THE SECRETS OF GREAT PARTNER COMPENSATION SYSTEMS PRESENTED

THE SECRETS OF GREAT PARTNER COMPENSATION SYSTEMS PRESENTED BY: MARC ROSENBERG, CPA THE ROSENBERG ASSOCIATES LTD. www. rosenbergassoc. com

The Rosenberg Associates n Marc Rosenberg, CPA, President n Over 20 years consulting to CPA firms n Consultant, author and speaker to CPAs n 700 client firms from coast to coast n n - Named one of the most recommended CPA firm consultants by INSIDE Public Accounting Top 100 Most Influential People in Accounting Profession – Accounting Today 9 consecutive years THE ROSENBERG ASSOCIATES LTD. www. rosenbergassoc. com

Our proprietary consulting methods, handouts, n checklists, and intellectual capital are captured in each of n these monographs. n Order monographs at: www. rosenbergassoc. com Titles CPA Firm Management & Governance CPA Firm Succession Planning: A Perfect Storm Strategic Planning & Goal Setting for Results n How to Negotiate a CPA Firm Merger n How to Operate a Compensation Committee n What Really Makes a CPA Firm Profitable? n Guide to Planning the Firm Retreat n Effective Partner Relations & Communication n How to Bring in New Partners THE ROSENBERG ASSOCIATES LTD. www. rosenbergassoc. com

Rosenberg is active with CPA firms: n n n n Facilitate retreats Partner compensation & retirement Succession planning Mergers Strategic planning Practice management reviews Partner relations and conflict Upward evaluation surveys THE ROSENBERG ASSOCIATES LTD. www. rosenbergassoc. com

The Rosenberg Associates The Rosenberg MAP Survey – “Generally accepted as the barometer for CPA firm practice management” according to Accounting Today th 14 ! r a Ye THE ROSENBERG ASSOCIATES LTD. www. rosenbergassoc. com

Where Marc goes in his free time THE ROSENBERG ASSOCIATES LTD. www. rosenbergassoc. com

Where Marc goes in his free time MVP THE ROSENBERG ASSOCIATES LTD. www. rosenbergassoc. com

Final Groundrule I take questions during the presentation THE ROSENBERG ASSOCIATES LTD. www. rosenbergassoc. com

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Compensation Systems 1. 2. Equal d e s a Ownership percentage t o N p THE ROSENBERG ASSOCIATES LTD. www. rosenbergassoc. com r o f er n a m b e c

Performance-based systems THE ROSENBERG ASSOCIATES LTD. www. rosenbergassoc. com

Compensation Systems: Performance-Based 3. Formulas billings x 38. 743% ÷ √billable hours x A/R² - (cash receipts on Thursdays) ÷ (founding partner’s birthday) + billing rate x (1. 732 x realization rate) + √IPP ≠ 50. 9 ∏∑∑ book of business� - ∫ gross fees ÷ 0. 00 THE ROSENBERG ASSOCIATES LTD. www. rosenbergassoc. com

Compensation Systems: Performance-Based 4. Paper and pencil 5. Cumulative points 6. Profit center approach THE ROSENBERG ASSOCIATES LTD. www. rosenbergassoc. com

Compensation Systems: Performance-Based 7. MP decides 8. Compensation committee 9. All partners meet to decide 10. Combination of some of the above THE ROSENBERG ASSOCIATES LTD. www. rosenbergassoc. com

MVP Partner Compensation Systems 2 Ptrs 3 -4 Ptrs 5 -7 Ptrs 8 -12 Ptrs 13+ Ptrs 2011 Total 0% 19% 23% 54% 70% 32% 23% 36% 29% 11% 30% Paper & Pencil 3% 4% 5% 2% 2% 3% Ownership Pct 10% 4% 6% 2% 8% 5% MP Decides 12% 11% 12% 6% 9% 10% Pay Equal 32% 6% 4% 4% 0% 7% All Decide 20% 14% 3% 0% 13% Open 98% 82% 81% 65% 49% 77% 2% 18% 19% 35% 51% 23% Comp Committee Formula Closed 2012 Rosenberg MAP Survey THE ROSENBERG ASSOCIATES LTD. www. rosenbergassoc. com 2012 Rosenberg MAP Survey

Partner Compensation Systems Changes in Past 4 years 5 -7 Partners Comp Committee Formula Per 2012 Rosenberg MAP Survey 8 -12 Partners 13+ Partners 2011 2005 23% 19% 54% 39% 70% 58% 36% 47% 29% 39% 11% 38% THE ROSENBERGASSOCIATESLTD. www. rosenbergassoc. com

Have any firms listening today changed their compensation system in recent years? If yes, why did you change? What did you change? THE ROSENBERG ASSOCIATES LTD. www. rosenbergassoc. com

Partner Comp Best Practices Best Practice 1. Should be performance based. Smaller Firms Larger Firms Common but not always. Always. Performance=metrics plus other factors 2. Practice Origination is king. development plays a big role. Important but other factors have a role. 3. Multi-tier system: • Interest less common • Int on capital (5%) • Base (60 -80%) • Bonus (10 -30%) • • 4. Comp linked to strategic plan. Rare More common Base often a draw Bonus trues up final number THE ROSENBERG ASSOCIATES LTD. www. rosenbergassoc. com Interest more common More likely for base & bonus to be separate

Partner Comp Best Practices Best Practice Smaller Firms Larger Firms 5. Teamwork rules! Rare. For comp, teamwork rarely considered More common 6. Performance criteria made clear Production is king. Little else matters. • • • 7. Intangibles are important Virtually ignored. Important recognition; but they rarely trump production. 8. System selected should be fair. Formulas most common until 7 -8 partners. Comp committee most common 7 -8 partners THE ROSENBERG ASSOCIATES LTD. www. rosenbergassoc. com Production stats Goals Performed role well Live core values Intangibles

Partner Comp Best Practices Best Practice 9. How comp committee functions Smaller Firms Jury or Congress Larger Firms Management 10. Communication Very little from CC to partners: More common but not great 11. Ptr evals and goal setting used to evaluate partners Very rare More common 12. Ptr comp used to “manage” partners Near-total reliance; no other method Only one of several techniques 13. Open vs. closed Almost all open Open more common but closed on the rise • Onset of new year • Monitor during year • End of year THE ROSENBERG ASSOCIATES LTD. www. rosenbergassoc. com

Recent Significant Trends In Partner Compensation Techniques 1. 2. 3. 4. 5. More comp committees; fewer formulas Link with strategic planning Intangibles Teamwork Less emphasis on book of business 6. 7. Q 8. THE ROSENBERG ASSOCIATES LTD. www. rosenbergassoc. com

QUESTION FOR LISTENERS Have any firms recently reduced the weighting of BOOK OF BUSINESS in their compensation systems? WHY did you do it? HOW did you do? THE ROSENBERG ASSOCIATES LTD. www. rosenbergassoc. com

MVP Recent Significant Trends In Partner Compensation Techniques 1. 2. 3. 4. 5. 6. 7. 8. More comp committees; fewer formulas Link with strategic planning Intangibles Teamwork Less emphasis on book of business Less emphasis on billable hours Generous to new partners Closed vs. open (though most still open) THE ROSENBERG ASSOCIATES LTD. www. rosenbergassoc. com

Drill down on 2 most common systems • • Formulas Compensation Committee THE ROSENBERG ASSOCIATES LTD. www. rosenbergassoc. com

Formula Complications Inherited wealth THE ROSENBERG ASSOCIATES LTD. www. rosenbergassoc. com

Formula Complications Hoarding THE ROSENBERG ASSOCIATES LTD. www. rosenbergassoc. com

Formula Complications Recognition of technical specialties: n n Tax A&A quality control THE ROSENBERG ASSOCIATES LTD. www. rosenbergassoc. com

Formula Complications Which criterion is most important? Who is to say? THE ROSENBERG ASSOCIATES LTD. www. rosenbergassoc. com

Formula Complications How to value management THE ROSENBERG ASSOCIATES LTD. www. rosenbergassoc. com

Formula Complications How to recognize intangible contributions How long we get credit for origination THE ROSENBERG ASSOCIATES LTD. www. rosenbergassoc. com

Formula Complications n n n Partners with lower billing rates or who head up non - profit area Client on one partner’s book when another really manages the client “I” vs “WE” Q THE ROSENBERG ASSOCIATES LTD. www. rosenbergassoc. com

QUESTION TO LISTENERS For those who use a formula system… …How do you avoid the inherent problems in formula methods? g n i d r a o H n o t p m o c e ssiv n Exce d e t i r e h n i t those tha h t l a e w r i the n ue l a v t ’ n s e Do s e l b i g n a t n i THE ROSENBERG ASSOCIATES LTD. www. rosenbergassoc. com

3 Formulas That Can Work Reasonably Well 1. 20/50 2. Finder/Minder/Grinder 3. Formulas for both metrics and intangibles Carve-outs for interest, mgmt & bonus THE ROSENBERG ASSOCIATES LTD. www. rosenbergassoc. com

#1 - 20/50 Method Defined: 20% x client base 50% x billable dollars (hours x rate x realization) 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 THE ROSENBERG ASSOCIATES LTD. www. rosenbergassoc. com

#2 - Finder Minder Grinder n n n Finder – who brings it in Minder – manages the client relationship AND the engagement Grinder – doing billable work The challenge is coming up with the weighting: n 1/3 – 1/3 n 35 -45 -20 n Other? THE ROSENBERG ASSOCIATES LTD. www. rosenbergassoc. com

#3 - Another formula system I’ve seen OVERALL SYSTEM INTANGIBLES BALLOT Interest on capital ? % Production measures ? % Mgmt stipends ? % Intangibles-paper-pencil ? % Leadership 54321 Mentoring staff 54321 Pract development 54321 Sharing clients 54321 Teamwork 54321 Good citizenship 54321 Expertise & techn skills 5 4 3 2 1 Etc. 54321 Total Incentive bonus ? % Mgmt’s discretion ? % Total 100% THE ROSENBERG ASSOCIATES LTD. www. rosenbergassoc. com

Comp Committee: Why Firms Use It n n Formulas have big flaws Balances rewards between production and intangibles MP doesn’t want sole responsibility Partners won’t give sole power to MP THE ROSENBERG ASSOCIATES LTD. www. rosenbergassoc. com

Compensation Committee Keys To Success THE ROSENBERG ASSOCIATES LTD. www. rosenbergassoc. com

MVP Comp Committee: Keys to Success 1. IF THE PEOPLE BEING JUDGED DON’T TRUST THE JUDGES, THE SYSTEM WON’T WORK. PERIOD. THE ROSENBERG ASSOCIATES LTD. www. rosenbergassoc. com

Compensation Committee Keys To Success 2. Make-Up of Committee: n Small n MP is permanent member n Voted or appointed (ideally, CC = management, not jury or Congress) n All members must be credible n Not everyone gets a turn THE ROSENBERG ASSOCIATES LTD. www. rosenbergassoc. com

Compensation Committee Keys To Success 3. CC has full mandate to decide methods, techniques, values, weighting, size of tiers, etc. 4. Link of comp to strategic plan and vision. Partners do what the firm needs them to do. THE ROSENBERG ASSOCIATES LTD. www. rosenbergassoc. com

MVP Comp Committee: Keys to Success 5. Performance Criteria n n Leadership People skills and development Practice development Client service n n Client transition Traditional production measures Teamwork Good citizenship THE ROSENBERG ASSOCIATES LTD. www. rosenbergassoc. com Q

QUESTION FOR LISTENERS Firms certainly use OTHER criteria to evaluate partners than these listed. 1. 2. 3. 4. 5. What do YOU use that I missed? 6. Keep it high level. 7. 8. Leadership People skills Pract. development Client service Client transition Traditional production Teamwork Good citizenship THE ROSENBERG ASSOCIATES LTD. www. rosenbergassoc. com

Compensation Committee: Keys to Success 6. Incentive bonus or Final Year-End Distribution? INCENTIVE BONUS n n FINAL DISTRIBUTION Separate criteria from base Base is a “salary” n n Same or similar criteria as the base Base is really a draw THE ROSENBERG ASSOCIATES LTD. www. rosenbergassoc. com

Incentive Bonus: Major Factors 1. 2. 3. 4. What did partner do to enable the firm to have a “good year? ” Exceeding production goals Achieving qualitative goals Intangibles 5. 6. THE ROSENBERG ASSOCIATES LTD. www. rosenbergassoc. com

Examples of Intangibles 1. 2. 3. 4. 5. 6. 7. 8. Mgmt/leadership Leveraging Staff mentoring Training Teamwork Be a good partner; no Lone Rangers Manage clients on others’ “books” Cross-selling 9. 10. 11. 12. 13. 14. 15. 16. Institutionalize clients Be “go-to” person… Back-up to partners Finds work for staff Good corp citizen Always learning; never coasting Communication skills Always willing to help others THE ROSENBERG ASSOCIATES LTD. www. rosenbergassoc. com

Incentive Bonus: Major Factors 1. 2. 3. 4. 5. 6. What did partner do to enable the firm to have a “good year? ” Exceeding production goals Achieving qualitative goals Intangibles Hitting home runs Partner performance evaluations THE ROSENBERG ASSOCIATES LTD. www. rosenbergassoc. com

Compensation Committee: Keys to Success 7. Sincere effort by CC to review all pertinent information. No “gut feels. ” 1. 2. 3. 4. 5. 6. 7. Production statistics Achievement of goals Input from MP, PICs, dept. heads Partner evaluations Upward evaluation by the staff Self-evaluations Paper and pencil (non-binding) THE ROSENBERG ASSOCIATES LTD. www. rosenbergassoc. com

Compensation Committee: Keys to Success 8. Communication at 3 critical points: a. Crystal clear on rules of game before it is played. b. Monitor progress. c. End of year: “Judgments explained are more readily accepted than those that are not. THE ROSENBERG ASSOCIATES LTD. www. rosenbergassoc. com

Compensation Committee: Keys to Success 9. Putting numbers next to names. Resist reverting to formulas. 10. CC makes 2 decisions: bonus for this year and bases for next year. 11. Tax season clash with CC timetable. 12. CC decisions final. No appeals. No votes. 13. Closed vs. open. THE ROSENBERG ASSOCIATES LTD. www. rosenbergassoc. com

Closed vs. Open Systems “If people are concerned about their absolute level of compensation, then they can be satisfied. However, if their focus is on relative standing, then they can never be satisfied. ” Andrew Grove Chairman of the Board Intel THE ROSENBERG ASSOCIATES LTD. www. rosenbergassoc. com

Open Vs. Closed System OPEN n n CLOSED Partners feel like “real” partners Avoids image of “smoke -filled room” n See how you stack up n Tough to take it away n n n Andy Grove quote CC less likely to be influenced by how they think partners will react Reduces unhealthy competition THE ROSENBERG ASSOCIATES LTD. www. rosenbergassoc. com Q

In the last few years, have any firms moved from open to closed? How well has it worked? Please key in your response to me, now. Q THE ROSENBERGASSOCIATESLTD. www. rosenbergassoc. com

How to use a partner comp system to get partners to do what the firm needs them to do 1. 2. 3. 4. 5. 6. 7. 8. 9. Create and follow a strategic plan. Written roles & expectations for each partner. Bring down “billing book” from its pedestal. Differentiate between origination & billing resp. Adopt the compensation committee system. Intangibles must play an important role in comp. Incentive bonus links all of the above. MP should be able to impact bonus. Communication. THE ROSENBERG ASSOCIATES LTD. www. rosenbergassoc. com

There are several areas where there STILL is controversy Sometimes, getting partners to agree on things is like herding cats. THE ROSENBERG ASSOCIATES LTD. www. rosenbergassoc. com

Areas where there STILL is controversy 1. 2. 3. 4. Partner charge hours Should business origination always trump everything else? Interest on capital Bonus vs. year-end distribution THE ROSENBERG ASSOCIATES LTD. www. rosenbergassoc. com

Pearls of Wisdom “If you’re weak at client service and good citizenship, you flunk and you’re out. ” THE ROSENBERG ASSOCIATES LTD. www. rosenbergassoc. com

Pearls of Wisdom “Don’t be a pig and don’t do something stupid. ” THE ROSENBERG ASSOCIATES LTD. www. rosenbergassoc. com

Pearls of Wisdom “If you’re a jerk, go find another home. ” THE ROSENBERG ASSOCIATES LTD. www. rosenbergassoc. com

Q&A Thanks for taking the time to listen today! Let me know of any questions you have now or in the future. Feel free to contact me: Marc Rosenberg, CPA Phone: 847 -251 -7100 marc@rosenbergassoc. com http: //blog. rosenbergassoc. com/ THE ROSENBERG ASSOCIATES LTD. www. rosenbergassoc. com

The Rosenberg Associates 1000 Skokie Blvd. Suite 555 Wilmette, IL 60091 Phone: 847 -251 -7100 Fax: 847 -251 -4622 marc@rosenbergassoc. com THE ROSENBERG ASSOCIATES LTD. www. rosenbergassoc. com