Quality partners, the essential ingredient of CPA firms

Accounting

As CEO of a midsized or small CPA firm, ask yourself this tough question: “Why would someone want to be a partner in this firm?”

Do you have a good answer? Here’s my take: “Rising stars” and laterals need a quality firm that has two major things going for it: (1) a track record of achieving sustained success and continually improved average partner earnings; and (2) a strategic plan that will enable the firm to transition from a merely good firm to a mid-market sustainable brand. Unless the firm exhibits these two key ingredients, a CEO truly doesn’t have a good answer as to why the firm will be attractive to potential partners.

To attract new partners with quality, including laterals, a firm needs to demonstrate it has a path to grow professionally and monetarily. This is usually accomplished by sharing your strategic plan to move from a merely good firm to a mid-market sustainable brand, and perhaps become the “category killer.” You should also share the firm’s history of revenue growth, earnings growth, and key metrics on revenue and earnings per partner. Also sharie the investments and commitments the firm is making in the people it wants to attract. For internal partner candidates, this will include a partner-in-training program, as summarized below.

Partner-in-training program

Many firms have developed a partner-in-training process that they use to evaluate and develop their partner candidates. It generally covers a two- or three-year span.

The candidates are invited to attend partner meetings and interactions with the CEO, managing partners and other senior partners. They are given goals specific to the program, exposed to firm financial and other partner-level information, provided with leadership training and other education, and mentored through the process by senior management. The purpose of this process is to give both the candidate and management the opportunity to observe the other and make sure that there is a good fit. Presented below is an example of the process and timeline required for a partner-in-training program:

Aspect

Structure

 

Objective

·       Develop high-performing senior managers (“rising stars”) who have the potential to become partners in two or three years. 

 

Participants

·       Senior managers nominated by office managing partners and regional managing partners and admitted through a selection process

 

Selection process
  1. Office managing partners and regional managing partners nominate candidates
  2. Approval for assessment
  3. Assessment
  4. Final selection into training program
Roles

·       Academy selection committee – CEO, managing partners and other senior partners

·       Candidate support – sponsoring partner

·       Partner admission – Executive Board

·       Program design and management – Continuing Education Department

 

Program components

·       Assessment

·       Development plan

·       Orientation

·       Group workshops

·       Executive coaching

·       Strategic project assignment

·       Progress reviews

·       Annual candidate evaluation

 

Developing existing partners

What does the firm need to do to develop existing partners? Here is where so many CEOs, managing partners and other senior partners fall short. Firms appoint new partners with plenty of excitement about their future prospects, but many firms do little, if anything, to develop those new partners. Four or five years later, firm leaders start mumbling, “John is a dud,” “Mary has fallen way short of our expectations,” or “Making Ari a partner was a mistake.” They may be right in their assessments, but which came first, the chicken or the egg?

We ask because many firms expect new partners to continuously build enterprise value and consistently help perpetuate the firm with new business originations, cross-sells and client retention. Unfortunately, life in a CPA firm doesn’t work that way. As partners gain experience, they need to be nurtured and developed. The best way to accomplish this is by using a performance management and compensation plan as addressed below:

A partner performance management and compensation plan must be performance-based, comparing actual performance to goals and objectives. This will enable you to consistently reach the right outcome, i.e., to fairly reward your high performers and make meaningful progress with your rising stars. It is not a formula-based system. Instead, it involves a good amount of judgment and interpretation.

Regardless of the components of your performance management and compensation plan, several themes should be adhered to:

  • You are working with quantifiable and qualitative factors. Quantifiable factors can be measured (e.g., production, billings and business development). Qualitative factors, such as leadership and team development, are more difficult to measure. 
  • No two partners are alike. You should consider different performance measures and goals based on the individual’s particular contributions to the firm.

With performance-based compensation, the firm needs to consider:

  • What target percentage of a partner’s compensation is salary (draw) vs. bonus and how much is at risk to performance criteria. Is total compensation at risk or just the bonus? 
  • Consider goal setting for partners and the results. 
  • Set quantifiable vs. qualitative criteria. How much of both does your plan incorporate? 
  • Are firm goals for the year integrated with the performance management and compensation plan? Knowing what the firm goals are and how each partner makes a contribution is key.
  • Is there a discretionary or non-assigned pool of money that you and your senior management team can use to reward exceptional performance, particularly with regard to the firm’s highest priorities?

Performance-based compensation process

What is your process? Here are some of the more important components we usually find:

  • The firm establishes overall goals for the year.
  • In collaboration with the CEO and the senior management team, each partner establishes goals, integrated with the firm’s goals. Performance is monitored.
  • The CEO and senior management team meets with each partner at year-end to review achievements vs. goals.
  • The CEO and senior management team make a recommendation of the year-end bonus allocation to the executive board based on each partner’s performance and judgments.
  • The executive board reviews and adjusts, if necessary, senior management’s recommendation.
  • Salaries and draws are set for the coming year by the executive board.
  • The executive board is responsible for a similar process with the CEO.

The tendency at many firms is to avoid confrontation regarding partner performance issues for an extended period of time, which allows for complacency and enhancement of the “comfort zone” culture. Unfortunately, as the need for more capable and innovative partners has heightened, the talent pool has shrunk, increasing the urgency and pressure to act quickly. CEOs need to manage at warp speed when implementing their short-term goals and objectives while securing a successful strategy for the longer term.
Highest-performing partners

I have always believed that a partner performance management and compensation plan has to make sure the firm is generously rewarding the highest-performing partners and the rising stars.

An important aspect of overcoming the CPA firm succession concern is the necessity for firms to quickly attract and retain game-changing talent concurrently with executing a cultural shift toward implementation.

Recruiting the right experienced talent for the right succession roles is the key

differentiator for timely succession planning. Firms no longer can rely solely on the traditional entry-level recruiting model and developing people over a period of more than 10 years to fill key partner positions. Nor can they resort to the old model of taking highly talented partners and providing them with largely average staff, hoping that the partners’ talents will sustain the firm.

Attracting game-changer types

A talent war is taking place as competition intensifies for quality high-level positions. The time to react to this marketplace crisis has become significantly shorter, especially for baby boomer partner firms. Talented, creative and innovative professionals are in high demand for pivotal positions, for not only replacing the “old guard” but also to deliver new and more innovative services. The rules of the new game dictate that CPA firms seeking to remain independent must attract game-changer types of partners and move quickly to bring them aboard.

Not every CPA firm will be fortunate enough to attract the multifaceted game-changer. Firms may have to revise the multifaceted, traditional one-partner-per-client approach and more frequently use multiple, hyper-specialized partners who perform small aspects of client service on firm engagements extremely well. Consequently, this modified approach means that succession-planning strategies will need to cultivate and recruit not just brilliant individuals, but brilliant teams of specialists. The partner-team structure requires a cultural and organizational change from traditional approaches normally associated with succession planning. Whether it’s a partner-team approach or other innovative strategies, the traditional methods of succession planning may no longer be achievable in the current and foreseeable future.

Simply put, to retain your “rising stars,” make sure you are helping them grow professionally, and compensating them on a path that demonstrates you acknowledge they are doing special things and are beginning to demonstrate they are keepers.

What made a CPA firm successful in the past will not guarantee success in the future, especially in regard to succession planning. To survive the succession crisis, a firm must initiate a strategic transformation that takes the firm quickly out of an antiquated and traditional state to a more realistic and market-driven approach as solutions to succession problems become more limited. Firms must develop and institute a plan to change and adapt their succession plans. The updated plans should focus on accelerating transformation of the existing partners and staff in terms of adapting quickly to the firm’s succession needs and the evolving future marketplace so they’re prepared to step in and fill those needs. CPA firms of all sizes are facing this challenge.

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