Performance Is Everything The Why, What, and How of Designing Compensation Plans

Compensation is the largest expense that a firm incurs. And yet, few firms really manage it well. The trick is realizing it is more complex than just splitting the pie.

The crucial issues of compensation and performance are inextricably linked. In this important resource, experts August Aquila and Coral Rice offer a unique perspective on how you can align your compensation and performance management plans in order to boost performance, maximize profits, and keep both your staff and clients happy.

This companion to Aquila and Rice’s successful AICPA publication, Compensation as a Strategic Asset, will pick up where that guide left off, offering readers the “Why, What, and How” for compensation plans filtered through the lens of performance management.

The authors convey, in the simplest and clearest terms, how firms can improve overall firm performance by engaging in the following activities:

• Develop a compelling vision
• Develop a strategy for what you want to accomplish
• Have the right systems in place to help achieve the strategy
• Align individual goals with firm and departmental goals
• Create an effective performance review system
• Monitor performance monthly and quarterly for trends
• Provide higher performers with more rewards than average performers

Ultimately, this guide is based on what other firms are doing, and let's you know why it’s working or why it’s not. By guiding you through a process and providing you with the tools to design a partner and staff compensation plan, Performance Is Everything will help you develop the plan that works for your firm.

August J Aquila, an internationally known consultant, speaker, and author, has held leading positions in the accounting profession for more than 25 years. He currently heads AQUILA Global Advisors, LLC, a full-service consulting firm to accounting and other professional services firms.

Coral L. Rice is one of the accounting profession’s top consultants and executive coaches in the areas of organizational development, compensation, and learning. She serves as a global senior consultant in FranklinCovery’s 4 Disciplines of Execution practice and has served both Fortune 100 and smaller clients in a variety of consulting roles.

Acknowledgments xi

About the Authors xiii

Part 1: Why You Need to Reward People Differently  1

Chapter 1: Workforce Trends in the Twenty-First Century 3

Rapid Pace of Technological Change 4

Shifting Demographic Patterns 4

Job Sharing 5

Permanent Part-Time Positions at the Owner and Employee Levels 6

Globalization of the Workforce 6

Employers Demanding Higher Skills 7

Lack of Clearly Defined and Stable Jobs 8

Flattening of Organizations 8

Women in Leadership Roles 8

“Around-the-Clock” Economy (24/7) 9

Trust 9

Final Thoughts 10

Chapter 2: Superior Performance Comes From Alignment  11

Performance Variables 12

The 7S Model 12

Other Models 15

The Nine Performance Variables 15

Organization Level 16

Process Level 18

Performer Level 20

Final Thoughts 24

Chapter 3: Building a Compelling Vision  25

A Vision Is More Than a Simple Statement 26

How to Ensure Owners Connect to the Vision 26

When to Involve Owners in Creating the Vision 27

What Should a Compelling Vision Contain? 28

The How To Is as Important as the Vision 29

Journey, Milestones, and Measuring Progress 30

What’s in it for Me? 30

Final Thoughts 30

Chapter 4: Link People Performance to Strategy  31

What Is Strategy? 31

Where to Start? 32

Case Study 33

Strategy Execution as a Core Competency 36

Final Thoughts 36

Chapter 5: Your Role as the Leader  37

Even Managing Owners Need Assistance 37

What Successful Managing Owners Do—The Leadership Model 38

Setting Direction 39

Gaining Commitment 40

Execution 42

Personal Example 44

Final Thoughts 46

Chapter 6: Why You Need to Reward Different People Differently  49

Financial Reasons 50

Performance-Compensation Gap 50

Need to Reward the Performers 51

Align Monetary and Nonmonetary Rewards With Position Level 52

Operational Reasons 53

Evolving Business Models 53

Rapidly Changing Competitive Landscape 55

Generational Reasons 55

Work-Life Balance 55

Generational Differences 56

Today’s Compensation Plan 57

Written Win-Win Agreements 57

Customized Criteria and Goals 58

Focus on Current Production and Future Capacity 58

Reward Performance, Not Entitlement 59

Include At-Risk Compensation 59

Ensure Fairness 59

Create a New Culture 60

Exercise Courage 60

Final Thoughts 60

Part 2: What You Need to Reward 61

Chapter 7: Make It Happen Through Performance Management 63

Survey Results 64

Owners and Performance Management Systems 68

Job Descriptions 69

Final Thoughts 69

Chapter 8: Selecting the Right Performance Measures  71

Vision, Strategy, and Objectives 71

The Role of Performance Measures in Driving Behavior 71

Why Choose Performance Measures That Are Linked to Firm Objectives 72

How to Choose Performance Measures That Are Linked to Firm Objectives 73

Potential Dangers When Using Performance Measures 74

Using Scorecards to Categorize and Clarify Performance Measures 75

Firm Scorecard 75

Department Scorecard 76

Individual Scorecard 77

Categories of Objectives 77

Financial Measures 78

Client Service Measures 78

Internal Systems and Business Process Measures 79

Employee Growth and Learning Measures 81

Business Development Measures 82

Final Thoughts 83

Chapter 9: Overcome the Challenges in Creating a Compensation Plan  85

Best Practices in Designing a Compensation System 86

Entitlement Performance Continuum 87

Evaluate Current Plan 87

Getting Started 88

Six Major Obstacles and How to Avoid Them 90

Final Thoughts 92

Chapter 10: Choosing the Right Elements: Build a Compensation Plan  93

Base Pay 93

Compensation for the New Owner 94

How Do You Determine the Market Value (“Street Value”) of Your Owners? 96

Developing Pay Ranges 97

Developing Owner Pay Ranges 97

Bonus 98

Bonus Compensation Criteria 99

Types of Bonus Compensation 100

Combining Tangible and Intangible Compensation 100

Administering the Plan 101

Performance Management 101

Final Thoughts 102

Part 3: How to Reward Performance  109

Chapter 11: How to Manage Performance Effectively 111

What Is Performance Management? 111

Ensure Performance Expectations Are Clear From the Beginning 112

Create a Culture Where Giving and Receiving Feedback Is the Norm 112

The Role of the Johari Window in Performance Management 113

Giving Feedback 118

Performance Evaluations 119

Final Thoughts 120

Chapter 12: Owners Need to Be Evaluated Too 133

Factors Determining the Owner’s Value 133

Owner Evaluation 134

Only Performance Is Reality 138

Align Goals and Rewards to Strategic Initiatives 139

Building a Culture of Accountability—“Accountability is Good, But Not for Me” 139

Setting Goals 141

What Support Will Owners Need? 142

Start With the Firm’s Strategic Plan 142

Individual Owner Performance Plan 142

Areas of Performance Evaluation 144

Goal Setting 144

Steps in the Evaluation Process 145

Changes to the Owner Performance Plan 145

Final Thoughts 145

Chapter 13: Even Managing Owners Need Feedback  151

The View From the Top 151

Other Criteria 153

Final Thoughts 153

Chapter 14: How to Compile and Assimilate a Bonus Performance Plan  161

The Right Performance Bonus Plan 161

Sample Performance Bonus Document 162

Owner Performance Bonus Plans 163

Case Study—Compensation System in a Midsized Firm 163

Case Study—Large Firm 165

Managing Owner and Executive Committee 165

Line Owners 166

Managers 166

Discretionary Pool 167

Final Thoughts 167

Part 4: Where Do You Go From Here?  179

Chapter 15: What Will You Do Tomorrow? 181

Appendix: 2011–2012 Performance Management and Compensation Survey  183

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