THE EQUITY FACTOR IN COMPENSATION

A Primer for the Managing Partner – And Everyone Else In The Firm

COMPENSATION AS A STRATEGIC ASSET: the New Paradigm, By August J. Aquila and Coral L. Rice. AICPA, 2007. 197 pp., Paperback.

            Sometimes, in the middle of day-to-day activities, it’s hard to notice the magnitude of change in both society and the business world. This is particularly true in the professions. In practice, things change slowly and incrementally, at what’s been called a petit pace.

            So it has been in the accounting and legal professions. Today’s professions are substantially different than they were 10 or 20 years ago. The world of commerce – the world served by the accounting and legal professions -- has changed shape in many ways. You see professional practice altered by myriad factors, including a new regulatory environment, technology undreamed of 20 years ago, a competitive environment that was first enabled in 1977 and that now itself reshapes the professional practice. Now you see globalization, talent shortages, a clientele infinitely more sophisticated than it has ever been before. You see cherished traditions, ranging from the traditional partnership structure to the tedious hourly billing practice, challenged and decomposing. You see the practices of accounting and law changing, not originating by the professionals, but at the insistence of the clientele. And quite naturally, you see traditional compensation practices challenged and changing, in response to pressures from within this new, dynamic environment. Managing a professional firm today requires more managerial talent than has ever before been needed.

            It is this new paradigm of using compensation as a strategic asset that the brilliant and  thoughtful authors, August Aquila and Coral Rice, so aptly describe, define, and instruct.

            I should note, in the spirit of full disclosure, that August Aquila and I have been – and probably will be again in the future – colleagues and collaborators. We did, remember, co-author Client at the Core (John Wiley and Sons, 2005, and, in the early days of marketing’s ascendancy, worked in senior marketing positions at a then-Big Eight accounting firm.) He has since successfully metamorphed from a marketing consultant into the more complex field of accounting firm management, from whence comes his expertise in the field of accounting firm compensation and management. There is, I’ve discovered, no greater authority in this field – including mergers and acquisitions – than August.

            Co-author Coral L. Rice is a consultant in organizational development, human resources, and learning services. Her expertise is in diagnosing and designing people systems and processes,  designed to improve strategic goals.  Formerly, she had been with the Franklin Covey company, responsible for creating Covey’s Knowledge EpiCenter, the firm’s knowledge management system.

            Too many accounting and law firms are still run by the seat of the managing partner’s pants. Too often, those pants are tailored by an attitude of , “I have this professional degree, and therefore my intuition is all the managerial knowledge and experience I need.” As Peter Drucker had often pointed out, there are indeed some managers and leaders who are natural geniuses, and whose instincts and intuition lead to brilliant management – but not many. The rest, he said, have to learn from scratch. He also pointed out that it can be learned. And that is the value of this primer, in which Aquila and Rice go step by step in showing the way to more successful firm management.

            Compensation planning, the authors point out, is at the heart of professional firm management skill. And while compensation problems have always been at the heart of firm management, the substantially changed economic environment mandates that a new paradigm -- a new way of thinking about compensation -- is now important.

            The authors identify 11 paradigm shifts now taking place in accounting firm owner compensation planning…

• Evaluating compensation based on customized criteria and goals – for example, the classic factors of billable hours, business development and origination. “Everyone,” the authors say, “was, in essence, put into the same mold.”
• Using win-win agreements. In the past, formula calculations were used. Under the new paradigm, expectations are the key to compensation determination.
• Focusing on current production and future capacity. “We often tell our clients that no margin means no mission,” they say. The new paradigm suggests that a firm needs to focus on productivity, including building capacity for future production as well as current production.
• Providing a solid safety net. The old way was to let firm owners sink or swim on their own. Under the new paradigm, more resources must be supplied to help owners to achieve goals.
• Rewarding performance. Not much in traditional accounting firm management. Now, it should be an integral part of management thinking.
• At-risk compensation. From entitlement compensation systems to performance-based compensation.
• Ensuring fairness throughout a firm.
• Agreeing upon goals.
• Creating a new culture.
• Exercising courage.
• Balancing individual and firm benefits.

The authors address each of these factors with a carefully devised system, designed to enhance management and improve profitability. Each is based upon a systematic approach, including such techniques as the balanced scorecard. The authors meticulously describe compensation terminology, and define current compensation methods, as a guide to designing a new compensation system, based upon the new paradigms of the accounting profession and the changing needs of the clientele. At the heart of the systems described, is the best use of the talents inherent in each firm, as well as the needs of the firm’s owners.

They address, as well, the thorny problem of pay for performance, discussing both the rationale for and against, and the various systems.

Compensation As A Strategic Asset is an extraordinary handbook of a process that’s both dynamic and very much on the minds of most professionals, as might be expected from these distinguished authors. There are, I suspect, few managing partners in either accounting or law who wouldn’t benefit from a thorough reading of this book.

 HOME