THE SECRETS OF GREAT PARTNER COMPENSATION SYSTEMS PRESENTED BY: MARC ROSENBERG, CPA

1. THE SECRETS OF GREAT PARTNER COMPENSATION SYSTEMS PRESENTED BY: MARC ROSENBERG, CPA

2. The Rosenberg Associates Marc Rosenberg, CPA President Consultant, author and speaker to the CPA profession Based in Chicago Over 700 client firms from coast to coast Top 100 Most Influential Person in Accounting Profession – Accounting Today - - 8 consecutive years 24 years consulting to firms The Rosenberg Associates

3. Rosenberg is active with CPA firms: • Facilitate retreats • Partner compensation & retirement • Succession planning • Mergers • Strategic planning • Practice management reviews • Partner relations and conflict • Upward evaluation surveys The Rosenberg Associates

4. Titles How to Bring in New Partners Negotiating CPA Firm Mergers Operating a Comp Committee What Really Makes a CPA Firm Profitable? Guide to Planning the Firm Retreat Effective Partner Relations and Communication Succession Planning Strategic Planning and Goal-Setting Firm Management & Governance • Also known as “white papers” • Our proprietary consulting methods, handouts, checklists and intellectual capital are captured in each of these monographs New New ComingSoon The Rosenberg Associates

5. The Rosenberg Associates The Rosenberg MAP Survey – “Generally accepted as the barometer for CPA firm practice management” according to Accounting Today 14th Year! The Rosenberg Associates

6. Where Marc goes in his free time The Rosenberg Associates

7. Where Marc goes in his free time MVP The Rosenberg Associates

8. Final Groundrule I take questions during the presentation The Rosenberg Associates

9. The Rosenberg Associates

10. Compensation Systems • Equal • Ownership percentage Not performance-based The Rosenberg Associates

11. Compensation Systems:Performance-Based 3. Formulas billings x 38.743% ÷ √billable hours x A/R² - (cash receipts on Thursdays) ÷ (founding partner’s birthday) + billing rate x (1.732 x realization rate) + √IPP ≠ 50.9 ∏∑∑ book of business - ∫ gross fees ÷ 0.00 The Rosenberg Associates

12. Compensation Systems 4. Paper and pencil 5. Cumulative points 6. Profit center approach The Rosenberg Associates

13. Compensation Systems 7. MP decision 8. Compensation committee 9. All partners meet to decide 10. Combination of some of the above The Rosenberg Associates

14. MVP Partner Compensation Systems 2011 Rosenberg MAP Survey The Rosenberg Associates

15. Partner Compensation SystemsChanges in Past 5 years Per 2011 Rosenberg MAP Survey The Rosenberg Associates

16. Partner Comp Best Practices The Rosenberg Associates

17. Partner Comp Best Practices The Rosenberg Associates

18. Partner Comp Best Practices The Rosenberg Associates

19. Recent Significant TrendsIn Partner Compensation Techniques • More comp committees; fewer formulas • Link with strategic planning • Intangibles • Teamwork • Less emphasis on book of business Q The Rosenberg Associates

20. QUESTION FOR LISTENERS Have any firms recently reduced the weighting of BOOK OF BUSINESSin their compensation systems? WHY did you do it? HOW did you do? The Rosenberg Associates

21. MVP Recent Significant TrendsIn Partner Compensation Techniques • More comp committees; fewer formulas • Link with strategic planning • Intangibles • Teamwork • Less emphasis on book of business • Less emphasis on billable hours • Generous to new partners • Closed vs. open (though most still open) The Rosenberg Associates

22. Drill down on2 most common systems Formulas Compensation Committee The Rosenberg Associates

23. Formula Complications Inherited wealth The Rosenberg Associates

24. Formula Complications Hoarding The Rosenberg Associates

25. Formula Complications Recognition of technical specialties: • Tax • A&A quality control The Rosenberg Associates

26. Formula Complications Which criterion is most important? Who is to say? The Rosenberg Associates

27. Formula Complications How to value management The Rosenberg Associates

28. Formula Complications How to recognize intangible contributions How long we get credit for origination The Rosenberg Associates

29. Formula Complications • Partners with lower billing rates or who head up non - profit area • Client on one partner’s book when another really manages the client • “I” vs “WE” Q The Rosenberg Associates

30. QUESTION TO LISTENERS For those who use a formula system… …How do you avoid the inherent problems in formula methods? • Hoarding • Inherited wealth • Doesn’t value intangibles • Doesn’t value A&A and tax experts • Encourages “I” vs. “WE.” The Rosenberg Associates

31. 3 Formulas That Can WorkReasonably Well • 20/50 • Finder/Minder/Grinder • Formulas for both metrics and intangibles Carve-outs for interest, mgmt & bonus The Rosenberg Associates

32. #1 - 20/50 Method Defined: 20% x client base 50% x billable dollars (hours x rate x realization) The Rosenberg Associates

33. #2 - Finder Minder Grinder • Finder – who brings it in • Minder – manages the client relationship AND the engagement • Grinder – doing billable work The challenge is coming up with the weighting: • 1/3 – 1/3 – 1/3 • 35-45-20 • Other? The Rosenberg Associates

34. OVERALL SYSTEM INTANGIBLES BALLOT Leadership 5 4 3 2 1 Mentoring staff 5 4 3 2 1 Pract development 5 4 3 2 1 Sharing clients 5 4 3 2 1 Teamwork 5 4 3 2 1 Good citizenship 5 4 3 2 1 Expertise & techn skills 5 4 3 2 1 Etc. 5 4 3 2 1 Etc. 5 4 3 2 1 Total #3 - Another formula system I’ve seen Interest on capital ?% Production measures ?% ?% Mgmt stipends ?% Intangibles-paper-pencil ?% Incentive bonus ?% Mgmt’s discretion 100% Total The Rosenberg Associates

35. Comp Committee:Why Firms Use It • Formulas have big flaws • Balances rewards between production and intangibles • MP doesn’t want sole responsibility • Partners won’t give sole power to MP The Rosenberg Associates

36. Compensation Committee Keys To Success The Rosenberg Associates

37. Comp Committee:Keys to Success MVP 1.IF THE PEOPLE BEING JUDGED DON’T TRUST THE JUDGES, THE SYSTEM WON’T WORK.PERIOD. The Rosenberg Associates

38. Compensation CommitteeKeys To Success 2.Make-Up of Committee: • Small • MP is permanent member • Voted or appointed (ideally, CC = management, not jury or Congress) • All members must be credible • Not everyone gets a turn The Rosenberg Associates

39. Compensation CommitteeKeys To Success 3. CC has full mandate to decide methods, techniques, values, weighting, size of tiers, etc. 4. Link of comp to strategic plan and vision. Partners do what the firm needs them to do. The Rosenberg Associates

40. Comp Committee:Keys to Success MVP • Leadership • People skills and development • Practice development • Client service • Client transition • Traditional production measures • Teamwork • Good citizenship 5. Performance Criteria Q The Rosenberg Associates

41. QUESTION FOR LISTENERS Firms certainly use OTHER criteria to evaluate partners than these listed. What do YOU use that I missed? Keep it high level. • Leadership • People skills • Pract. development • Client service • Client transition • Traditional production • Teamwork • Good citizenship The Rosenberg Associates

42. INCENTIVE BONUS Separate criteria from base Base is a “salary” FINAL DISTRIBUTION Same or similar criteria as the base Base is really a draw Compensation Committee:Keys to Success6. Incentive bonus or Final Year-End Distribution? The Rosenberg Associates

43. Incentive Bonus:Major Factors • What did partner do to enable the firm to have a “good year?” • Exceeding production goals • Achievingqualitative goals • Intangibles • Hitting home runs • Partner performance evaluations The Rosenberg Associates

44. Compensation Committee:Keys to Success 7. Sincere effort by CC to review all pertinent information. No “gut feels.” • Production statistics • Achievement of goals • Input from MP, PICs, dept. heads • Partner evaluations • Upward evaluation by the staff • Self-evaluations • Paper and pencil (non-binding) The Rosenberg Associates

45. Compensation Committee:Keys to Success 8. Communication at 3 critical points: • Crystal clear on rules of game before it is played. • Monitor progress during the year. • End of year: “Judgments explained are more readily accepted than those that are not. The Rosenberg Associates

46. Compensation Committee:Keys to Success 9. Putting numbers next to names. Resist reverting to formulas. 10. CC makes 2 decisions: bonus for this year and bases for next year. 11. Tax season clash with CC timetable. 12. Closed vs. open. 13. CC decisions final. No appeals. No votes. The Rosenberg Associates

47. Examples of Intangibles • Mgmt/leadership • Leveraging • Staff mentoring • Training • Teamwork • Be a good partner; no Lone Rangers • Manage clients on others’ “books” • Cross-selling • Institutionalize clients • Be “go-to” person… • Back-up to partners • Finds work for staff • Good corp citizen • Always learning; never coasting • Communication skills • Always willing to help others The Rosenberg Associates

48. Closed vs. Open Systems “If people are concerned about their absolute level of compensation, then they can be satisfied. However, if their focus is on relative standing, then they can never be satisfied.” Andrew Grove Chairman of the Board Intel The Rosenberg Associates

49. OPEN Partners feel like “real” partners Avoids image of “smoke-filled room” See how you stack up Tough to take it away CLOSED Andy Grove quote CC less likely to be influenced by how they think partners will react Reduces unhealthy competition Open Vs. Closed System Q The Rosenberg Associates

50. QUESTION FOR LISTENERS Has anyone’s firm changed from OPEN to CLOSED? How did your partners react? Did the change work out well for you? The Rosenberg Associates