PARTNER COMPENSATION FOR A NEW MILLENIUM PRESENTED BY: MARC ROSENBERG, CPA

PARTNER COMPENSATION

FOR A NEW MILLENIUM

PRESENTED BY: MARC ROSENBERG, CPA

The Rosenberg AssociatesThe Rosenberg Associates

The Rosenberg AssociatesThe Rosenberg AssociatesMarc Rosenberg, CPAMarc Rosenberg, CPAPresidentPresident

Consultant, author and speaker to Consultant, author and speaker to the CPA professionthe CPA profession

Based in ChicagoBased in Chicago

Over 700 client firms from coast Over 700 client firms from coast to coastto coast

Top 100 Most Influential Person in Top 100 Most Influential Person in Accounting Profession – Accounting Profession – Accounting Today -Accounting Today -

- - 77 consecutive yearsconsecutive years

22 years consulting to firms22 years consulting to firms


Rosenberg is active with CPA firms:Rosenberg is active with CPA firms:

Facilitate retreatsFacilitate retreats Partner compensation & retirementPartner compensation & retirement Succession planningSuccession planning MergersMergers Strategic planning Strategic planning Practice management reviewsPractice management reviews Partner relations and conflictPartner relations and conflict Upward evaluation surveysUpward evaluation surveys



The Rosenberg MAP Survey – The Rosenberg MAP Survey – Accounting Today Accounting Today calls it “generally calls it “generally accepted as the barometer for CPA accepted as the barometer for CPA firm practice management.”firm practice management.”

The Management CatalystThe Management Catalyst – quarterly – quarterly newsletter sent to 3,000 CPA firms newsletter sent to 3,000 CPA firms nationwide, free of chargenationwide, free of charge


Where Marc goes in his free timeWhere Marc goes in his free time

Watch for MVP Slides

MVP

Final Groundrule

I take questions during the presentation


Best PracticesBest PracticesFrom RosenbergFrom Rosenberg

1.1. Performance - basedPerformance - based

2.2. Practice development plays a Practice development plays a meaningful rolemeaningful role

3.3. Integrate with strategic planning, Integrate with strategic planning, goal setting and performance goal setting and performance evaluationsevaluations


Best PracticesBest Practices

4. Teamwork rules: Partners do what 4. Teamwork rules: Partners do what the firm the firm needsneeds them to do them to do

5. Multi - tier:5. Multi - tier: Return on capitalReturn on capital BaseBase Incentive bonusIncentive bonus


Best PracticesBest Practices

6. MP has more impact than other 6. MP has more impact than other partnerspartners

7. Reward intangibles7. Reward intangibles

8. Flexible8. Flexible


9. Leadership vs. Management vs. Administration*9. Leadership vs. Management vs. Administration*

LeadLead

Identify challengesIdentify challengesFocus people on challengesFocus people on challengesBuild strong cultureBuild strong cultureFinding new thingsFinding new thingsGuarantees firm’s future valueGuarantees firm’s future value

Worth Worth MORE MORE than your billing than your billing raterate

ManageManage

Plan and implementPlan and implementImpact partner behaviorImpact partner behaviorEstablish partner accountabilityEstablish partner accountabilityP&L managementP&L managementSolve problems quicklySolve problems quickly

Worth your Worth your billing ratebilling rate

AdministerAdminister

Focus is on the day to dayFocus is on the day to dayMonitor/report on resultsMonitor/report on resultsOperate systemsOperate systemsPolicies and proceduresPolicies and proceduresSupport practice personnelSupport practice personnel

Worth Worth LESSLESS than your billing than your billing raterate

* Originally presented by Bob Bunting, modified by Rosenberg


Compensation SystemsCompensation Systems

1.1. EqualEqual

2.2.

Not

per

form

ance

-bas

ed


Are All Partners Created Equal?Are All Partners Created Equal?

AnnualAnnual

FeesFeesHigh To High To

Low RatioLow RatioIncome / Income / PartnerPartner

# Ptrs/# Ptrs/

Total Total

> $10 million> $10 million 3.23.2 $435,000$435,000 15/14015/140

$6-10 million$6-10 million 2.62.6 $369,000$369,000 7/537/53

$4-6 million$4-6 million 2.02.0 $363,000$363,000 5/325/32

$2-4 million$2-4 million 1.81.8 $272,000$272,000 4/224/22

Highest paid partners out-earned lowest paid by 2.3 to 1 ratio (Firms over $2M) .

From 2009 Rosenberg MAP Survey



1.1. EqualEqual

2.2. Ownership percentageOwnership percentage

Not

per

form

ance

-bas

ed


Compensation Systems:Compensation Systems:Performance-BasedPerformance-Based

3. Formulas3. Formulas

billings x 38.743% ÷ √billable hoursbillings x 38.743% ÷ √billable hours

x A/R² - (cash receipts on Thursdays)x A/R² - (cash receipts on Thursdays)

÷ (founding partner’s birthday) + billing ÷ (founding partner’s birthday) + billing raterate

x (1.732 x realization rate) + √IPP ≠ 50.9x (1.732 x realization rate) + √IPP ≠ 50.9

∏∑∑ ∏∑∑ book of business - ∫ gross fees ÷ book of business - ∫ gross fees ÷ 0.000.00



4. Paper and pencil4. Paper and pencil

5. Cumulative points5. Cumulative points

6. Profit center approach6. Profit center approach



7. MP decision7. MP decision

8. Compensation committee8. Compensation committee

9. All partners meet to decide9. All partners meet to decide

10. Combination of some of the above10. Combination of some of the above

Recap of Ptr Comp SystemsRecap of Ptr Comp SystemsSystem Best For: Greatest Advantage

Pay equal •Small firms•Just getting started

•“Appears” to avoid arguments

Ownership percentage

•No one •NEVER a fair way to reward performance

Formulas •“Eat what you kill” firm and/or •Low level of trust

•Natural appeal to CPAs

Paper & pencil •Firms that don’t like formulas but can’t make the leap to trusting one person or a committee

•What’s more fair than the collective wisdom of all the partners?

MP decides •Firms with a highly credible or dominating MP

•Credibility and fairness of MP

Comp committee

•8 or more partners •Embraces performance-based comp, recognizes intangibles


MVP

6 Things To Be Taken Into 6 Things To Be Taken Into Account in Allocating IncomeAccount in Allocating Income

1.1. FinderFinder

2.2. MinderMinder

3.3. GrinderGrinder

4.4. Capital investedCapital invested

5.5. Management (not administration)Management (not administration)

6.6. Intangibles including goal setting, Intangibles including goal setting, living core values, fulfilling your roleliving core values, fulfilling your role


MVP

Partner Compensation SystemsPartner Compensation Systems2 2

PtrsPtrs3-4 3-4

PtrsPtrs5-7 5-7

PtrsPtrs8-12 8-12 PtrsPtrs

13+ 13+ PtrsPtrs

20092009

TotalTotal20082008

TotalTotal

Comp Comp CommitteeCommittee

5%5% 10%10% 25%25% 49%49% 73%73% 32% 29%

FormulaFormula 20%20% 41%41% 38%38% 28%28% 14%14% 31% 33%

Paper & PencilPaper & Pencil 0%0% 3%3% 5%5% 1%1% 3%3% 3% 3%

Ownership PctOwnership Pct 5%5% 7%7% 4%4% 3%3% 2%2% 4% 5%

MP DecidesMP Decides 18%18% 11%11% 11%11% 12%12% 3%3% 11% 8%

Pay EqualPay Equal 30%30% 8%8% 4%4% 3%3% 2%2% 7% 9%

All DecideAll Decide 22%22% 20%20% 13%13% 4%4% 3%3% 12% 13%

OpenOpen 93%93% 83%83% 81%81% 69%69% 50%50% 75%

ClosedClosed 7%7% 17%17% 19%19% 31%31% 50%50% 25%

2010 Rosenberg MAP SurveyTHEROSENBERG ASSOCIATES LTD.www.rosenbergassoc.com

MVP

Partner Compensation SystemsPartner Compensation SystemsChanges in Past 4 yearsChanges in Past 4 years

5-7 Partners5-7 Partners 8-12 Partners8-12 Partners 13+ Partners13+ Partners

20092009 20072007 20052005 20092009 20072007 20052005 20092009 20072007 20052005

Comp Comp CommitteeCommittee

25%25% 21%21% 19%19% 49%49% 45%45% 39%39% 73%73% 72%72% 58%58%

FormulaFormula38%38% 40%40% 47%47% 28%28% 33%33% 39%39% 14%14% 19%19% 38%38%

All other All other systemssystems

37%37% 39%39% 34%34% 23%23% 22%22% 22%22% 13%13% 9%9% 4%4%

Per 2010 Rosenberg MAP Survey


Formula ComplicationsFormula Complications

Inherited Inherited wealthwealth



HoardingHoarding



Recognition of Recognition of technical technical specialties:specialties:

TaxTax A&A quality controlA&A quality control



Which criterion is Which criterion is most important?most important?

Who is to say?Who is to say?



How to value How to value management management



How to recognize How to recognize intangible intangible contributionscontributions

How long we get How long we get credit for credit for originationorigination



Bring a partner along Bring a partner along on a sales pitchon a sales pitch



Partners with lower billing rates or Partners with lower billing rates or who head up non - profit areawho head up non - profit area

Client on one partner’s book when Client on one partner’s book when another really manages the clientanother really manages the client

““I” vs “WE”I” vs “WE”


3 Formulas That Can Work3 Formulas That Can WorkReasonably WellReasonably Well

1.1. 20/50 20/50

2.2. Finder/Minder/Grinder Finder/Minder/Grinder

3.3. Formulas for both metrics and intangiblesFormulas for both metrics and intangibles

Carve-outs for interest, mgmt & bonusCarve-outs for interest, mgmt & bonus

#1 - 20/50 Method#1 - 20/50 Method

Pct. of Income Using 20/50

Number of Firms*

>120% 65

105 – 120% 64

95 – 105% 66

80-95% 88

< 80% 44

Overall avg. = 104% 324


Defined: 20% x client base50% x billable dollars (hours x rate x realization)

* 2009 Rosenberg MAP Survey


#2 - Finder Minder Grinder#2 - Finder Minder Grinder

Finder – who brings it inFinder – who brings it in

Minder – manages the client relationship Minder – manages the client relationship ANDAND the the engagementengagement

Grinder – doing billable workGrinder – doing billable work

The challenge is coming up with the weighting:The challenge is coming up with the weighting: 1/3 – 1/3 – 1/31/3 – 1/3 – 1/3 35-45-2035-45-20 Other?Other?


#3 - Another formula system I’ve seen#3 - Another formula system I’ve seen

OVERALL SYSTEMOVERALL SYSTEM INTANGIBLES BALLOTINTANGIBLES BALLOT

LeadershipLeadership 5 4 3 2 1 5 4 3 2 1

Mentoring staffMentoring staff 5 4 3 2 15 4 3 2 1

Pract developmentPract development5 4 3 2 15 4 3 2 1

Sharing clientsSharing clients 5 4 3 2 15 4 3 2 1

TeamworkTeamwork 5 4 3 2 15 4 3 2 1

Good citizenshipGood citizenship 5 4 3 2 15 4 3 2 1

Expertise & techn skillsExpertise & techn skills 5 4 3 2 15 4 3 2 1

Etc.Etc. 5 4 3 2 15 4 3 2 1

Etc.Etc. 5 4 3 2 15 4 3 2 1

TotalTotal

Interest on capital

Production measures

Mgmt stipends

Intangibles-paper-pencil

Incentive bonus

Mgmt’s discretion

Total

?%

?%

?%

?%

?%

?%

100%


Recent Significant TrendsRecent Significant TrendsIn Partner Compensation TechniquesIn Partner Compensation Techniques

1.1. More comp committees; fewer formulasMore comp committees; fewer formulas2.2. Link with strategic planningLink with strategic planning3.3. IntangiblesIntangibles4.4. TeamworkTeamwork5.5. Less emphasis on book of businessLess emphasis on book of business6.6. 7.7. 8.8.


The The decliningdeclining importance of importance of “book of business”“book of business”

44 Reasons Reasons

1. Stresses teamwork and the one-firm 1. Stresses teamwork and the one-firm conceptconcept

2. Intangible factors must be 2. Intangible factors must be considered alsoconsidered also


The declining importance of The declining importance of “book of business”“book of business”

3. Partners freely transferring clients 3. Partners freely transferring clients to others to others

4. I4. Institutionalizingnstitutionalizing clients; creating clients; creating “multiple touch points”“multiple touch points”


Recent Significant TrendsRecent Significant TrendsIn Partner Compensation TechniquesIn Partner Compensation Techniques

1.1. More comp committees; fewer formulasMore comp committees; fewer formulas2.2. Link with strategic planningLink with strategic planning3.3. IntangiblesIntangibles4.4. TeamworkTeamwork5.5. Less emphasis on book of businessLess emphasis on book of business6.6. Less emphasis on billable hoursLess emphasis on billable hours7.7. Generous to new partnersGenerous to new partners8.8. Closed vs. open (though most still open)Closed vs. open (though most still open)

MVP


Comp Committee:Comp Committee:Why Firms Use ItWhy Firms Use It

Formulas have big flawsFormulas have big flaws Balances rewards between Balances rewards between

production and intangiblesproduction and intangibles MP doesn’t want sole responsibilityMP doesn’t want sole responsibility Partners won’t give sole power to MP Partners won’t give sole power to MP


Comp Committee:Comp Committee:Keys to SuccessKeys to Success

1.1. IF THE PEOPLE IF THE PEOPLE BEING JUDGED BEING JUDGED DON’T TRUST DON’T TRUST THE JUDGES, THE JUDGES, THE SYSTEM THE SYSTEM WON’T WORK.WON’T WORK.

PERIOD.PERIOD.



2. RULES GOVERNING THE DECISIONS 2. RULES GOVERNING THE DECISIONS MUST BE CONSISTENT AND WELL MUST BE CONSISTENT AND WELL UNDERSTOOD; PARTNERS MUST UNDERSTOOD; PARTNERS MUST UNDERSTAND WHAT BEHAVIORS AND UNDERSTAND WHAT BEHAVIORS AND RESULTS TRANSLATE THE MOST TO RESULTS TRANSLATE THE MOST TO BIGGER REWARDS.BIGGER REWARDS.

THINGS MUST BE CLEARTHINGS MUST BE CLEAR



3. A SINCERE EFFORT MUST BE MADE 3. A SINCERE EFFORT MUST BE MADE BY THE JUDGES TO COLLECT ALL BY THE JUDGES TO COLLECT ALL PERTINENT INFORMATION AND PERTINENT INFORMATION AND STUDY IT. STUDY IT.

DON’T ALLOCATE COMPENSATION DON’T ALLOCATE COMPENSATION BASED ON REPUTATION, INTUITION, BASED ON REPUTATION, INTUITION, PERCEPTION, ETC.PERCEPTION, ETC.



4. JUDGMENTS THAT ARE 4. JUDGMENTS THAT ARE EXPLAINEDEXPLAINED AND AND COMMUNICATEDCOMMUNICATED ARE MORE ARE MORE READILY ACCEPTED THAN THOSE READILY ACCEPTED THAN THOSE THAT ARE NOT.THAT ARE NOT.

MVP


Make-Up of CommitteeMake-Up of Committee

SmallSmall MP is permanent memberMP is permanent member Voted or appointedVoted or appointed All members must be credibleAll members must be credible Not everyone gets a turnNot everyone gets a turn

Data Reviewed by CommitteeData Reviewed by Committee

1.1. Partner evaluationsPartner evaluations

2.2. Self-evaluationsSelf-evaluations

3.3. Upward evaluation by the staffUpward evaluation by the staff

4.4. Achievement of goalsAchievement of goals

5.5. Production statisticsProduction statistics

6.6. Input from MP, PICs, dept. heads Input from MP, PICs, dept. heads

7.7. Paper and pencil (non-binding)Paper and pencil (non-binding)


Comp Committee:Comp Committee:Important DecisionsImportant Decisions

1.1. Determining the # of CC membersDetermining the # of CC members2.2. How long is a CC member’s term?How long is a CC member’s term?3.3. Should the CC be the same as or different Should the CC be the same as or different

from the MC/EC?from the MC/EC?4.4. Who evaluates partners: CC or MC/EC?Who evaluates partners: CC or MC/EC?5.5. Performance criteria:Performance criteria:

What will be looked at?What will be looked at? Will criteria be weighted or looked at subjectively?Will criteria be weighted or looked at subjectively?


Performance CriteriaPerformance Criteria

LeadershipLeadership People skills and People skills and

developmentdevelopment Practice Practice

developmentdevelopment Client serviceClient service

Client transitionClient transition Traditional Traditional

production measures production measures TeamworkTeamwork Good citizenshipGood citizenship

The Top 50 firms largely stay away from weighting one vs. the other.

MVP


Comp Committee Operation:Comp Committee Operation:Important DecisionsImportant Decisions

6. How will CC communicate with each partner? 6. How will CC communicate with each partner?

7. How the CC 7. How the CC actuallyactually allocates the $$$: allocates the $$$:• MP recommendations + group “tweaking”MP recommendations + group “tweaking”• CC does a paper and pencil exercise, then tweaksCC does a paper and pencil exercise, then tweaks• Some sort of ranking/performance gridSome sort of ranking/performance grid


Important Comp Committee Important Comp Committee DecisionsDecisions

8. Incentive bonus or Final Year-End Distribution? 8. Incentive bonus or Final Year-End Distribution?

INCENTIVE INCENTIVE

BONUSBONUS

Separate criteria from Separate criteria from basebase

Base is a “salary”Base is a “salary”

FINAL FINAL

DISTRIBUTIONDISTRIBUTION

Same or similar criteria Same or similar criteria as the baseas the base

Base is really a drawBase is really a draw


Incentive Bonus:Incentive Bonus:Major FactorsMajor Factors

1.1. What did partner do to enable the What did partner do to enable the firm to have a “good year?”firm to have a “good year?”

2.2. Exceeding Exceeding productionproduction goals goals3.3. AchievingAchieving qualitativequalitative goals goals4.4. IntangiblesIntangibles5.5. Hitting home runsHitting home runs6.6. Partner performance evaluationsPartner performance evaluations

Examples of IntangiblesExamples of Intangibles

Mentoring and development of staffMentoring and development of staff Earning respect and credibility of Earning respect and credibility of

personnel personnel A good delegatorA good delegator A team playerA team player Overall leadershipOverall leadership Adheres to firm policies and rulesAdheres to firm policies and rules


StrategicPlanning

andCore Values

Partner Evaluation

PartnerCompensation

The Convergence of 3 Aspects of Management

MVP


Closed vs.Closed vs. Open Systems Open Systems

““If people are concerned about their If people are concerned about their absolute level of compensation, then they absolute level of compensation, then they cancan be satisfied. However, if their focus is be satisfied. However, if their focus is on relative standing, then they can on relative standing, then they can nevernever be satisfied.”be satisfied.”

Andrew GroveAndrew Grove

Chairman of the BoardChairman of the Board

Intel Intel


Open Vs. Closed SystemOpen Vs. Closed System

OPENOPEN

Partners feel like “real” Partners feel like “real” partnerspartners

Avoids image of Avoids image of “smoke-filled room”“smoke-filled room”

See how you stack upSee how you stack up

Tough to take it awayTough to take it away

CLOSEDCLOSED

Andy Grove quoteAndy Grove quote

CC less likely to be CC less likely to be influenced by how influenced by how they think partners they think partners will reactwill react

Reduces unhealthy Reduces unhealthy competitioncompetition

What do you think?

There are several areas There are several areas where there STILL is where there STILL is

controversycontroversy

Sometimes, getting partners Sometimes, getting partners to agree on things is like to agree on things is like

herding cats.herding cats.



Areas where there STILL is Areas where there STILL is controversycontroversy

1.1. Partner charge hoursPartner charge hours2.2. Should business origination always Should business origination always

trump everything else?trump everything else?3.3. Interest on capitalInterest on capital4.4. Bonus vs. year-end distributionBonus vs. year-end distribution


Pearls of WisdomPearls of Wisdom

““If you’re weak at If you’re weak at client service and client service and good citizenship, good citizenship, you flunk and you flunk and you’re out.”you’re out.”



““Don’t be a pig Don’t be a pig

and don’t do and don’t do

something stupid.”something stupid.”



““If you’re a jerk, If you’re a jerk,

go find another go find another home.”home.”


QUESTIONS



1000 Skokie Blvd. Suite 5551000 Skokie Blvd. Suite 555

Wilmette, IL 60091Wilmette, IL 60091

Phone: 847-251-7100Phone: 847-251-7100

Fax: 847-251-4622Fax: 847-251-4622

[email protected]@rosenbergassoc.com

PARTNER COMPENSATION FOR A NEW MILLENIUM PRESENTED BY: MARC ROSENBERG, CPA

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