PREFACE

While there are many topics that generate a wide range of feelings and emotions in accounting firms, the topic of how to compensate firm owners is certainly one that generates some of the widest and most volatile emotions. So, why would anyone want to tackle a book about owner and staff compensation plans? It would seem to be a fool’s errand.

It has often been said a lack of money is the root of all evil. Maybe that explains, in part, why there is so much disagreement among CPA firm owners. We believe this book can help CPA firm owners and other professional services firm owners learn not only how to split the compensation pie, but significantly grow the pie by aligning compensation plans to the firm’s mission, vision, values and strategy.

Many firms struggle with compensation issues not merely because of the allocation of income, but also because of the overall economic performance of the firm.

This book then is as much about growing the pie as it is about using compensation as a strategic asset to split the pie in an effort to recruit, reward, and retain more effectively.

The best way to root out the so-called “evil” is to increase the amount of money the firm can allocate. While having more money to distribute may keep disagreements at a minimum, money alone does not necessarily mean the compensation system rewards the right things and allows for fair distribution. As we will demonstrate, money only solves part of the problem.

Compensation systems, programs, and methods by themselves do not generate sustained positive results for a firm. In the nineteenth century, the French novelist, Gustave Flaubert wrote; “Success is a consequence, not a goal.” Success doesn’t happen because we wish ourselves to be successful. Firms are not successful because partners simply want them to be. Successful firms develop and implement processes that fundamentally change and nurture the relationship between owners and employees and the firms for which they both work.

The other piece of the compensation dilemma, allocation, also needs to be addressed. Unless a firm has a fair compensation system that is easy to understand, no amount of money can root out all the “evil.” Compensation policies and practices must also align with other elements of a firm, especially the firm’s culture and values. Finally, a credible compensation system supports and is tied to the firm’s mission, vision, and strategy.

Successful firms don’t just happen. They have good leaders and good employees who strive each day to achieve mission and vision by living the firms’ values and carrying out strategy. In other words, they work at being successful. They execute! And they reward for performance rather than entitlement.

Compensation may not be the only reason we work, but it is often a necessity in our lives. The amount of money we earn is often perceived as a measure of our personal and professional value. At the same time, most of us recognize that it is not only about money. We also want a positive work environment, a sense of personal and professional growth, and an opportunity to contribute to something larger than ourselves.

Poorly designed compensation systems and their lack of perceived fairness can fracture firms, encourage owners to look elsewhere, create feelings of despair and angst, and cause frustration and dissension among owners and employees. In turn, most owners realize they can achieve more by working together than by working in silos, but they’re unsure about how to create a compensation system that rewards for both independent and interdependent accomplishment.

Firms are comprised of human beings, and a good compensation system should reflect its stakeholders’ needs. And while there may never be enough money to satisfy everyone completely, there should be sound ways that help firm leaders make good decisions about who should be paid what and explain to partners and employees why they earn what they earn. Thomas Jefferson may have captured the current compensation situation best when he wrote, “There is nothing more unequal than the equal treatment of unequal people.”

Jay R. Schuster and Patricia K. Zingheim write, “Most (research) suggests that organizations that are able to design their pay programs to pay the best performers better than other performers are able to accomplish several important organizational imperatives:

▮ Making excellent performance financially worthwhile.

▮ Communicating to satisfactory performers the importance of acceptable and better performance.

▮ Communicating to less than satisfactory performers that their performance must improve or they will be encouraged to find employment where their abilities more closely match the performance expectations of the organization.”¹

This book is written for firm leaders and owners who are interested in learning how to do so—how to align compensation to the firm’s mission, vision, values, and goals. We also examine the key characteristics of the most common current compensation systems and provide results from the first comprehensive compensation survey among CPA firms conducted by us and the PCPS Division of the AICPA.

What we share in this book is a new perspective on the crucial subject of designing an effective compensation system based on the needs of your firm. We know from experience that each compensation system can succeed, and each can also fail. There is no perfect compensation system. The real challenge is to design a compensation system that aligns financial rewards with the firm’s strategic direction.

We hold that compensation and performance should be linked. And performance evaluation should take into account both the financial (objective measures) and nonfinancial (subjective measures) aspects of creating value in the firm. It should also take into account and measure both leading and lagging measures of success.

Compensation as a Strategic Asset also lays out a framework and methodology that will not only help a firm get top notch results, but also provides a step-by-step process on how to create an effective compensation program. First, stakeholder (such as owner, employee, or client) needs must be identified. Second, each firm needs to develop its unique mission, vision, values and a strategy—all of which are designed to meet stakeholder needs. Third, authentic and effective leaders must drive appropriate goal-setting and performance management systems to accomplish the above. These systems should focus on overall profitability and a variety of factors beyond the traditional measurements of chargeable time, revenue growth and origination.

Owners and employees who help the firm execute its strategies should share most in its profits. We provide workable solutions for profit allocation. While many of the techniques we describe are not new, we share how to apply them in new and different ways.

The goal of this book is to share with you our experiences, insights and views on this critical aspect of firm management. We hope it adds to the existing body of knowledge and stirs additional dialogue about CPA firm compensation plans.

August J. Aquila
Minnetonka, MN

Coral Rice
St. Louis, MO
April 1, 2007