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Partner Compensation

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Title: Partner Compensation


1
Partner Compensation
  • Bill Reeb, CPA
  • Succession Institute, LLC

2
You Need to Better Understand
The Impact of Strategy
3
Planning Is a Tool To Avoid the Costly Zig-Zag
Effect!
Target
Start
4
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 ...

5
Most Firms Operate Like the Sailboat Below
6
Eat What YouKill ModelVs.Building a Village
Model
7
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

8
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

9
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

10
You Need to Better Understand
Book of Business Obstacles
11
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

12
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

13
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

14
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

15
You Need to Better Understand
Partner Roles and Responsibilities
16
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.

17
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

18
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

19
Partner Responsibility
  • Relationship Management is the Primary
    Responsibility of A Partner!!!!!!
  • Because if the Partner is Not Doing this who is?

20
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.

21
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.

22
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

23
You Need to Better Understand
Common SOPs driving Compensation
24
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.

25
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?

26
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

27
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

28
You Need to Better Understand
Compensation
29
You have to Unbundle
  • Retirement
  • Ownership and
  • Compensation

30
Critical Success Factor
  • The Stronger the Partnerusuallythe Weaker the
    firm

31
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.

32
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

33
Reverse the Upside Down Pyramid
  • Force workdown
  • Partners doingpartner work,
  • Managers doing manager work, etc.

34
Anchor
  • Everyone On Outputs where practical Not
    Inputs!!!!

35
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)

36
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

37
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

38
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

39
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

40
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

41
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

42
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

43
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

44
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

45
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

46
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.

47
Thank You For Your Time!
Bill Reeb, CPA.CITP Succession Institute,
LLC Phone 512-338-1006 Email bill_at_successioninst
itute.com Website www.billreeb.com www.succession
institute.com (under construction)
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