Partner%20Compensation

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Partner Compensation

• Bill Reeb, CPA
• Succession Institute, LLC

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You Need to Better Understand
The Impact of Strategy
3
Planning Is a Tool To Avoid the Costly Zig-Zag
Effect!
Target
Start
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The Planning Cycle

• Planning

• Develop Mission Vision

• Mission Completion

• Evaluate SWOTs

• Goal Attainment

• Establish Goals

• Plan Accomplishment

• Identify Plans

• Objective Realization

• Derive Objectives

• Budget Achievement

• Create Budgets

• Formulate Incentives

• Formulate Incentives

• Which lead to ...

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Most Firms Operate Like the Sailboat Below
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Eat What YouKill ModelVs.Building a Village
Model
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Eat What You Kill Model

• Natural Hunters
• Strong Personalities
• Add People to Assist the Hunters
• The Classic Entrepreneur they want to have
  their hands in every aspect of the process
  (hunting, skinning, food preparation, cooking)
• Only the Strong Survive

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Building a Village Model

• Focus on making the mostout of the talent within
  village
• Specialization of Roles and Responsibilities
• Constantly narrowing the roleof the Hunter and
  removing him/her from as many processes as
  possible
• Building more processes, support, methodology and
  infrastructure

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Distinctions between EWYK BAV Model

• Developing Leadership
• Creating viable enduring chain of command
• Operating like a firm rather than like a group
  of individual owners
• Transitioning of clients occursanytime firm
  decides a clientcould be better served by other
  resources
• Developing systems to reward desired behavior
• Developing staffing model that leverages
  realization utilization

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You Need to Better Understand
Book of Business Obstacles
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Book of Business Obstacles

• Gap in Book Size should be minimized (Small
  Book)
• Very little leverage (600-750k typically).
  Partner does a great deal of the technical work
• Lower Realization because wrong person is doing
  the work
• Little staff development and inconsistent
  utilization because partner is the work horse
• Partner does not spend enough time developing
  client relationships
• No excess capacity to take on more work (cant
  grow if everyone is maxed out/often add new
  partners when shouldnt)
• Over-served clients (teaches small clients their
  work is worthy of a partner doing it creates
  transition problems)
• Few firms will want to buy these over-served
  books or when they do, they will do so at a deep
  discount

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Book of Business Obstacles

• Large Book partners tend to delegate the project
  management and spend more time developing client
  relationships across all services
• They tend to abuse delegation. Rather than
  develop managers and staff, they typically
  delegate their project management to a junior
  partners which sets in motion a stifling and
  damaging environment
• These partners tend to hoard client management
  even though they have passed off almost all of
  the responsibility to others which then creates
  the situation where many of their smaller clients
  are underserved or even ignored (stifles firm
  growth and puts the client relationship at risk)
• Younger partners are often relegated to the role
  of manager because of the workload passed to them
  by senior partners. This destroys realization
  and leverage because of improper resource
  management
• Because junior partners often fill the role of
  manager, the real seniors and managers are poorly
  developed and too large a gap in talent evolves
  between partners and staff.
• The younger partners always get criticized for
  not acting like a partner when it is the senior
  partners that set them up and perpetuate the
  system

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Book Management

• The Firm must Focus on Closing the Gap between
  Partners Books.
• This means Partner Compensation Has to be
  Addressed for this to Happen
• You Need to Believe that, Purely because of
  Demographics, it is time to Start Building a
  Business Infrastructure that Will Support
  Partners Being Able to Manage a Doubled Book Size
  in the next 5 Years and Being Able Manage a
  Tripled Book Size in 10.
• You Need to Address What a Partners Roles and
  Responsibilities are

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You Need to Have the Discipline to Give Up Clients

• To different partners
• Because they are unprofitable
• Because they no longer make sense with your
  service offerings
• Because they are difficult to work with or
  mistreat your people
• Because the only time you collect your last fee
  is when you start your next project
• Because their work comes at a time when you are
  always in overload

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You Need to Better Understand
Partner Roles and Responsibilities
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Classifying Clients

• An A client is often defined as one of 15 to
  20 of the clients that make up 70 to 80 of the
  firms revenues.
• A B client is one that you are right now most
  likely under-serving, but has an opportunity to
  generate sizable revenues for your firm.
• A C client is a client that does not have much
  additional service opportunity other than what
  you already do, and the revenues generated are
  small.
• A D client could seemingly fall into ANYof the
  classifications above.

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Basic Partner Roles Responsibilities

• Partners are responsible for client account
  management. This includes
• Maintaining client satisfaction with, and loyalty
  to, the firm
• Continuously updating their understanding of
  clients priorities
• Meeting with A clients at least 4 times a year,
  B at least 2 times a year
• Identifying additional services that would be
  beneficial to those clients
• Provide a high-level oversight of the work
  performed for those clients
• Billing and collecting fees
• Pass down the regular contact and
  billing/collecting responsibilities of C
  clients and potentially some low level B
  clients to managers
• Maintain a constant connection with key referral
  sources

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Basic Partner Roles Responsibilities

• Leveraging the work being performed for the
  clients you manage. Partners do client
  management first, Managers do project management
  first, staff does detail work.
• Focusing on the developing people and building a
  right-side up Pyramid
• Implementing firm strategy
• Pricing projects above firm established minimum
  levels of realization, moving D clients up or
  out, stop clogging the firm with bad work
• To actively promote and comply with Firm-wide
  initiatives

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Partner Responsibility

• Relationship Management is the Primary
  Responsibility of A Partner!!!!!!
• Because if the Partner is Not Doing this who is?

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Technical Partners

• This is a person in the firm that is highly
  technically competent and their professional
  focus is on
• being the firms preeminent resource in specific
  technical areas,
• providing advice and council to other partners
  (and staff) in those technical areas,
• taking on the oversight and project management of
  the firms most complex technical work,
• oversight of quality systems, processes and
  training to ensure technical standards are
  maintained regarding the firms work product.
• Can a partner be both a technical partner and a
  client relationship partner? Yes 2/3rds CR,
  1/3rd T
• As firms grow larger, they can begin to afford
  the overhead of maintaining technical-only
  partners.
• Unfortunately, the reality of most CA/CPA firm
  partners is that they provide lip service to
  their role of client relationship partner and
  bury themselves in their role of technical
  partner.

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For Example

• The tax partner the walking tax library for the
  firm when he or she is the relationship manager
  for a client, can not decide to only talk about
  tax related issues.
• If you are the partner in charge of a client
  relationship (A and High Bs), you are obligated
  to understand that clients top priorities, both
  strategically and tactically, all the time.
• You are also obligated to report that information
  to the firm in some systematic way.
• And you are responsible for finding ways to help
  the client when possible through extending firm
  services, referring work to other professionals,
  staying involved as the clients advocate, etc.
• The relationship manager role is one of being the
  clients general contractor for professional
  services.
• If you are unwilling to fulfill this role, then
  you should not be responsible for client
  relationships within the firm, which begs the
  question as to why you are a partner in the first
  place.

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Partner Accountability Requires a Framework

• You have to have a Strategy
• Partner and Staff goals have to be established to
  support that strategy
• There has to be a clear understanding of what is
  expected of a everyone, from partner on down
• You have to be willing to fire anyone, especially
  a partner
• The managing partner has to have a significant
  compensation stick to reward or punish behaviors
• Partners have to understand that they represent
  the Board, the Managing Partner is their Only
  Employee, and everyone else (include themselves
  when performing client work) works for the
  Managing Partner

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You Need to Better Understand
Common SOPs driving Compensation
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Balancing of Clients

• The MP/CEO needs to havethe authority to
  balanceresources and shift clientsaround within
  the firm
• This should be done to ensure top clients are
  being adequately taken care of, timely serviced
  and maximize loyalty
• This includes ensuring clients have the
  opportunity to become aware of services that
  might be of interest
• To minimize the book of business gaps. The
  bigger the gap in books of business, the more
  those with the large books will hold everyone
  else hostage to their demands. And the more
  those with small books with get a free financial
  ride on the backs of those with large books.

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What is Your Client Acceptance Process?

• Who can decide what business you take on?
• What process is followed to insure you are taking
  on profitable business?
• Who verifies the availability of staff/resources
  to avoid constant workload compression?
• How is all of this information communicated and
  to whom?
• What about new work from existing clients?
• How are your weeding out marginal clients? Who
  can make that happen?

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Without Marketing SOP, You are Looking for
Problems

• Without systematizing marketing and investing in
  marketing processes, your firm will find a
  difficult time breaking through that barrier to
  the next level
• Rainmakers will hold the firm hostage
• Firm split-ups will likely occur
• It takes more of a firm-wide effort to make an
  impact with every new dollar of growth
• Its about partners and managers being required
  to live up to the firms job descriptions rather
  than their individual definitions

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Services Offered

• Your firm CANT afford to ALLOW partners to build
  island services
• Services need to be synergistic
• All services need to be built to support
  staffing, or shut them down now
• Technology
• Wealth Management
• Litigation Support
• Business Valuation

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You Need to Better Understand
Compensation
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You have to Unbundle

• Retirement
• Ownership and
• Compensation

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Critical Success Factor

• The Stronger the Partnerusuallythe Weaker the
  firm

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Compensation Systems Framework

• Compensation should be based on firm strategy and
  changed accordingly.
• Compensation systems should be built to reward
  behaviors you want, offer incentives for changes
  needed, and penalize actions you want to stop.
• Compensation systems should be to
  highly-compensate exceptional partners, reward
  good partners, and drive off marginal ones.

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Basic Issues

• The roles and responsibilities of the partner
  need to be defined
• Client Service Partners versus Technical Partners
• Goals both objective and subjective need to be
  establish annually
• Someone has to be empowered to hold the partners
  accountable
• Partners need support in managing and discussing
  their client service appointments and findings
• Equity versus Annual Performance

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Reverse the Upside Down Pyramid

• Force workdown
• Partners doingpartner work,
• Managers doing manager work, etc.

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Anchor

• Everyone On Outputs where practical Not
  Inputs!!!!

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Some Basics of Partner Compensation

• Compensation systems should always be tied to
  strategy
• What role does guaranteed salary play (60-70)
• What role do incentives play in the process
  (20-25)
• What role does the Managing Partner Goals play in
  this process (15-20)

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Are You Willing to Pay the Price?

• You have to spend a great deal of time thinking
  through and developing your compensation models
  and system (non-billable time administrative
  time)
• It takes time to identify what is expected of
  each person and come up with compensation targets
  that are fair and effective.
• You have to be willing to deal with the real
  issues the firm needs to address
• Realization
• Giving away projects
• Excessive write-off of time or not recording time
• Hanging on to D clients
• Procrastinating regarding spending time with A
  and B clients
• Doing manager level work to keep busy instead of
  partner level work

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Are You Willing to Pay the Price?

• You have to develop a reporting system that kicks
  out the necessary reports as a by-product of
  processing everyday work-in-process
• You have to be willing to commit enough
  compensation to the performance pool for it to
  truly influence behavior

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From a Recent PCPS Survey

• What criteria do you use to determine owner
  compensation (select all that apply)
• a salary or base draw 86
• ownership 48
• the size of the owners client book or fees
  managed 38
• billable/collectable hours 32
• new business developed 28
• performing certain identified firm functions
  (chairing committees, certain leadership roles,
  etc.) 28
• growing the existing business with a current
  client 17
• capital accounts 15
• cross-selling other services into your client
  base 11
• business transferred to other partners/managers
  8
• client satisfaction goals 5

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From a Recent Meeting, Problems Identified from
Existing System

• Client number based mostly on who got the call
  1st
• Compensates for admin duties but not results
• Does not assist with accountability
• Does not consider non-personnel costs of "book
  (risk, workload, timing, profit)
• Does not promote cross selling
• Does not promote team (firm) concepts (Creates
  "firms" with in the Firm)
• Doesn't penalize damaging/negative behavior
• Doesn't really reward the right activities
• Doesn't recognize true cost/value of
  administrative responsibilities
• Emphasizes doing billable work yourself
• Lateral pay move or less from senior manager
• Less vacation than professional staff

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From a Recent Meeting, Problems Identified from
Existing System

• Most likely promotes overcharging of billable hrs
• No "formal" subjective element
• No adjustment for high-profit/lower risk work
• No incentive for non-generating partner to manage
  the business
• Not tied to goals of the firm
• Partners are only concerned about their clients
• Partners max out on business they can handle
• Results in wide range of book size among partners
• Rewards generator long after management is turned
  over
• Rewards hording of work clients
• Shared client duties aren't split fairly
• The way right offs are handled
• Too much emphasis on the "client numbers

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Partner Compensation Example

• Partner incentive compensation might consist of
• Base Salary Plus the Compensation Pool (either
  or -)
• Leverage
• Training and Development
• Partner Billings (book under certain
  circumstances)
• Profitability of Book
• Growth/New Business
• Managing Partner discretionary Pool for meeting
  individual and firm goals (needs to be sizeable)
• Individual Goals correlating to Firm Strategy
• Some additional compensation adjustments might
  include
• Interest on Capital over a minimum amount
• Salary adjustments for Partners in charge of
  offices or certain administrative functions

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From a Recent Partner Compensation Meeting

• Base Pay Guaranteed pay not added back to
  overall pool
• Personal billings All personal billings in
  excess of your base draw, you will receive an
  incentive on everything in excess. However, at
  some point, we dont want to pay additional
  incentive because it would promote the partners
  doing the detail work.
• Growth
• New business incentive for existing clients
  Initiator 5, closer 5 (first year fees), MP
  referees
• New business incentive for new clients Initiator
  5, closer 5 (first year fees), MP referees
• Transfer (new clients) 5
• Transfer (existing clients) 10

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From a Recent Partner Compensation Meeting

• Payment for book of business. There will be
  factor giving credit for book of business size.
  However, there would be a maximum earning
  potential based on a schedule
• Note Book of business compensation should only
  be considered viable if the Firm is responsible
  (MP) for trying to balance book of business
  between disciplines. Future formulas should have
  negative incentive for not meeting minimums
  established
• Goals and subjective assessment from MP.
  Objective Goals represent 60, subjective
  performance 40. The pool would be 20 with that
  total divided up at the discretion of the MP

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From a Recent Partner Compensation Meeting

• Leverage. Total book divided by Total Partner
  Time that worked on that book.
• That ratio must be above a certain ratio to
  participate in the pool. Total pool recommended
  to be 450,000. If below the required ratio,
  that partner would not participate in the pool.
  Those that qualify, split the pool at a rate of
  their ratio to total of all ratios that qualify.
• Remainder Split proportionately to all partners
  based on their overall compensation, including
  base

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From a Recent Partner Compensation Meeting

• Managing Partner Compensation
• A base salary
• Plus three incentive components
• 1. Payment on firm profitability goal
• 2. Payment on meeting certain operational goals
  (i.e. - training, executing business plan, etc.)
• 3. Participate in the commission revenue for new
  business or growth of existing client

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You Cant Change Partner Behavior

• If you try to run your business by consensus
• If you dont have a strategy
• If personal partner goals are not established
  supporting that strategy
• If there is not a clear understanding of what is
  expected of a partner
• If you are not willing to fire a partner
• If the managing partner does not have a
  compensation stick to reward or punish behaviors
• If there is no money left to pay for performance
  because all of the compensation is committed to
  ownership , client immovable book of business,
  and seniority.

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Thank You For Your Time!
Bill Reeb, CPA.CITP Succession Institute,
LLC Phone [phone] Email bill_at_successioninst
itute.com Website www.billreeb.com www.succession
institute.com (under construction)