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Are You Getting The Most Out of Your Compensation System?

John Fitzgerald, CPA 05.13.2015 | Practice Made Perfect

An effective compensation system should be more than just about money. It should be designed so that its overall impact is rewarding not only to the individual partners but to the firm as a whole.  There are a host of compensation systems - Equal Partnership, Lock-step, 50/50 subjective-objective, among others - each with their unique pros and cons. For an analysis of these systems click here. Whatever system you choose, see if it fulfills some or all of these criteria.  

The Characteristics of an Effective Compensation System

Rewards, encourages, and motivates. This is the prime goal of any compensation system. Your rewards should be designed to retain your best and keep them happy. It should also help motivate those who are on the fence or who need a little prompting.  The system can provide you with the evidence and hard facts you require should it be necessary to remove a non-performer. In all cases, each partner recognizes that he or she is accountable for his or her actions and has the means and support to try and succeed. 

Promotes firm goals.  Gear your compensation system so that it fuels firm goals. If you want to grow certain niche areas, assume that any effort and success in that niche will be amply rewarded.  Any goals you set should be reasonable and attainable.  Setting goals that are clearly out of reach or require extraordinary effort will discourage more than encourage.

Incentivizes long-term behavior.  An effective compensation system becomes part of your firm culture. It will become a part of the natural behavior within your organization and not be regarded as something imposed on the partners. It encourages each partner to concentrate on his own efforts rather than looking at the performance of other partners.

Enhances core values.  Know what you are known for or want to be known for. Whatever firm personality you wish to project and foster, use your compensation system to reward that behavior. 

Attracts lateral hires.  A well-regarded compensation system is an attractive element in any effort to bring in fresh talent, to bolster a service niche, or to start a new one by bringing in experienced professionals. 

Provides a sense of predictability.  Partners should easily understand that clearly defined behaviors produce clearly defined results. If there are hints of favoritism or looseness in the application of rules, the system will be ineffective. 

Avoids large swings in income.  While no partner would object to the occasional influx of a large reward, you should also take measures to see that inevitable dry periods do not take too much of a toll.

Rewards total contributions to the firm. The following are all nonbillable activities: Published articles; media interviews; blogs; speeches; pro bono work; association and committee membership; recruiting; and firm management meetings.  All contribute to the growth, success, and reputation of the firm. Your system should take these activities into account. Failing to do this will discourage these activities and can only be detrimental to overall morale.  

Evolves as your firm evolves.  As your firm grows, the compensation system that worked when you were smaller or less diversified may not be as effective. It is important to remain flexible and make adjustments in tune with the firm you have become.