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August Aquila
August Aquila
 
Coral Rice
Coral Rice

How to Design a Good Compensation Plan

Today’s CPA workforce requires very different kinds of compensation plan. Follow these 12 strategies to ensure adherence to the principles of good design.

July 20, 2009
by August Aquila and Coral Rice

In our last column, we revealed the differences between an effective and ineffective compensation plan. Only after accounting and financial companies address issues of fairness, strategy and changing needs, can it begin to build the actual compensation plan. Today's workers are often loyal to themselves first and the firm second. Your father’s compensation plan won’t work today. And while firms will design different plans, there are fundamental and foundational principles to which every plan should align.

To ensure adherence to the principles of good design, consider the following 12 items.

  1. Ask foundational questions. Before getting too far into the design plan, ask the following questions:


    • What is the life of the plan?
    • Who will be responsible for administering it?
    • Who will participate in the plan? Just owners, or owners and employees?
    • How often and when will payments be made?
    • How will you determine the payout?
    • How will you measure the goal?
    • How will you track results?
    • Will there be minimum thresholds or will it be an all-or-nothing payout?

  2. Ensure the plan is win-win-win. For any compensation plan to succeed over time, it must meet the needs of three critical stakeholders: clients, employees and other stakeholders. Secondary stakeholders include employees’ family members, vendors and suppliers, referral sources, the community and so on.
  3. Use both satisfiers and motivators. In the mid-1960s management theorist Frederick Herzberg made a discovery that changed the way in which people understood motivation in the workplace. Herzberg interviewed 200 engineers and accountants and asked them about one positive and one negative work experience they had encountered. He then probed their answers to find out what was behind each experience. Herzberg discovered a group of ‘satisfiers’ who were generally responsible for positive experiences and a set of ‘dissatisfiers’ who were generally responsible for negative workplace experiences. Satisfiers (base pay, benefits and so on) allow you to attract and retain people, but don't motivate performance. Motivators (pay-for-performance incentives, empowerment, recognition, job opportunities, growth and learning and more) drive people to improve performance.
  4. Get owners, employees or both involved in the design. We like to say, “no involvement, no commitment.” Be sure you provide all owners an opportunity to participate in the design of the plan. By inviting participation, valuing all viewpoints and brainstorming about the whys and hows, it is more than possible to design a system that is both fair and objective.
  5. Balance rewards for results and effort. While you always want to pay for results, it is also important to recognize effort. Owners who worked hard for results but failed to achieve them based on circumstances outside their control should receive recognition, even if it is not monetary.
  6. Identify measures, define targets and track performance. Measures need to be identified. For example, a measure could be “new business development.” A target for an owner could be three-to-five new clients with total revenue of $50,000 to $75,000. Then achievement toward the target is tracked and reported monthly.
  7. Strive to create high trust among owners and between owners and employees. Low trust can kill a compensation plan, and changing compensation plans in a negative or low-trust environment is virtually impossible. The best way to raise trust in an organization and therefore make needed changes to compensation, is to build personal character and competence within individuals so they can create trusting relationships with each other. Not only must individuals talk the talk, they must walk the walk. This is a case where actions speak louder than words.
  8. Avoid side or one-off agreements. When recognizing and rewarding superior performance, do not have special agreements; they can create different classes of citizens in your firm. Every employee within a specific role should have the same bonus opportunity or potential for similar performance. Superstars work well under such a system generally. Remember, however, one great year does not make a superstar. Over time, a real superstar’s base compensation increases substantially over the average performer. In addition, the superstar should receive annual bonus payments far above the average performer.
  9. Communicate, communicate and communicate. Implementing a new or revised compensation plan requires constant and detailed communication. Ensure you allocate sufficient time to involve everyone in the design of the program, explain the program, answer questions about the program and allow individuals to see how they would have been affected by it had your firm been “on this plan” last year.
  10. Reengage. During the first year, it is necessary to recommit and reengage everyone often. If there are problems with the initial design, explore them and make needed modifications.
  11. Budget for bonuses. There is nothing as disappointing as working hard to achieve goals, meeting the goals and receiving absolutely no bonus for your efforts. On the flip side, it is difficult for firms to distribute significant bonus dollars when it has not reached its desired profitability goals. We therefore suggest a modest budget to ensure deserving individuals receive bonuses, but that deserving individuals receive significant bonuses only to the degree the firm reaches its goals. If all owners and staff in a firm achieve their goals, the financial results generally lag and paying bonuses is not problematic.
  12. Pay for performance. Make sure you separate base compensation from incentive pay. Focus your plan on rewarding and paying for performance, results and productivity.

Rolling Out the Plan

Perhaps the best way to implement a new compensation plan is to run the old and new plans simultaneously for a year. You pay based on the old plan, but show employees what they would have earned under the new plan. By using this method you can ensure:

  • The new plan creates alignment.
  • You are able to track measures and provide periodic reports.
  • Communication is timely and on target.
  • You are able to debug any problems.

Once you unveil the plan, meet regularly and often with employees and owners to make sure people understand the plan as well as the actions they must take to meet the stated goals. As you gain experience with the new plan, ask yourself the following questions:

  • Are we seeing the right behaviors from employees and owners?
  • Is overall productivity improving?
  • Is owner and employee morale improving?
  • Are we on track to achieve our goals?
  • Are we gaining alignment with key stakeholders — employees, clients and owners?

Conclusion

After designing a great plan, we recommend running the old and new plans simultaneously for a year. You pay based on the old plan, but show employees what they would have earned under the new plan. This helps you ensure that the new plan creates alignment, you are able to track measures, your communication is on target and you can debug any problems.

As you gain experience with the plan, ask the following questions:

  • Are we seeing the right behaviors from those affected by the plan?
  • Is overall productivity improving?
  • Is owner and employee morale improving?
  • Are we on track to achieve our goals?
  • Are we gaining alignment with key stakeholders?
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August J. Aquila is the CEO of AQUILA Global Advisors, LLC, which specializes in succession planning, M&A, compensation plans and strategic planning. He also heads up Chantrey Capital Advisors, Inc., which specializes in helping privately held businesses between $4 and $30 million acquire or sell firms. He counts among his CPA clients firms ranging from more than $110 million in revenue to as small as $1 million. He is a sought-after advisor in succession planning and a frequent speaker at AICPA and state society meetings on succession. Coral L. Rice has been helping accounting firms and other organizations for more than 15 years in a variety of consulting, sales, and leadership development roles. She possesses unique expertise in diagnosing and helping clients design or redesign their systems and processes to support strategic goals, especially those related to people (e.g., recruitment, retention and succession). Her work has been featured in the Journal of Accountancy, and the book Compensation As a Strategic Asset: The New Paradigm.