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Reward & Compensation & Incentives:Pay-for-Performance
Human Capital Center Toolbox Series
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Reward & Compensation & Incentives: Pay-for-Performance 1
Table of Contents
1Set the Firms Mission, Vision and Core Values
1Create the Firms Strategic Plan
1Develop and Communicate
a Firm-Wide Compensation Philosophy
2Determine Desired Outcomes
o a New Compensation System
4Design New Compensation Systems/Plans
5Develop Win-Win Agreements
7Develop and Implement a Transition Plan
8Manage Perormance
8Review the Compensation System/Plan Annually
10Other Rewards and Recognition
What is the PCPS Human Capital Center Toolbox Series?
The Toolbox Series is designed to highlight the learning and tools available
in the Human Capital Center (HCC), including templates, action plans,
checklists and more. The HCC serves PCPS members by ocusing on stang
best practices and providing the resources to master and implement those
recommendations. Contributions to the Toolbox Series were made by the
AICPAs Specialized Communities, including the Personal Financial Planning,
Inormation Technology, Forensic and Valuation Services and PCPS
sections. Visit the 11 segments o the Human Capital Center at
pcps.aicpa.org/Resources/Human+Capital+Center/to discover more.
Reward & Compensation & Incentives:
Pay-for-Performance
Original content or the Reward, Compensation & Incentives section
o the PCPS Human Capital Center was provided by August Aquila and
Coral Rice, who are highly regarded consultants to the CPA proession,
especially in the area o owner and sta compensation.
Set the Firms Mission, Vision and Core Values
The rst step in designing a c ompensation plan is to determine your
rms purpose, uture and key ideals. Firms that have not completed
this step prior to addressing a new compensation model can reer to
the Strategy and Planning section o the PCPS Human Capital Center.
The rm should also develop a core value evaluation on which to
measure adherence to the rms core values. Reer to the Core Values
Survey Tool to learn more.
Create the Firms Strategic Plan
The Strategic Plan document helps all stakeholders understand how the
rm will accomplish its mission and vision and who will be responsible
or each goal. From here, you can learn how to best pay team members
based on perormance. For rms that do not have a Strategic Plan,
please reer to the Strategy and Planning section.
Develop and Communicate a Firm-WideCompensation Philosophy
Next its imperative that the rms mission, vision and values are
refected in its compensation philosophy. Furthermore, this philosophy
must be made available to team members and reerred to regularly.
The Sample Compensation Philosophy will help get you started with
this step.
This tool icon refers to Tools that are available
in the PCPS Human Capital Center.
http://pfp.aicpa.org/http://infotech.aicpa.org/http://fvs.aicpa.org/http://pcps.aicpa.org/http://pcps.aicpa.org/Resources/Human+Capital+Center/http://pcps.aicpa.org/Resources/Human+Capital+Center/http://pcps.aicpa.org/http://fvs.aicpa.org/http://infotech.aicpa.org/http://pfp.aicpa.org/ -
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pcps.aicpa.org/resources/human+capital+center2 Reward & Compensation & Incentives: Pay-for-Performance 3
Determine Desired Outcomesof a New Compensation System
An eective compensation plan outlines the newly implemented
changes and benets in the revised compensation system/plan.
The ollowing are some o the questions that must be answered
armatively to ensure a good plan how does your rm score?
Is the system air?
Have you involved those most aected by the plan?
Does everyone understand how it works?
Does it encourage everyone to do whats best or
the clients?
Does it reward or current production as well as
uture capacity?
Is the compensation system tied to the frms
strategic goals?
Does the system usually provide or predictability
in total compensation year-over-year?
Will the system keep the frm alive ater the retirement
o senior owners?
In addition, what other outcomes does the rm want rom a new or
re-designed compensation plan? Review the Desired Outcomes of
New Comp System Template to help you address these questions andconsider outcomes that are important to your rm. Every compensation
plan should be constructed to help the rm achieve its strategic goals
and to attract, reward and retain the right people. I the plan does not
accomplish these two objectives, it needs to be restructured.
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pcps.aicpa.org/resources/human+capital+center4 Reward & Compensation & Incentives: Pay-for-Performance 5
Design New Compensation Systems/Plans
Once you have a solid oundation, youre
ready to build the actual compensation
plan. Remember, todays workers
are generally loyal to themselves rst
and the rm second. Your athers
compensation plan wont work today.
The present workorce requires a very
dierent kind o compensation plan.
While rms will design dierent plans,
there are undamental principles to
which every plan should align. Consider
the ollowing:
Establish undamentals, like who will administer the plan, eligibility
requirements, tracking results, etc.
Ensure the plan is win-win-win or each o the three critical
stakeholders: clients, employees and shareholders.
Use satisers (which attract and retain) and motivators (which drive
people to improve perormance).
Get owners, employees, or both, involved in the design.
Balance rewards or results and eort.
Identiy measures, dene targets and track perormance. Check out
the Firm Competency Model and Core Values Survey Tool to help
measure success.
Create high trust between owners and employees. Low trust can
kill a compensation plan.
Avoid side or one-o agreements to prevent dierent classes
o citizens in your rm.
Recommit and re-engage everyone in the rst year. I there are
problems with the initial design, explore them and make the
necessary modications.
Budget or bonuses. A modest budget or bonuses is advisable.
I all owners and sta in a rm achieve their goals, the nancial
results should be there to support more signicant bonuses.
Communicate. Be sure to allocate sucient time to explain the
program, answer questions and allow individuals to see the
dierences between the current and past plans.
A best practice is to provide team members with a list o
Frequently Asked Questions in an eort to address questions,
concerns and transparency. Employ the Sample Frequently Asked
Questions Tool as the oundation or your rms list o FAQs.
Develop Win-Win Agreements
There is no single compensation plan that works or all rms; thereore,
it is necessary to develop an individual rm-based list o compensation
criteria. We suggest a list that includes activities that produce results
today, as well as activities that will build capacity or producing results
tomorrow.
At the beginning o each scal year, each sta member, together with
his or her manager or owner, should develop agreed-upon individual
perormance goals that align with the rms strategic goals usingsome type o goal-setting orm or template. Not only are goals dened
at the beginning o the year, but also measures and targets or success
or each goal are dened. The Perormance Management section o the
PCPS Human Capital Center oers tools and guidance on establishing
goals based on a Firm Competency Model.
See the Goal Category Checklists or sample goals (including
measures) and goal categories. Category weightings or the purpose
o computing year-end perormance ratings vary among rms and
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pcps.aicpa.org/resources/human+capital+center6 Reward & Compensation & Incentives: Pay-for-Performance 7
individual people. At the end o the year, use these measures to
determine the degree to which the employee or owner has achieved
each goal.
There are sample win-win agreements outlining goal categories, goals
and measures in the Tools sub section. These agreements can be as
simple or complex as desired. We strongly recommend starting with
a simple agreement, but note that each rm must develop unique and
dynamic win-win agreements based on its rms vision and strategic
initiatives.
The Sample Partner Win-Win Agreement includes the ollowing ve
sections:
Base Compensation
Over time, base compensation should become a lower percentage
o total compensation so that more compensation (at least 25% or
more) is at risk and based on current-year perormance.
Core Values
All partners are evaluated by peers and a number o employees on
how well they uphold the rms core values using the Core Values
Survey Tool.
Objective Performance Criteria
There are hundreds o objective production criteria on which a rm
can evaluate individuals and could include personal production,
book realization and business development.
Balanced Scorecard
Use this to measure goals that may not have immediate ties
to production, like developing new services, mentoring team
members, transerring business to another partner, etc.
Discretionary Bonus Allocation
Because not all people contribute equally, this bonus should ideally
be allocated based on extraordinary perormance and/or a special
and unique contribution(s).
Develop and Implement a Transition Plan
Team members must trust the measures and the measurement tools to
eel comortable with the new compensation plan. It is advisable to pay
the people based on the old plan, but show them what they would have
earned under the new plan. By using this method, you ensure:
The new plan creates alignment.
You are able to track measures and provide
quarterly reports.
Communication is timely and on target.
You are able to debug any problems.
Ater introducing the new plan, meet regularly and oten with
employees and owners to conrm people understand the system, as
well as the actions they must take to meet the stated goals. As you gain
experience with the new plan, ask yoursel the ollowing questions:
Are we seeing the right behaviors rom all our
team members?
Is our overall productivity improving?
Is owner and employee morale improving?
Are we on track to achieve our goals?
Are we gaining alignment with key
stakeholders employees, clients
and owners?
To assist in communicating the timetable or implementation and to
answer questions employees naturally have about the new plan, we
have included the Sample PFP Calendar of Events and the Sample
Frequently Asked Question documents, respectively.
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pcps.aicpa.org/resources/human+capital+center8 Reward & Compensation & Incentives: Pay-for-Performance 9
Sample Win-Win Agreement tools
are provided to demonstrate
examples of how firms can develop
their own unique and dynamic
individual compensation contracts.
Manage Performance
Managing perormance is not something done only at year end;
workers must know they are being held accountable. They also must
hold each other accountable or their perormance throughout the year.
Bruce Tulgan, author o FAST Feedback, suggests that oten the
dierence between a low-perorming team and a high-perorming team
lies in a coaching-style manager who knows how to keep individual
perormers ocused and motivated day ater day. Tulgan believes
employees should receive FAST eedback: Frequent, Accurate, Specifc
and Timely. These are the our qualities employees most oten ascribe
to evaluations rom the best manager they ever had, but also to
responses they need but dont get rom most managers. Employees
should receive both positive and constructive eedback.
The PCPS Human Capital Centers Perormance Management section
oers additional guidance on managing perormance. Reer to the
Feedback and Eectively Managing Perormance Guideor specic tips
and direction or your team members.
Review the CompensationSystem/Plan Annually
Ater implementing a pay-or-perormance compensation system, the
rm should assess its plan annually to determine whether it is helping
the rm meet strategic objectives.
This means analyzing i the rm accomplished the desired outcomes,
i people are engaged in necessary behaviors or accomplishing the
goals, and i there were faws in the system/plan that prevented people
rom doing what needed to be done. Accomplish this analysis by
surveying employee satisaction with the new plan, benchmarking and
updating, as necessary.
The PCPS/TSCPA National MAP Survey and the 2006 CPA Owner
Compensation Survey can assist you with the benchmarking analysis.
http://pcps.aicpa.org/NR/rdonlyres/40590704-623E-4DB8-8131-6671A444CE5A/0/Feedback_Effectively_Managing_Peformance.dochttp://pcps.aicpa.org/NR/rdonlyres/40590704-623E-4DB8-8131-6671A444CE5A/0/Feedback_Effectively_Managing_Peformance.doc -
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pcps.aicpa.org/resources/human+capital+center10 Reward & Compensation & Incentives: Pay-for-Performance 11
Other Rewards and Recognition
Non-Financial Rewards
Human beings like being recognized and acknowledged or a job well
done. Studies show that non-monetary awards can be as meaningul as
monetary ones. Consider doing the ollowing:
Providing lunch or meeting short-term goals
Closing early on Friday
Sharing git cards
Awarding frm dollars or frm products
and/or logo wear
Spotlighting the employee o the month
in an internal and/or external newsletter
Providing special parking privileges
Allowing extra paid time o
Hosting frm and/or department outings
Recognizing Tenure
While pay should not be tied to tenure, recognition should be. Long-
term, productive employees are key to every successul business,
but especially or accounting rms where client relationships are
paramount. A service award based on tenure is a way o saying
thanks to people who have contributed to the rms success. Some
examples include a rm pin, git certicates and individual time with
the managing partner at specic intervals.
Remember to make a big deal out o any and all promotions and service
awards. These milestones present great opportunities to remind team
members that they are part o a amily and that the rm is interested
in everyones personal growth. Building a sense o amily and
appreciation is an invaluable retention tool or any size rm.
Speaking o retention, visit the PCPS Top Talent Studybooklet and the
Employee Retention Guide to gather additional incentive ideas and best
practices.
Following the above ten steps can lead you and your rm to a
successul pay-or-perormance program that will better enable you to
attract and retain the best and brightest in the proession.
NOTE: The book Compensation as a Strategic Asset: A New Paradigm
was also written by August Aquila and Coral Rice. It is an impressive
guidebook to navigating the tricky subject o partner compensation. As
your rm progresses through the journey o implementing a pay-or-
perormance program, you might want to reer to this valuable tool.PCPS members can receive a discount when purchasing Compensation
as a Strategic Asset.
Visit aicpa.org/PCPS and become a member today. Youll enjoy
access to an array o tools and resources r elated to stang and
compensation issues. To nd out i your rm is already a member,
email [email protected].
https://pcps.aicpa.org/Admin/CSCLogin?ReturnURL=%2fResources%2fHuman%2bCapital%2bCenter%2fWork%2bLife%2band%2bRetention%2fPCPS%2bComplimentary%2bTop%2bTalent%2bStudy%2bBooklet.htmhttp://www.cpa2biz.com/AST/Main/CPA2BIZ_Primary/PracticeManagement/Staffing/PRDOVR~PC-090493/PC-090493.jsphttp://pcps.aicpa.org/http://aicpacommunities.org/http://aicpacommunities.org/http://pcps.aicpa.org/http://www.cpa2biz.com/AST/Main/CPA2BIZ_Primary/PracticeManagement/Staffing/PRDOVR~PC-090493/PC-090493.jsphttps://pcps.aicpa.org/Admin/CSCLogin?ReturnURL=%2fResources%2fHuman%2bCapital%2bCenter%2fWork%2bLife%2band%2bRetention%2fPCPS%2bComplimentary%2bTop%2bTalent%2bStudy%2bBooklet.htm -
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pcps.aicpa.org/resources/human+capital+center12
Access These Tools At aicpa.org/PCPS
Core Values Survey Tool
Sample Compensation Philosophy
Desired Outcomes o New Comp System Template
Sample Frequently Asked Questions
Goal Category Checklists
Sample Partner Win-Win Agreement
Sample Manager Win-Win Agreement
Sample PFP Calendar o Events
2006 Owner Compensation Survey
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