Performance-Based Compensation Systems for Owners
When I was a partner in a larger accounting firm, our firm owners met with a consultant to discuss an overhaul of our owner compensation system. We made several attempts to do the job on our own – after all, we are accountants. But what we discovered through our DIY efforts is the adage “a lawyer who represents himself has a fool for a client” applies to accountants as well.
What did we learn from the process? Performance-based compensation systems for owners are the way to go but the design and implementation process is difficult!
Aligning Individual Performance with Business Goals
If you are a business owner, you have likely attempted goal-setting for your employees over the years. You may have even paid out employee bonuses based on the achievement of team and individual goals. Assuming that you are measuring and rewarding the right things, these systems can drive success in your business.
But it is far easier to hold your employees accountable than it is to look in the mirror and make a candid assessment of your own job performance. One way to do that is to establish SMART goals for not only your team, but also for you and your ownership group. SMART goals are:
Here are a few likely outcomes of establishing a solid link between the achievement of SMART goals and rewards:
More focus on the practice goals
More questioning of the status quo pertaining to patients, vendors, employees and processes
More awareness of your own actions - time management, project management, employee coaching, patient communications, etc.
Promoting Greater Transparency and Fairness in the Compensation System
Our prior owner compensation system had three components:
A base salary that was the same for each owner,
Ownership percentage-based profit distributions,
And year-end performance bonuses allocated to each owner at the discretion of the firm’s compensation committee.
Our compensation system was old school, but it served us fairly well over the years. The drawbacks were obvious though. First, the system tilted heavily in favor of seniority. The older owners owned greater shares of the firm and thus commanded greater shares of the profit distributions, independent of performance.
Second, while the year-end performance bonus was used to right some wrongs of the ownership-based distributions, overall owner compensation suggested we placed a far greater value on age than performance.
Ultimately, we decided that by not adequately recognizing performance, our current system rewarded the status quo, and that needed to change.
Challenges of Making a Change
Performance-based compensation is a great tool for an organization that wants to achieve greater things; however, you will run into a few challenges transitioning from the old to the new. Here are a few of those challenges:
Agreeing on the performance measures
Most owners and employees will favor performance measures that line up with what they are good at. That is why establishing what is best for your practice needs to be a group exercise. The performance measures need to cover all aspects of practice performance. Examples include:
Participation in practice management and decision-making
Compliance with practice policies
Shifting compensation from one owner to another
Changing the compensation system will result in a re-allocation of the compensation pool, sometimes in dramatic ways. You may decide that a phase-in over a couple of years is necessary to keep the peace and ensure buy-in. Regardless of whether you go all-in or phase-in, adopting a new system requires clear communication with all owners.
In our firm, we each purchased our ownership shares; however, those shares were not equal. Although not necessary, we made the decision to equalize our ownership so that ownership had no influence on the allocation of owner compensation. In doing that, we had some owners buying and others selling to get to equal ownership. If this describes your situation, you will need to decide whether or not the practice will be the facilitator and financing agent for these ownership transfers.
Recognize, too, that owner compensation is not a “fix it and forget it” exercise. If something is not working as intended – for example, you chose a bad measurable – then hit the brakes and make a change. Once you work out the kinks, you will be set with a plan that lines up your rewards system with individual and practice goals.