THE ROSENBERG ASSOCIATES LTD. www.rosenbergassoc.com THE SECRETS OF GREAT PARTNER COMPENSATION SYSTEMS PRESENTED BY: MARC ROSENBERG, CPA
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THE SECRETS OF
GREAT PARTNER COMPENSATION SYSTEMS
PRESENTED BY: MARC ROSENBERG, CPA
THEROSENBERG ASSOCIATES LTD.www.rosenbergassoc.com
The Rosenberg AssociatesThe Rosenberg Associates Marc Rosenberg, CPA, PresidentMarc Rosenberg, CPA, President
Over 20 years consulting to CPA firmsOver 20 years consulting to CPA firms
Consultant, author and speaker to CPAsConsultant, author and speaker to CPAs
700 client firms from coast to coast700 client firms from coast to coast
Named one of the most recommended CPA firm Named one of the most recommended CPA firm consultants by consultants by INSIDE Public AccountingINSIDE Public Accounting
Top 100 Most Influential People in Top 100 Most Influential People in Accounting Profession – Accounting Profession – Accounting TodayAccounting Today
- - 99 consecutive years consecutive years
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TitlesTitles CPA Firm Management & Governance CPA Firm Management & Governance
CPA Firm Succession Planning: A Perfect StormCPA Firm Succession Planning: A Perfect Storm
Strategic Planning & Goal Setting for ResultsStrategic Planning & Goal Setting for Results
How to Negotiate a CPA Firm MergerHow to Negotiate a CPA Firm Merger
How to Operate a Compensation CommitteeHow to Operate a Compensation Committee
What What ReallyReally Makes a CPA Firm Profitable? Makes a CPA Firm Profitable?
Guide to Planning the Firm RetreatGuide to Planning the Firm Retreat
Effective Partner Relations & CommunicationEffective Partner Relations & Communication
How to Bring in New PartnersHow to Bring in New Partners
Our proprietary consulting Our proprietary consulting methods, handouts, checklists, methods, handouts, checklists, and intellectual capital are and intellectual capital are captured in each of these captured in each of these monographs.monographs.
Order monographs at:www.rosenbergassoc.com
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Rosenberg is active with CPA firms:Rosenberg is active with CPA firms:
Facilitate retreatsFacilitate retreats Partner compensation & retirementPartner compensation & retirement Succession planningSuccession planning MergersMergers Strategic planning Strategic planning Practice management reviewsPractice management reviews Partner relations and conflictPartner relations and conflict Upward evaluation surveysUpward evaluation surveys
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The Rosenberg AssociatesThe Rosenberg Associates
The Rosenberg MAP Survey – The Rosenberg MAP Survey – “Generally “Generally accepted as the barometer for CPA firm accepted as the barometer for CPA firm practice management” according to practice management” according to Accounting TodayAccounting Today
14th Year!
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Where Marc goes in his free timeWhere Marc goes in his free time
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Where Marc goes in his free timeWhere Marc goes in his free time
MVP
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Final Groundrule
I take questions during the presentation
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The Rosenberg Associates
Management of a CPA Firm: The Highest Level
VISION
FIRM GOALS
PARTNER GOALS
ENGINES
Leadership
Operations
Partner Comp
Accountability
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Compensation SystemsCompensation Systems
1.1. EqualEqual
2.2. Ownership percentageOwnership percentage
Not performance-based
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Performance-based Performance-based systemssystems
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Compensation Systems:Compensation Systems:Performance-BasedPerformance-Based
3. Formulas3. Formulas
billings x 38.743% ÷ √billable hoursbillings x 38.743% ÷ √billable hours
x A/R² - (cash receipts on Thursdays)x A/R² - (cash receipts on Thursdays)
÷ (founding partner’s birthday) + billing ÷ (founding partner’s birthday) + billing raterate
x (1.732 x realization rate) + √IPP ≠ 50.9x (1.732 x realization rate) + √IPP ≠ 50.9
∏∑∑ ∏∑∑ book of business - ∫ gross fees ÷ book of business - ∫ gross fees ÷ 0.000.00
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Compensation Systems:Compensation Systems:Performance-BasedPerformance-Based
4. Paper and pencil4. Paper and pencil
5. Cumulative points5. Cumulative points
6. Profit center approach6. Profit center approach
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Compensation Systems:Compensation Systems:Performance-BasedPerformance-Based
7. MP decides7. MP decides
8. Compensation committee8. Compensation committee
9. All partners meet to decide9. All partners meet to decide
10. Combination of some of the above10. Combination of some of the above
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Partner Compensation SystemsPartner Compensation Systems2 2
PtrsPtrs3-4 3-4
PtrsPtrs5-7 5-7
PtrsPtrs8-12 8-12 PtrsPtrs
13+ 13+ PtrsPtrs
20112011
TotalTotal
Comp CommitteeComp Committee 0%0% 19%19% 23%23% 54%54% 70%70% 32%
FormulaFormula 23%23% 36%36% 36%36% 29%29% 11%11% 30%
Paper & PencilPaper & Pencil 3%3% 4%4% 5%5% 2%2% 2%2% 3%
Ownership PctOwnership Pct 10%10% 4%4% 6%6% 2%2% 8%8% 5%
MP DecidesMP Decides 12%12% 11%11% 12%12% 6%6% 9%9% 10%
Pay EqualPay Equal 32%32% 6%6% 4%4% 4%4% 0%0% 7%
All DecideAll Decide 20%20% 20%20% 14%14% 3%3% 0%0% 13%
OpenOpen 98%98% 82%82% 81%81% 65%65% 49%49% 77%
ClosedClosed 2%2% 18%18% 19%19% 35%35% 51%51% 23%
2012 Rosenberg MAP Survey2012 Rosenberg MAP Survey
MVP
2012 Rosenberg MAP Survey
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Partner Compensation SystemsPartner Compensation SystemsChanges in Past 4 yearsChanges in Past 4 years
5-7 5-7 PartnersPartners
8-12 8-12 PartnersPartners
13+ 13+ PartnersPartners
20112011 20052005 20120111
20020055
20112011 20052005
Comp Comp CommitteeCommittee
23%23% 19%19% 54%54% 39%39% 70%70% 58%58%
FormulaFormula36%36% 47%47% 29%29% 39%39% 11%11% 38%38%
Per 2012 Rosenberg MAP Survey THEROSENBERG ASSOCIATES LTD.www.rosenbergassoc.com
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Have any firms listening today Have any firms listening today changedchanged their compensation system their compensation system
in recent years?in recent years?
If yes, If yes, whywhy did you change? did you change?WhatWhat did you change? did you change?
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Partner Comp Best PracticesPartner Comp Best Practices
Best Practice Smaller Firms Larger Firms
1. Should be performance based.
Common but not always.
Performance=metrics
Always.
Performance=metrics plus other factors
2. Practice development plays a big role.
Origination is king. Important but other factors have a role.
3. Multi-tier system:•Int on capital (5%)•Base (60-80%)•Bonus (10-30%)
• Interest less common• Base often a draw• Bonus trues up final
number
• Interest more common• More likely for base &
bonus to be separate
4. Comp linked to strategic plan.
Rare More common
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Partner Comp Best PracticesPartner 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.
• Production stats• Goals• Performed role well• Live core values• Intangibles
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
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Partner Comp Best PracticesPartner Comp Best PracticesBest Practice Smaller Firms Larger Firms
9. How comp committee functions
Jury or Congress Management
10. Communication from CC to partners:•Onset of new year•Monitor during year•End of year
Very little 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
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Recent Significant TrendsRecent Significant TrendsIn Partner Compensation TechniquesIn Partner Compensation Techniques
1.1. More comp committees; fewer formulasMore comp committees; fewer formulas2.2. Link with strategic planningLink with strategic planning3.3. IntangiblesIntangibles4.4. TeamworkTeamwork5.5. Less emphasis on book of businessLess emphasis on book of business6.6. 7.7. 8.8.
Q
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QUESTION FOR LISTENERSQUESTION FOR LISTENERS
Have any firms recently Have any firms recently reducedreduced the the weighting of weighting of BOOK OF BUSINESSBOOK OF BUSINESS in in their compensation systems?their compensation systems?
WHY did you do it?WHY did you do it?
HOW did you do?HOW did you do?
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Recent Significant TrendsRecent Significant TrendsIn Partner Compensation TechniquesIn Partner Compensation Techniques
1.1. More comp committees; fewer formulasMore comp committees; fewer formulas2.2. Link with strategic planningLink with strategic planning3.3. IntangiblesIntangibles4.4. TeamworkTeamwork5.5. Less emphasis on book of businessLess emphasis on book of business6.6. Less emphasis on billable hoursLess emphasis on billable hours7.7. Generous to new partnersGenerous to new partners8.8. Closed vs. open (though most still open)Closed vs. open (though most still open)
MVP
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Drill down onDrill down on2 most common systems2 most common systems
• FormulasFormulas• Compensation CommitteeCompensation Committee
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Formula ComplicationsFormula Complications
Inherited Inherited wealthwealth
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Formula ComplicationsFormula Complications
HoardingHoarding
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Formula ComplicationsFormula Complications
Recognition of technical Recognition of technical specialtiesspecialties::
TaxTax A&A quality controlA&A quality control
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Formula ComplicationsFormula Complications
Which criterion is Which criterion is most important?most important?
Who is to say?Who is to say?
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Formula ComplicationsFormula Complications
How to value How to value management management
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Formula ComplicationsFormula Complications
How to recognize How to recognize intangible contributionsintangible contributions
How long we get credit How long we get credit for originationfor origination
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Formula ComplicationsFormula Complications
Partners with lower billing rates or Partners with lower billing rates or who head up non - profit areawho head up non - profit area
Client on one partner’s book when Client on one partner’s book when another really manages the clientanother really manages the client
““I” vs “WE”I” vs “WE”Q
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QUESTION TO LISTENERSQUESTION TO LISTENERS
For those who use a For those who use a formulaformula system… system…
……How do you avoid How do you avoid the inherent the inherent problems in formula problems in formula methods?methods?
HoardingHoarding
Excessive comp to Excessive comp to
those that those that
inheritedinherited their their
wealthwealth
Doesn’t value Doesn’t value
intangiblesintangibles
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3 Formulas That Can Work3 Formulas That Can WorkReasonably WellReasonably Well
1.1. 20/50 20/50
2.2. Finder/Minder/Grinder Finder/Minder/Grinder
3.3. Formulas for both metrics and intangiblesFormulas for both metrics and intangibles
Carve-outs for interest, mgmt & bonusCarve-outs for interest, mgmt & bonus
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#1 - 20/50 Method#1 - 20/50 Method
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
Defined: 20% x client base50% x billable dollars (hours x rate x realization)
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#2 - Finder Minder Grinder#2 - Finder Minder Grinder
Finder – who brings it inFinder – who brings it in
Minder – manages the client relationship Minder – manages the client relationship ANDAND the the engagementengagement
Grinder – doing billable workGrinder – doing billable work
The challenge is coming up with the weighting:The challenge is coming up with the weighting: 1/3 – 1/3 – 1/31/3 – 1/3 – 1/3 35-45-2035-45-20 Other?Other?
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#3 - Another formula system I’ve seen#3 - Another formula system I’ve seen
OVERALL SYSTEMOVERALL SYSTEM INTANGIBLES BALLOTINTANGIBLES BALLOT
LeadershipLeadership 5 4 3 2 1 5 4 3 2 1
Mentoring staffMentoring staff 5 4 3 2 15 4 3 2 1
Pract developmentPract development5 4 3 2 15 4 3 2 1
Sharing clientsSharing clients 5 4 3 2 15 4 3 2 1
TeamworkTeamwork 5 4 3 2 15 4 3 2 1
Good citizenshipGood citizenship 5 4 3 2 15 4 3 2 1
Expertise & techn skillsExpertise & techn skills 5 4 3 2 15 4 3 2 1
Etc.Etc. 5 4 3 2 15 4 3 2 1
Etc.Etc. 5 4 3 2 15 4 3 2 1
TotalTotal
Interest on capital
Production measures
Mgmt stipends
Intangibles-paper-pencil
Incentive bonus
Mgmt’s discretion
Total
?%
?%
?%
?%
?%
?%
100%
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Comp Committee:Comp Committee:Why Firms Use ItWhy Firms Use It
Formulas have big flawsFormulas have big flaws Balances rewards between Balances rewards between
production and intangiblesproduction and intangibles MP doesn’t want sole responsibilityMP doesn’t want sole responsibility Partners won’t give sole power to MP Partners won’t give sole power to MP
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Compensation Compensation CommitteeCommittee
Keys To SuccessKeys To Success
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Comp Committee:Comp Committee:Keys to SuccessKeys to Success
1.1. IF THE PEOPLE IF THE PEOPLE BEING JUDGED BEING JUDGED DON’T TRUST THE DON’T TRUST THE JUDGES, THE JUDGES, THE SYSTEM WON’T SYSTEM WON’T WORK.WORK.
PERIOD.PERIOD.
MVP
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Compensation CommitteeCompensation CommitteeKeys To SuccessKeys To Success
2.Make-Up of Committee:2.Make-Up of Committee: SmallSmall MP is permanent memberMP is permanent member Voted or appointed (ideally, CC Voted or appointed (ideally, CC
= management, not jury or Congress)= management, not jury or Congress) All members must be credibleAll members must be credible Not everyone gets a turnNot everyone gets a turn
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Compensation CommitteeCompensation CommitteeKeys To SuccessKeys To Success
3. 3. CC has full mandate to decide methods, CC has full mandate to decide methods, techniques, values, weighting, size of tiers, etc.techniques, values, weighting, size of tiers, etc.
4. 4. Link of comp to strategic plan and vision. Link of comp to strategic plan and vision. Partners do what the firm Partners do what the firm needsneeds them to do. them to do.
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Comp Committee:Comp Committee:Keys to SuccessKeys to Success
LeadershipLeadership People skills and People skills and
developmentdevelopment Practice Practice
developmentdevelopment Client serviceClient service
Client transitionClient transition Traditional Traditional
production production measures measures
TeamworkTeamwork Good citizenshipGood citizenship
MVP
Q
5. Performance Criteria
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QUESTION FOR LISTENERSQUESTION FOR LISTENERS
Firms certainly use Firms certainly use OTHER criteria to OTHER criteria to evaluate partners evaluate partners than these listed. than these listed.
What do YOU use What do YOU use that I missed?that I missed?
Keep it high level.Keep it high level.
1.1. LeadershipLeadership
2.2. People skillsPeople skills
3.3. Pract. developmentPract. development
4.4. Client serviceClient service
5.5. Client transitionClient transition
6.6. Traditional productionTraditional production
7.7. TeamworkTeamwork
8.8. Good citizenshipGood citizenship
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Compensation Committee:Compensation Committee:Keys to SuccessKeys to Success
66. . Incentive bonus or Final Year-End Distribution? Incentive bonus or Final Year-End Distribution?
INCENTIVE INCENTIVE
BONUSBONUS
Separate criteria from Separate criteria from basebase
Base is a “salary”Base is a “salary”
FINAL FINAL
DISTRIBUTIONDISTRIBUTION
Same or similar criteria Same or similar criteria as the baseas the base
Base is really a drawBase is really a draw
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Incentive Bonus:Incentive Bonus:Major FactorsMajor Factors
1.1. What did partner do to enable the What did partner do to enable the firm to have a “good year?”firm to have a “good year?”
2.2. Exceeding Exceeding productionproduction goals goals3.3. AchievingAchieving qualitativequalitative goals goals4.4. IntangiblesIntangibles5.5. 6.6.
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Examples of IntangiblesExamples of Intangibles
1.1. Mgmt/leadershipMgmt/leadership
2.2. LeveragingLeveraging
3.3. Staff mentoringStaff mentoring
4.4. TrainingTraining
5.5. TeamworkTeamwork
6.6. Be a good partner; Be a good partner; no Lone Rangersno Lone Rangers
7.7. Manage clients on Manage clients on others’ “books”others’ “books”
8.8. Cross-sellingCross-selling
9.9. Institutionalize clientsInstitutionalize clients
10.10. Be “go-to” person…Be “go-to” person…
11.11. Back-up to partnersBack-up to partners
12.12. Finds work for staffFinds work for staff
13.13. Good corp citizenGood corp citizen
14.14. Always learning; Always learning; never coastingnever coasting
15.15. Communication skillsCommunication skills
16.16. Always willing to help Always willing to help othersothers
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Incentive Bonus:Incentive Bonus:Major FactorsMajor Factors
1.1. What did partner do to enable the What did partner do to enable the firm to have a “good year?”firm to have a “good year?”
2.2. Exceeding Exceeding productionproduction goals goals3.3. AchievingAchieving qualitativequalitative goals goals4.4. IntangiblesIntangibles5.5. Hitting home runsHitting home runs6.6. Partner performance evaluationsPartner performance evaluations
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Compensation Committee:Compensation Committee:Keys to SuccessKeys to Success
77. Sincere effort by CC to review all pertinent . Sincere effort by CC to review all pertinent information. No “gut feels.”information. No “gut feels.”
1.1. Production statisticsProduction statistics
2.2. Achievement of goalsAchievement of goals
3.3. Input from MP, PICs, dept. heads Input from MP, PICs, dept. heads
4.4. Partner evaluationsPartner evaluations
5.5. Upward evaluation by the staffUpward evaluation by the staff
6.6. Self-evaluationsSelf-evaluations
7.7. Paper and pencil (non-binding)Paper and pencil (non-binding)
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Compensation Committee:Compensation Committee:Keys to SuccessKeys to Success
8. 8. Communication at 3 critical points:Communication at 3 critical points:
a.a. Crystal clear on rules of game Crystal clear on rules of game before it is played.before it is played.
b.b. Monitor progress.Monitor progress.
c. End of year: “Judgments explained are more c. End of year: “Judgments explained are more readily accepted than those that are not. readily accepted than those that are not.
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Compensation Committee:Compensation Committee:Keys to SuccessKeys to Success
10.10.Putting numbers next to names. Resist reverting to Putting numbers next to names. Resist reverting to formulas.formulas.
11.11.CC makes 2 decisions: bonus for this year and bases for CC makes 2 decisions: bonus for this year and bases for next year.next year.
12.12.Tax season clash with CC timetable.Tax season clash with CC timetable.
13.13. CC decisions final. No appeals. No votes.CC decisions final. No appeals. No votes.
14.14. Closed vs. open.Closed vs. open.
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Closed vs.Closed vs. Open Systems Open Systems
““If people are concerned about their If people are concerned about their absolute level of compensation, then they absolute level of compensation, then they cancan be satisfied. However, if their focus is be satisfied. However, if their focus is on relative standing, then they can on relative standing, then they can nevernever be satisfied.”be satisfied.”
Andrew GroveAndrew Grove
Chairman of the BoardChairman of the Board
Intel Intel
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Open Vs. Closed SystemOpen Vs. Closed System
OPENOPEN
Partners feel like “real” Partners feel like “real” partnerspartners
Avoids image of Avoids image of “smoke-filled room”“smoke-filled room”
See how you stack upSee how you stack up
Tough to take it awayTough to take it away
CLOSEDCLOSED
Andy Grove quoteAndy Grove quote
CC less likely to be CC less likely to be influenced by how influenced by how they think partners they think partners will reactwill react
Reduces unhealthy Reduces unhealthy competitioncompetition
Q
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In the last few years, have any firms In the last few years, have any firms moved from open to closed?moved from open to closed?
How well has it worked?How well has it worked?Please key in your Please key in your
response to me, response to me, now.now.
QTHEROSENBERG ASSOCIATES LTD.www.rosenbergassoc.com
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How to use a partner comp system to get How to use a partner comp system to get partners to do what the firm partners to do what the firm needsneeds them to do them to do
1.1.Create and follow a strategic plan.Create and follow a strategic plan.
2.2.Written roles & expectations for each partner.Written roles & expectations for each partner.
3.3.Bring down “billing book” from its pedestal.Bring down “billing book” from its pedestal.
4.4.Differentiate between origination & billing resp.Differentiate between origination & billing resp.
5.5.Adopt the compensation committee system.Adopt the compensation committee system.
6.6.Intangibles must play an important role in comp. Intangibles must play an important role in comp.
7.7.Incentive bonus links all of the above.Incentive bonus links all of the above.
8.8.MP should be able to impact bonus.MP should be able to impact bonus.
9.9.Communication. Communication. Communication. Communication.
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There are several areas There are several areas where there STILL is where there STILL is
controversycontroversy
Sometimes, getting partners Sometimes, getting partners to agree on things is like to agree on things is like
herding cats.herding cats.
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Areas where there STILL is Areas where there STILL is controversycontroversy
1.1. Partner charge hoursPartner charge hours2.2. Should business origination always Should business origination always
trump everything else?trump everything else?3.3. Interest on capitalInterest on capital4.4. Bonus vs. year-end distributionBonus vs. year-end distribution
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Pearls of WisdomPearls of Wisdom
““If you’re weak at If you’re weak at client service and client service and good citizenship, good citizenship, you flunk and you flunk and you’re out.”you’re out.”
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Pearls of WisdomPearls of Wisdom
““Don’t be a pig Don’t be a pig
and don’t do and don’t do
something stupid.”something stupid.”
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Pearls of WisdomPearls of Wisdom
““If you’re a jerk, If you’re a jerk,
go find another go find another home.”home.”
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Q & A
Phone: [email protected]
http://blog.rosenbergassoc.com/
Marc Rosenberg, CPA
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:
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The Rosenberg AssociatesThe Rosenberg Associates
1000 Skokie Blvd. Suite 5551000 Skokie Blvd. Suite 555
Wilmette, IL 60091Wilmette, IL 60091
Phone: 847-251-7100Phone: 847-251-7100
Fax: 847-251-4622Fax: 847-251-4622
[email protected]@rosenbergassoc.com