Divider
Divider


August Aquila
 

Coral Rice
  Effective and Not-so-Effective Compensation Systems

Are there any real differences?

June 18, 2009
by August Aquila and Coral Rice

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?

  1. Is the system fair?
  2. Is it applied fairly?
  3. Have you involved those most affected by the plan?
  4. Does everyone understand how it works?
  5. Does it promote the most profitable work for the firm?
  6. Does it create a one-firm concept, rather than silos?
  7. Does it encourage the owners to live the firm’s core values?
  8. Does it encourage everyone to do what’s best for the clients?
  9. Is there some flexibility to reward exceptional performance?
  10. Does it substantially reward performers over nonperformers?
  11. Does it reward for current production as well as building future capacity?
  12. Is the compensation system tied to the firm’s strategic goals?
  13. Does the system usually provide for predictability in total compensation year over year?
  14. Is the system modified from time to time based on the changing needs of the firm?
  15. Will the system keep the firm alive after the retirement of the senior owners?

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:

  • Embrace a total compensation philosophy which reminds employees that their compensation includes a lot more than just base pay.
  • Define and communicate your compensation philosophy. A focused compensation philosophy answers these fundamental questions:
    • What do you want to pay for?
    • How do you want to pay for it?
    • What is your competitive posture?
    • How will you split up the pie?
  • Tailor the plan to your firm’s culture and values. Too many professional services firms and corporations generally have little or no connection between their stated values and what the compensation plan rewards. Matching organizational values to performance requires a new approach to compensation.
  • Link compensation to achieving the firm’s vision, mission and strategy. This involves identifying the firm’s top strategic objectives, defining what they mean in terms of organizational behavior and designing your compensation plan in a way that rewards and recognizes those behaviors.
  • Define and describe core values and evaluate how well owners live them.
  • Know what creates value in your firm. In accounting firms, value gets created by identifying and satisfying client needs in a profitable manner and by developing processes and systems that improve work flow efficiencies.
  • Create and hold people accountable to competency maps that outline needed skills and behaviors.
  • Focus on criteria that improve both top line and bottom line.
  • Reward skills and behaviors that drive results (for example, developing more efficient processes, training others, billing in a timely fashion). You can only create permanent behavior change by first changing the culture and the environment, then using compensation to reinforce those changes.
  • Measure and reward individual, team, departmental and firm-wide objectives.

Conclusion

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.

Rate this article 5 (excellent) to 1 (poor). Send your responses here.

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).