|Effective and Not-so-Effective Compensation Systems
Are there any real differences?
June 18, 2009
While there is no perfect compensation plan, there are many basic characteristics of a good plan. To create an effective compensation plan, the following questions must be answered affirmatively. Consider your own firm and then determine how many of these questions to which you can answer “yes” when it comes to your current compensation plan?
Every compensation plan should be constructed to help the firm achieve its strategic goals and to attract, reward and retain the right people. If the plan does not accomplish these two objectives it needs to be restructured, unless your goal, of course, is to attract and retain average or less-than-average performers. Jim Collins in Good to Great writes, “The purpose of a compensation system should not be to get the right behavior from the wrong people, but to get the right people on the bus in the first place and then keep them there.”1
Public accounting firm compensation plans have changed over the past 20 years or so because the business environment and the workforce have dramatically changed and new technology dominates today’s business workflow. And even though compensation plans have changed and continue to change, they remain as one of the most difficult systems to change in any organization, especially accounting firms.
Today’s workforce also operates somewhat differently from previous generations. There was a time when the employee and the employer had an unwritten social contract. The employee was loyal to the company and vice versa. Somewhere along the line this social contract was broken. Organizations have less loyalty to employees and employees are often accused of being loyal only to themselves. If this is true, today’s workforce needs a different kind of compensation program.
In Practice What You Preach, David Maister observed, “The method of compensation is largely irrelevant as a causal factor for high and sustained performance.” He continues to note, “Those who contributed the most to the overall success of the office are the most highly rewarded. Notice that this does not suggest what the pay scheme should be. The determining factor is just whether the people think it rewards the right people.”2
Designing Good Compensation Plans
Some of the best practices in designing a compensation system include:
Only after addressing the above issues is a firm able to build the actual compensation plan. And while firms design different plans, there are fundamental and foundational principles to which every plan should align.
August J. Aquila is the CEO of AQUILA Global Advisors, LLC, which specializes in succession planning, mergers and acquisitions, 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 in this area has been featured in the Journal of Accountancy, and in the book, Compensation as a Strategic Asset: The New Paradigm.
1Jim Collins, Good to Great: Why Some Companies Make the Leap…and Others Don’t (New York: Harper Collins Publishers, Inc., 2001), p. 49.2David Maister, Practice What You Preach (New York: The Free Press, Simon & Schuster, 2001).