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. Develop Mission & Vision • Evaluate SWOTs • Establish Goals • Identify Plans The Planning Cycle • Planning • Develop Mission & Vision • Evaluate SWOTs • Mission Completion • Establish Goals • Goal Attainment • Identify Plans • Plan Accomplishment • Derive Objectives • Objective Realization • Create Budgets • Budget Achievement • 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 (can’t grow if everyone is maxed out/often add new partners when shouldn’t) • 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 Partner’s 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 Partner’s 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 firm’s 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 client’s 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 firm’s 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 firm’s most complex technical work, • oversight of quality systems, processes and training to ensure technical standards are maintained regarding the firm’s 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 B’s), you are obligated to understand that client’s 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 client’s advocate, etc. • The relationship manager role is one of being the client’s 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 • It’s about partners and managers being required to live up to the firm’s job descriptions rather than their individual definitions

27. Services Offered • Your firm CAN’T 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 owner’s 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 don’t 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 Can’t Change Partner Behavior: • If you try to run your business by consensus • If you don’t 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@successioninstitute.com Website: www.billreeb.com www.successioninstitute.com (under construction)