How to Create a Compensation System that Keeps Partners Engaged

Seriously, look no further, says August Aquila, a consultant specializing in professional service firm compensation plans and mergers and the author of Leadership at its Strongest: What Successful Managing Partners Do and Compensation as a Strategic Asset.

Compensation alone won’t motivate partners to accomplish all of these goals, according to Aquila. Instead, it’s the firm’s culture that will:

• define values and behaviors expected of partners and then
• reward partners whose behavior meets expectations and advances those values.

“If we think compensation in and of itself is going to make someone a trusted advisor, we sort of have the tail wagging the dog,” Aquila says. “The firm’s culture is the dog, and the tail is the compensation.”

In other words, to keep partners engaged, motivate them to grow the firm and to develop as trusted advisors, the firm must first identify its driving values, and then describe the behaviors that will support those principles. For example, perhaps the firm believes that teamwork can provide clients with better service, allowing one staff member to identify a client’s needs that another partner might miss. Therefore, tying compensation with behavior that boosts client teamwork and with the behavior’s beneficial results can motivate partners to achieve the firm’s goals more quickly.

“When you think of the firm’s compensation, most firms have historically put the emphasis on performance — meaning production, typically: billable hours, business development,” Aquila says. “There hasn’t been equal emphasis on behavior.”

This can result in the following kind of partner, Aquila says: “I’m a prima donna, I’m a pain in the ass, but I bring in a lot of business, but I turn off staff, which means we have to spend more on recruiting, and it’s sort of a vicious circle.”

“Somewhere along the line, firms have to decide: Do they want this individual or don’t they want this individual? No matter what compensation plan you have, it’s not going to make any difference” in that type of situation, he says.

Similarly, the firm has hard choices even before beginning a discussion about compensation systems if they have, as Aquila puts it, “someone who was a solid performer 10 or 15 years ago but has [unofficially] retired and hasn’t told anyone.”

“Under a new compensation program, it’s really important to look at each partner in the firm and make a decision: A, are they good ‘citizens,’ and B, do they perform or can they perform at the level you want them to?”

Once those questions are answered and the firm’s values are linked to desired behavior, firms can then develop a compensation plan using metrics that focus partners on developing some of the “soft skills” that can build them into trusted advisors.

“The trusted advisor, when you think about it, isn’t necessarily trusted because of their technical skills,” Aquila says. “Their technical skills are important, but the trusted advisor is trusted because of the way they behave, act and communicate, which goes back to soft skills. I can be the best tax consultant in the world, but if I cannot communicate that to a client or cannot have empathy with a client or cannot show the client how I’m helping them, do I really become a trusted advisor?”

Aquila says being a trusted advisor is about having the client’s best interests in mind. He recalls one firm that actually told a client another CPA firm in the market would be better for helping with a particular problem. “Most firms would say, I can do it, whether they could or not and then they’d try to figure out how to do it and maybe do a so-so job,” he says. “This one firm said, ‘Look, we’re not good in this one area and we think this other firm could help you a lot better.’ That turned out to be a client for life for the first firm.”

Compensation should be planned in such a way that it encourages partners to act in the client’s best interest. Total compensation structures vary from firm to firm, of course, but Aquila suggests that base salary should make up roughly 70 percent of total compensation in a healthy pay package. Bonus would be about 25 percent, and a payment for return on capital invested in the firm could be the remaining 5 percent. For each type of compensation, goals and metrics measuring achievement against those goals could be categorized into three buckets:

• economics
• business development
• value enhancement

Each bucket could have metrics aimed at measuring both performance and the behavior, he says.

The economics bucket covers metrics that measure revenue generation for the firm. Aquila encourages using cash collected as a metric here, because it is less easily manipulated as a performance index than, say, chargeable hours or billable hours. Another metric could be realization or gross profitability of clients

The business development bucket could include performance metrics related to new business (that the partner brings in for themselves or brings in for the firm) and cross-selling (the opportunities created for the partner or for others). Behavior-focused metrics could be related to arranging meetings between potential prospects and partners.

The value enhancement bucket covers behavior and performance that enhance the value of the entire company, Aquila says. Example metrics could include tracking the number of seminars that a partner gave in support of efforts to become a go-to expert in the market on a particular subject. Another might be using staff and client surveys to determine whether the partner always puts the client first, if that is a firm value. “Measure [value enhancement] in a simple way, asking your staff or clients, ‘Do you feel that Partner A puts clients first?’ and using answers like always, sometimes or needs improvement.“

Some parts of the compensation package might place more emphasis on behavior or performance metrics aimed at value enhancement. Others could focus more on firm economics or business development, Aquila says.

Ultimately, activities should be driven by the firm’s vision and the firm’s leaders, Aquila says. “If the firm doesn’t have that, if the firm doesn’t really know what it wants to achieve or how to achieve it, then people come in and they just behave any way they want to.”

To learn more about the changes that successful accounting firms make, download the complimentary eBook, Next-Level Accountants: Your guide to growing a firm of trusted advisors.

——-

Mary Ellen Biery is a research specialist at Sageworks, a financial information company that provides financial analysis and valuation applications to accounting firms.