizenship


Compensation Committee:Compensation Committee:Keys to SuccessKeys to Success

66. . Incentive bonus or Final Year-End Distribution? 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


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. 6.6.


Examples of IntangiblesExamples of Intangibles

1.1. Mgmt/leadershipMgmt/leadership

2.2. LeveragingLeveraging

3.3. Staff mentoringStaff mentoring

4.4. TrainingTraining

5.5. TeamworkTeamwork

6.6. Be a good partner; Be a good partner; no Lone Rangersno Lone Rangers

7.7. Manage clients on Manage clients on others’ “books”others’ “books”

8.8. Cross-sellingCross-selling

9.9. Institutionalize clientsInstitutionalize clients

10.10. Be “go-to” person…Be “go-to” person…

11.11. Back-up to partnersBack-up to partners

12.12. Finds work for staffFinds work for staff

13.13. Good corp citizenGood corp citizen

14.14. Always learning; Always learning; never coastingnever coasting

15.15. Communication skillsCommunication skills

16.16. Always willing to help Always willing to help othersothers


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



77. Sincere effort by CC to review all pertinent . Sincere effort by CC to review all pertinent information. No “gut feels.”information. No “gut feels.”

1.1. Production statisticsProduction statistics

2.2. Achievement of goalsAchievement of goals

3.3. Input from MP, PICs, dept. heads Input from MP, PICs, dept. heads

4.4. Partner evaluationsPartner evaluations

5.5. Upward evaluation by the staffUpward evaluation by the staff

6.6. Self-evaluationsSelf-evaluations

7.7. Paper and pencil (non-binding)Paper and pencil (non-binding)



8. 8. Communication at 3 critical points:Communication at 3 critical points:

a.a. Crystal clear on rules of game Crystal clear on rules of game before it is played.before it is played.

b.b. Monitor progress.Monitor progress.

c. End of year: “Judgments explained are more c. End of year: “Judgments explained are more readily accepted than those that are not. readily accepted than those that are not.



10.10.Putting numbers next to names. Resist reverting to Putting numbers next to names. Resist reverting to formulas.formulas.

11.11.CC makes 2 decisions: bonus for this year and bases for CC makes 2 decisions: bonus for this year and bases for next year.next year.

12.12.Tax season clash with CC timetable.Tax season clash with CC timetable.

13.13. CC decisions final. No appeals. No votes.CC decisions final. No appeals. No votes.

14.14. Closed vs. open.Closed vs. open.


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


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

Q


In the last few years, have any firms In the last few years, have any firms moved from open to closed?moved from open to closed?

How well has it worked?How well has it worked?Please key in your Please key in your

response to me, response to me, now.now.

QTHEROSENBERG ASSOCIATES LTD.www.rosenbergassoc.com


How to use a partner comp system to get How to use a partner comp system to get partners to do what the firm partners to do what the firm needsneeds them to do them to do

1.1.Create and follow a strategic plan.Create and follow a strategic plan.

2.2.Written roles & expectations for each partner.Written roles & expectations for each partner.

3.3.Bring down “billing book” from its pedestal.Bring down “billing book” from its pedestal.

4.4.Differentiate between origination & billing resp.Differentiate between origination & billing resp.

5.5.Adopt the compensation committee system.Adopt the compensation committee system.

6.6.Intangibles must play an important role in comp. Intangibles must play an important role in comp.

7.7.Incentive bonus links all of the above.Incentive bonus links all of the above.

8.8.MP should be able to impact bonus.MP should be able to impact bonus.

9.9.Communication. Communication. Communication. Communication.


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.


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


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.”



““Don’t be a pig Don’t be a pig

and don’t do and don’t do

something stupid.”something stupid.”



““If you’re a jerk, If you’re a jerk,

go find another go find another home.”home.”


Q & A

Phone: [email protected]

http://blog.rosenbergassoc.com/

Marc Rosenberg, CPA

Thanks for taking the time to listen today!

Let me know of any questions you have now or in the future.

Feel free to contact me:


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

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