The management topics of partner value and compensation continue to attract considerable attention at firm summits and management conferences. The discussions have become more complex with the addition of nonequity and non-CPA owners.
The balanced scorecard approach, connecting compensation to firm objectives, has made progress over the past several years as firms have moved more toward corporate rather than partnership compensation plans. However, for the most part, individual firms are reluctant to change compensation formulas just for the sake of change. There must be a compelling reason to change, and typically when it comes to changing compensation there are winners and losers. The fear of the unknown is often greater than the motivation for an improved system.
The old definition of a good compensation system is still relevant. People perceive a good compensation system as relatively fair and trust those managing the system. Here are several factors that typically determine the value of a partner:
- Leadership skills;
- Results — client satisfaction;
- Management skills;
- Talent development;
- Client development;
- Technical expertise;
- Team focus;
- Edge — the ability to make a decision;
- Being a life-long learner — the ability to change.
The age, size and culture of the firm play a distinct role in the firm’s partner compensation plan. The old saying, “Be careful about what you measure,” is certainly true, and partners are masters at focusing on the things that affect their own compensation.
A common misconception is that a compensation plan is for a career, rather than for a year or a few years. While I don’t imply that firms should change their compensation formulas for the sake of change, it is irresponsible to believe that a firm’s initiatives won’t change even if the strategic objectives remain constant for several years. The question then is, “What are the characteristics of a good partner compensation plan and how do firms tend to value partners in today’s competitive and transformative environment?” In looking at successful firms, I believe there are seven distinguishing characteristics:
1. The foundation. A current firm vision and strategic plan.
2. Taking time to think and plan. Working on the firm rather than in the firm.
3. Objectivity. An outside perspective.
4. Clear and communicated. A written compensation plan.
5. Fairness. Communicating the plan upfront.
6. Performance and job satisfaction. Consideration of each partner’s unique abilities.
7. Accountability and coaching. Frequent feedback and communication — quarterly is ideal.
We can further break out these seven characteristics into leadership, management, discipline and accountability. Accountability and discipline are missing today in many firms. Historically, partners have been evaluated on charge hours, book of business and realization. Many older compensation systems tend to focus primarily on financial results. Newer systems focus not only on the financial results, but also on staff development (training and learning), client development and satisfaction, and adherence to firm standards, policies and procedures.
You will notice that I didn’t mention “seniority.” Firms should not promote entitlement, but rather an environment of accountability and focus on the firm’s strategic objectives. Many firms have moved to closed compensation systems with a focus on growth and profitability, rather than competition among partners.
With this said, the value chain starts at the low end with partners who have technical skills, but not management and client development capabilities. The high end is for partners who focus on firm management and client development. In the middle are partners who serve clients, manage non-partner personnel, and have limited client development skills or responsibilities. As firms age and grow, they tend to increase the value of leadership and management, rather than simply valuing production. This is often a tough hurdle for many firms to clear, only because partners need to accept the required changes in both their roles within the firm and their compensation.
In fact, one of the most significant issues today with rapid growth and firm mergers is the challenge of getting partners to think like a larger business, rather than how they did in their previous firm. To change their thinking, we recommend an exercise called the 10X Growth Model. Force your partners to think by asking them what the firm would need to do if it were 10 times larger than it is today. In time, they will come up with answers to the effect that the firm would need:
1. A professional management team;
2. Quality talent with current skills;
3. Increased revenue per FTE;
4. To be managed like a business;
5. To train and develop talent;
6. Increased capital;
7. To document standards, policies and procedures;
8. To leverage resources across the firm;
9. To specialize; and,
10. To have integrated systems.
Next, ask the question: What would they need to do individually if the firm were 10 times larger? Their answers will generally focus on the following:
1. Become a better manager of people;
2. Adhere to standards, policies and procedures;
3. Get training and update skills;
4. Spend more time selling;
5. Form more alliances;
7. Spend less time doing client work;
8. Plan more time off;
9. Maintain confidence of self and subordinates; and,
10. Upgrade client base.
Now, for the most important question, ask them which one of these 10 items should be removed if the firm is only growing at 10 to 12 percent annually.
The answer is none.
Partners should be thinking like the firm is already 10 times larger than it is today and making decisions based on the future rather than the past. The growth and profitability of the firm must be planned, and each partner should be held accountable. There will be disagreement, but that is no reason to ignore the important issues of firm leadership and management’s responsibility. The best partners are those that have made the decision that they want to be led and managed.
In the past, pain, reward and education drove change. Most firms require all three factors, and the one partners respond to the most is the pain of change associated with compensation and the reward for doing the right things. Today, technology is also disrupting the profession at an accelerated pace, forcing firms to learn and change at a faster pace than the competition.
If you are serious about accountability and the desire to change partner compensation, start with a well-defined strategic plan. Then, as Jim Collins talks about in his best-selling book, “Good to Great,” the task of getting the wrong people off the bus may be an easier task than getting the right people in the right seats. Leadership requires tough decisions, and partner compensation is one of those issues that requires change, thinking and focus on written strategies.