Compensation—How to Implement a Performance-Based System

Source: Inside Public Accounting

The accounting profession has been slow to embrace performance-based compensation, but it is beginning to be more receptive to it. Anecdotal examples of results from adopting performance-based systems include:

• One firm experienced a 75 percent increase in partner income (average bonus of 17 percent).
• Another firm enjoyed a significant increase in new job applicants.
• In this same firm turnover as a result of compensation complaints effectively vanished.

What is performance-based compensation? No handy definition is given, but here are some characteristics:

• Compensation is linked to firm goals.
• Employees understand how personal performance is linked with firm goals.
• Employees’ personal goals are matched to their strengths. For example, one person may have a goal of 1,600 chargeable hours while another’s might be 1,200 chargeable hours, 200 mentoring hours, and 200 client management hours.
• Rewards are based on success factors such as client satisfaction, work quality, service to the community, team participation, and mentoring.

Bonuses are a significant percentage of total compensation in a performance-based system, but you might want to start small (say five percent to 10 percent) and phase in larger percentages as firm and individual goals are modified. At the start, you may want base salaries to be aligned with standards in the profession.

Michael Epstein, managing partner at Fuller Landau in Toronto, lists the following bases for bonus determination:

• Internalizing the firm’s core values and 360 degree appraisals is the basis for up to 2.5 percent of base salary.
• Job skill is the basis for up to another 2.5 percent.
• Five percent or greater can be earned for work in practice development, recruiting, coaching, and chargeable hours.

A critical element of a performance-based compensation program is training in:

• How to tell employees how to improve.
• How to coach employees on performance improvement.
• How to mentor employees on personal development and goal setting.

At Fuller Landau, some upper level people were terminated for not aligning their goals with the firm’s goals, or for failing to participate as mentors.

Another critical element is including staff when designing the process. This helps ensure their buy-in.

For related articles, see:

 From Inside Public Accounting, March 2007, p. 1. The Platt Consulting Group (www.plattgroupllc.com). Subscription $369 per year; back issues—nonsubscribers $40. 317-733-1920.