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Blake Christian
A quick guide to setting annual goals

Clear rewards and consequences must be established at the beginning of the goal-setting process.

September 9, 2013
by Blake Christian, CPA

The responsibility for setting annual goals falls primarily on a firm's managing partner or, in some cases, a management or compensation committee. To be effective, such goal setting must be performed annually, and there must be clear rewards and consequences established at the beginning of the process, generally near the beginning of the firm's fiscal or calendar reporting period.

Top-performing firms must constantly monitor, evaluate, and fine-tune their partner goals and incentive compensation systems to ensure that they offer the proper balance of carrots and sticks that will result in a cohesive partner group focused on the firm's overall objectives. Effective programs will reward both individual and firm revenue growth, timely client invoicing, and A/R collections. Practice development, quality client service, and technical competence, as well as recruitment and development of managers and staff, also should be rewarded.

Because each partner has different strengths and weaknesses, the annual goals should be customized, and the incentive system should reward incremental improvements (both objective and subjective) and push partners to improve their areas of weakness. Hard-dollar contributions (think cash basis vs. accrual basis), combined with overall improvement of the firm's operations/reputation, should be weighted and factored into the overall evaluations. The managing partner or committee should establish some baseline targets that all partners must hit, and then customize the weightings to reflect the desired areas of focus or improvement for each individual partner. A sample template is available here.

Setting goals the right way

Goals must be specific, realistic, and measurable. Goals must not be set too low, as this may allow for easy personal achievement. Conversely, setting goals too high can be demoralizing if the partner quickly determines that hitting the goal is impossible. Ideally, the managing partner should encourage the partner group to establish “stretch goals,” which are achievable but will be viewed as slightly above expectation by all parties.

By having the partners take the first crack at setting their goals, the managing partner can easily see if each partner is serious about improving his or her individual practice—and the firm's performance—and then fine-tune as necessary.

At the beginning of the year, firms should clearly establish the general methodology for allocating profits and determine what impact missing or exceeding goals will have on the partner group—individually and collectively. For example, if Partner A hits all his or her goals, but the firm misses its firm targets, how is Partner A affected? What if Partner A misses his or her overall goals, but only by 10%? Does he or she vest in a portion of the incentive bonus? What about those who exceed their goals by a significant margin—are they capped out? These sub-issues are beyond the scope of this article, but incremental rewards are key.

Measuring goals

Managing partners should separate the annual goals into two buckets—objective goals and subjective goals. They should also provide specific categories to which they can weigh and measure each partner's progress. For example, a highly technical partner with historically poor client-communication skills and mediocre manager-mentoring skills should probably get over-weighted in the latter two categories so that more of his or her compensation is tied to improving these soft skills. With respect to technical skills, the managing partner may encourage the partner to become more of a firmwide resource in distributing technical information and assisting with in-house training.

Objective goals

The following baseline data should be considered when setting the firm's and partner-level objective goals.

Year-to-year comparisons of:

  • Monthly and YTD work-in-progress (broken down between ongoing and new clients);
  • Partner-sourced revenue managed by sourcing partner (vs. referred by another);
  • Partner-sourced revenue managed by other partners;
  • Partner revenue sourced by other partners or employees;
  • Annual net billings (net of client expense reimbursements);
  • Realization—disclosed in terms of dollars and percentages;
  • Work-in-progress greater than 60/90 days;
  • Accounts receivable greater than 60/90 days;
  • Accounts receivable write-offs;
  • Cash collections; and
  • Direct personnel and other costs.
Subjective goals

Subjective goals should generally include the following:

  • Practice development (includes retention of current clients, expanded work on existing clients, development of new clients);
  • Staff/manager/partner development;
  • Recruiting—including attraction of senior-level talent;
  • Morale/motivation (how partners positively encourage direct reports);
  • Firm promotion/goodwill (e.g., community involvement, speeches, etc.); and
  • Local/regional/national thought leadership role.
Feedback and monitoring process

The best goal-setting plans by the managing partner will have little impact if the partners are not held accountable during the year. This is a very common execution flaw in many organizations and partner accountability is critical to ensure that the firm meets or exceeds its annual objectives.

Therefore, midyear reviews should be scheduled to allow assessment and allow partners to alter their strategies to take into account changes in the economy, their niche practice, or other factors. While there should be some level of midyear flexibility allowed for partners to update their goals (up or down), the managing partner should generally only allow such changes for factors that are beyond the partner's control. Furthermore, there should be a clear understanding of how such midyear changes will impact the partner's compensation goal for the year.

Next steps

The managing partner or management committee should first focus on the partner goal-setting process. The secondary focus should be to have the client-service partners establish similar goals for principals, managers, and other direct reports.

A committee or cross section of partners should also establish goals and compensation structure for the managing partner. This can be a risky role within the firm for obvious reasons, but is important for all the reasons discussed above. Some key measures should include benchmarking against peer firms, strategic firm growth, improved collections/cash flow, community and/or professional association involvement, partner morale, team building, and enhanced firm reputation. There are a variety of resources and consultants who specialize in such matters if outside input is deemed necessary.

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Blake Christian, CPA, MBT, is a tax partner in the Long Beach, Calif., office of CPA firm HCVT LLP.