Compensation as a Strategic Asset

Everyone wants to work at a successful firm where the rewards are both financial and professional.  What makes the top firms successful is not merely superior execution, though that's a good place to start, what makes them stand out is excellence at hiring and keeping the best, and having a smart succession plan in place.  Partner compensation can be an effective tool in achieving these goals.

Using the PCPS 2006 Owner Compensation Survey to identify compensation characteristics, preferences, and methods, authors Aquila and Rice show how to use recruiting, retention, goal-setting, evaluation, and pay for performance practices recommended by the top CPA firm management consultants. 

This is the one guide you need, tailored specifically for professional practices, to implement the leading methods to align compensation with performance and strategic initiatives.

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Why We Need A New Paradigm

"All significant breakthroughs are significant break-'withs' old ways of thinking."

- Thomas Kuhn

If you are reading this book, you are likely only somewhat satisfied or even dissatisfied with your firm’s current owner compensation system and you are wondering how to make it better. Or perhaps you want to benchmark your current compensation system against firms that are known for their best practices. Whatever your reasons for reading this book, you can make your current compensation system more effective, and perhaps even fairer, than it is today.

While the world in which the professional works today is vastly different from the traditional environment during the first 90 years of the twentieth century, compensation systems have not changed much during the same period. Practicing in the twenty-first century poses significant challenges to accounting firm owners in the areas of leadership, management, risk vs. reward, recruitment and retention, succession, and compensation.

This chapter discusses paradigm shifts in the accounting profession and paradigm shifts in owner compensation.

PARADIGM SHIFTS IN THE ACCOUNTING PROFESSION

No one can predict the future with accuracy, but we know what has worked in the past often no longer suffices in the new world order of the twenty-first century. We base this statement on our observations of the public accounting profession for more than 25 years, and we recognize the following realities:

• Global outsourcing
• Competitive landscape
• Increased regulation
• Advancements in technology
• Global economy
• Fee pressure
• Client demands
• Firm leadership
• New metrics
• Compensation
• Workplace diversity
• Work-life balance
• Generational differences
• Talent shortage

A discussion of each paradigm shift in the profession follows.

Global Outsourcing

The professional services sectors (law, accounting, and medicine) in the United States are beginning to feel pressures of the global economy. Accounting and tax preparation work is now outsourced to India or other countries, legal research is often contracted, and various activities such as medical practices are performed in locations far removed from the patient.

Competitive Landscape

In the first few years of the twenty-first century, the accounting profession faced some of its darkest hours. It is no exaggeration to state that the profession was shaken to its core. Arthur Andersen, one of the premier international accounting firms, was not only disgraced but destroyed. Never in the history of the accounting profession had one of the big international accounting firms gone out of business in this fashion. The catastrophic events of an Enron, WorldCom, or Adelphia; advances in technology; and increased client sophistication have contributed to the current environment in which accountants must now work and compete.

Increased Regulation

Public company auditors are now regulated by the Public Company Accounting Oversight Board (PCAOB) an agency created under the Sarbanes-Oxley Act (SOX), the 2002 corporate governance reform act. SOX was passed not only to oversee the auditors of public companies, but also to protect the interests of investors and further public interest in the preparation of informative, fair, and independent audit reports.

Advancements in Technology

Technology, such as the use of Web-based accounting and payroll solutions, plays an increasingly important role in today’s public accounting practice, regardless of the size of the firm. Technology allows any firm to have tax returns, write-up, and other backroom procedures processed in India, another low-cost country, or even a low-cost area in the United States. In his groundbreaking book, The World Is Flat: A Brief History of the Twenty-First Century, Thomas L. Friedman shares, “In 2003, some 25,000 U.S. tax returns were done in India. In 2004 the number was 100,000. In 2005, it is expected to be 400,000. In a decade, you will assume that your accountant has outsourced the basic preparation of your tax returns—if not more.”

Global Economy

The United States and other developed countries of the world are feeling the impact of a global economy. Many industries (such as automotive, manufacturing, and textile) have undergone, or are undergoing, widespread economic restructuring. Accounting firms of all sizes are beginning to feel some of the same global pressures. Like other businesses, they have no choice—they either generate a profit or they go out of business.

Fee Pressure

Fee pressure on basic or commodity services, such as bookkeeping or simple tax compliance, will increase over the next decade. Firms that are unable to maintain acceptable profit margins on commodity work, especially when commodity work comprises a large percentage of their practices, may have insufficient cash to allocate to owners. This will only cause more owner dissention and place additional pressure on owners to create compensation systems that reward for performance rather than entitlement.

Client Demands

We recently conducted a survey of more than 100 accounting firms for the Association of Accounting Firm Administrators. The survey showed that clients of the very smallest to the very largest firms are more sophisticated today than ever before. Clients continue to become more sophisticated in basic tax and financial issues. They have access to an overwhelming abundance of data and online resources that deal with business operations, taxes, and finance. As a result, the days of the generalist are, perhaps, short lived. While clients are willing to pay for value-added services, it may be harder to demonstrate the added value your firm can provide. The traditional business model of the professional adviser as the expert is not where future demand will lie. While this model has well served the service professions (such as legal, medical, and public accounting), today’s clients no longer see themselves as humble individuals asking experts for their “worldly advice.” Professionals today collaborate with their clients to create exact solutions to individual and organizational problems. This requires the professional to have deeper knowledge and greater skills than ever before. The future, we believe, will require accountants to have specialized knowledge in industries and specific practice areas as well as greater consulting skills.