1. THE SECRETS OF GREAT PARTNER COMPENSATION SYSTEMS PRESENTED BY: MARC ROSENBERG, CPA

2. The Rosenberg Associates Marc Rosenberg, CPA President Consultant, author and speaker to the CPA profession Based in Chicago Over 700 client firms from coast to coast Top 100 Most Influential Person in Accounting Profession – Accounting Today - - 8 consecutive years 24 years consulting to firms

3. The Rosenberg Associates Rosenberg is active with CPA firms: Facilitate retreats Facilitate retreats Partner compensation & retirement Partner compensation & retirement Succession planning Succession planning Mergers Mergers Strategic planning Strategic planning Practice management reviews Practice management reviews Partner relations and conflict Partner relations and conflict Upward evaluation surveys Upward evaluation surveys

4. Titles 1. How to Bring in New Partners 2. Negotiating CPA Firm Mergers 3. Operating a Comp Committee 4. What Really Makes a CPA Firm Profitable? 5. Guide to Planning the Firm Retreat 6. Effective Partner Relations and Communication 7. Succession Planning 8. Strategic Planning and Goal-Setting 9. Firm Management & Governance Also known as “white papers” Also known as “white papers” Our proprietary consulting methods, handouts, checklists and intellectual capital are captured in each of these monographs Our proprietary consulting methods, handouts, checklists and intellectual capital are captured in each of these monographs New Coming Soon The Rosenberg Associates

5. The Rosenberg MAP Survey – “Generally accepted as the barometer for CPA firm practice management” according to Accounting Today 14 th Year!

6. The Rosenberg Associates Where Marc goes in his free time

7. The Rosenberg Associates Where Marc goes in his free time MVP

8. Final Groundrule I take questions during the presentation The Rosenberg Associates

10. Compensation Systems 1. Equal 2. Ownership percentage Not performance-based

11. The Rosenberg Associates Compensation Systems: Performance-Based 3. Formulas billings x 38.743% ÷ √billable hours x A/R² - (cash receipts on Thursdays) ÷ (founding partner’s birthday) + billing rate x (1.732 x realization rate) + √IPP ≠ 50.9 ∏∑∑ book of business - ∫ gross fees ÷ 0.00

12. The Rosenberg Associates Compensation Systems 4. Paper and pencil 5. Cumulative points 6. Profit center approach

13. The Rosenberg Associates Compensation Systems 7. MP decision 8. Compensation committee 9. All partners meet to decide 10. Combination of some of the above

14. Partner Compensation Systems 2Ptrs3-4Ptrs5-7Ptrs 8-12 Ptrs 13+ Ptrs 2010Total Comp Committee 5%13%24%49%67%29% Formula27%38%32%33%11%31% Paper & Pencil 2%4%6%1%2%3% Ownership Pct 5%3%7%0%9%5% MP Decides 8%11%11%8%11%10% Pay Equal 33%6%4%5%0%7% All Decide 20%25%16%4%0%15% Open88%83%81%76%46%76% Closed12%17%19%24%54%24% 2011 Rosenberg MAP Survey MVP The Rosenberg Associates

15. Partner Compensation Systems Changes in Past 5 years 5-7 Partners 8-12 Partners 13+ Partners 201020052010200520102005 Comp Committee 24%19%49%39%67%58% Formula 32%47%33%39%11%38% All other systems 44%34%18%22%22%4% Per 2011 Rosenberg MAP Survey The Rosenberg Associates

16. Partner Comp Best Practices Best PracticeSmaller FirmsLarger 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. RareMore common The Rosenberg Associates

17. Partner Comp Best Practices Best PracticeSmaller FirmsLarger 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 The Rosenberg Associates

18. Partner Comp Best Practices Best PracticeSmaller FirmsLarger Firms 9. How comp committee functions Jury or CongressManagement 10. Communication from CC to partners: Onset of new year Monitor during year End of year Very littleMore common but not great 11. Ptr evals and goal setting used to evaluate partners Very rareMore common 12. Ptr comp used to “manage” partners Near-total reliance; no other method Only one of several techniques 13. Open vs. closedAlmost all openOpen more common but closed on the rise The Rosenberg Associates

19. Recent Significant Trends In Partner Compensation Techniques 1. More comp committees; fewer formulas 2. Link with strategic planning 3. Intangibles 4. Teamwork 5. Less emphasis on book of business 6. 6. 7. 7. 8. 8. Q

20. QUESTION FOR LISTENERS Have any firms recently reduced the weighting of BOOK OF BUSINESS in their compensation systems? WHY did you do it? HOW did you do? The Rosenberg Associates

21. Recent Significant Trends In Partner Compensation Techniques 1. More comp committees; fewer formulas 2. Link with strategic planning 3. Intangibles 4. Teamwork 5. Less emphasis on book of business 6. Less emphasis on billable hours 7. Generous to new partners 8. Closed vs. open (though most still open) MVP

22. Drill down on 2 most common systems Formulas Formulas Compensation Committee Compensation Committee The Rosenberg Associates

23. Formula Complications Inherited wealth

24. The Rosenberg Associates Formula Complications Hoarding Hoarding

25. The Rosenberg Associates Formula Complications Recognition of technical specialties : Recognition of technical specialties : Tax Tax A&A quality control A&A quality control

26. The Rosenberg Associates Formula Complications Which criterion is most important? Who is to say?

27. The Rosenberg Associates Formula Complications How to value management How to value management

28. The Rosenberg Associates Formula Complications How to recognize intangible contributions How to recognize intangible contributions How long we get credit for origination How long we get credit for origination

29. The Rosenberg Associates Formula Complications Partners with lower billing rates or who head up non - profit area Partners with lower billing rates or who head up non - profit area Client on one partner’s book when another really manages the client Client on one partner’s book when another really manages the client “I” vs “WE” “I” vs “WE” Q

30. QUESTION TO LISTENERS For those who use a formula system… …How do you avoid the inherent problems in formula methods? Hoarding Hoarding Inherited wealth Inherited wealth Doesn’t value intangibles Doesn’t value intangibles Doesn’t value A&A and tax experts Doesn’t value A&A and tax experts Encourages “I” vs. “WE.” Encourages “I” vs. “WE.” The Rosenberg Associates

31. 3 Formulas That Can Work Reasonably Well 1. 20/50 2. Finder/Minder/Grinder 3. Formulas for both metrics and intangibles Carve-outs for interest, mgmt & bonus

32. #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 The Rosenberg Associates Defined:20% x client base 50% x billable dollars (hours x rate x realization)

33. The Rosenberg Associates #2 - Finder Minder Grinder Finder – who brings it in Finder – who brings it in Minder – manages the client relationship AND the engagement Minder – manages the client relationship AND the engagement Grinder – doing billable work Grinder – doing billable work The challenge is coming up with the weighting: 1/3 – 1/3 – 1/3 1/3 – 1/3 – 1/3 35-45-20 35-45-20 Other? Other?

34. The Rosenberg Associates #3 - Another formula system I’ve seen OVERALL SYSTEM OVERALL SYSTEM INTANGIBLES BALLOT Leadership 5 4 3 2 1 Mentoring staff5 4 3 2 1 Pract development5 4 3 2 1 Sharing clients5 4 3 2 1 Teamwork5 4 3 2 1 Good citizenship5 4 3 2 1 Expertise & techn skills5 4 3 2 1 Etc.5 4 3 2 1 Total Total Interest on capital Production measures Mgmt stipends Intangibles-paper-pencil Incentive bonus Mgmt’s discretion Total ?% 100%

35. The Rosenberg Associates Comp Committee: Why Firms Use It Formulas have big flaws Formulas have big flaws Balances rewards between production and intangibles Balances rewards between production and intangibles MP doesn’t want sole responsibility MP doesn’t want sole responsibility Partners won’t give sole power to MP Partners won’t give sole power to MP

36. Compensation Committee Keys To Success The Rosenberg Associates

37. Comp Committee: Keys to Success 1.IF THE PEOPLE BEING JUDGED DON’T TRUST THE JUDGES, THE SYSTEM WON’T WORK. PERIOD. MVP

38. The Rosenberg Associates Compensation Committee Keys To Success 2.Make-Up of Committee: Small Small MP is permanent member MP is permanent member Voted or appointed (ideally, CC = management, not jury or Congress) Voted or appointed (ideally, CC = management, not jury or Congress) All members must be credible All members must be credible Not everyone gets a turn Not everyone gets a turn

39. Compensation Committee Keys To Success 3. CC has full mandate to decide methods, techniques, values, weighting, size of tiers, etc. 4. Link of comp to strategic plan and vision. Partners do what the firm needs them to do. The Rosenberg Associates

40. Comp Committee: Keys to Success Leadership Leadership People skills and development People skills and development Practice development Practice development Client service Client service Client transition Client transition Traditional production measures Traditional production measures Teamwork Teamwork Good citizenship Good citizenship The Rosenberg Associates MVP Q 5. Performance Criteria

41. QUESTION FOR LISTENERS Firms certainly use OTHER criteria to evaluate partners than these listed. What do YOU use that I missed? Keep it high level. 1. Leadership 2. People skills 3. Pract. development 4. Client service 5. Client transition 6. Traditional production 7. Teamwork 8. Good citizenship The Rosenberg Associates

42. Compensation Committee: Keys to Success 6. Incentive bonus or Final Year-End Distribution? INCENTIVEBONUS Separate criteria from base Separate criteria from base Base is a “salary” Base is a “salary”FINALDISTRIBUTION Same or similar criteria as the base Same or similar criteria as the base Base is really a draw Base is really a draw

43. The Rosenberg Associates Incentive Bonus: Major Factors 1. What did partner do to enable the firm to have a “good year?” 2. Exceeding production goals 3. Achieving qualitative goals 4. Intangibles 5. Hitting home runs 6. Partner performance evaluations

44. Compensation Committee: Keys to Success 7. Sincere effort by CC to review all pertinent information. No “gut feels.” 1. Production statistics 2. Achievement of goals 3. Input from MP, PICs, dept. heads 4. Partner evaluations 5. Upward evaluation by the staff 6. Self-evaluations 7. Paper and pencil (non-binding) The Rosenberg Associates

45. Compensation Committee: Keys to Success 8. Communication at 3 critical points: Crystal clear on rulesCrystal clear on rules of game before it is played. of game before it is played. Monitor progress duringMonitor progress during the year. the year. End of year: “Judgments explained are more readily accepted than those that are not.End of year: “Judgments explained are more readily accepted than those that are not. The Rosenberg Associates

46. Compensation Committee: Keys to Success 9. Putting numbers next to names. Resist reverting to formulas. 10. CC makes 2 decisions: bonus for this year and bases for next year. 11. Tax season clash with CC timetable. 12. Closed vs. open. 13. CC decisions final. No appeals. No votes. The Rosenberg Associates

47. Examples of Intangibles 1. Mgmt/leadership 2. Leveraging 3. Staff mentoring 4. Training 5. Teamwork 6. Be a good partner; no Lone Rangers 7. Manage clients on others’ “books” 8. Cross-selling 9. Institutionalize clients 10. Be “go-to” person… 11. Back-up to partners 12. Finds work for staff 13. Good corp citizen 14. Always learning; never coasting 15. Communication skills 16. Always willing to help others The Rosenberg Associates

48. Closed vs. Open Systems “If people are concerned about their absolute level of compensation, then they can be satisfied. However, if their focus is on relative standing, then they can never be satisfied.” Andrew Grove Chairman of the Board Intel

49. The Rosenberg Associates Open Vs. Closed System OPEN Partners feel like “real” partners Partners feel like “real” partners Avoids image of “smoke-filled room” Avoids image of “smoke-filled room” See how you stack up See how you stack up Tough to take it away Tough to take it away CLOSED CLOSED Andy Grove quote Andy Grove quote CC less likely to be influenced by how they think partners will react CC less likely to be influenced by how they think partners will react Reduces unhealthy competition Reduces unhealthy competition Q

50. QUESTION FOR LISTENERS Has anyone’s firm changed from OPEN to CLOSED? How did your partners react? Did the change work out well for you? The Rosenberg Associates

51. Using a partner comp system to get partners to do what the firm needs them to do 1. Create and follow a strategic plan. 2. Define role & expectations for each partner. 3. Bring down “billing book” from its pedestal. 4. Differentiate between origination & billing resp. 5. Adopt the compensation committee system. 6. Intangibles must play an important comp role. 7. Incentive bonus must link all of the above. 8. MP should be able to impact bonus. 9. Communication. Communication. The Rosenberg Associates

52. There are several areas where there STILL is controversy Sometimes, getting partners to agree on things is like herding cats. The Rosenberg Associates

53. Areas where there STILL is controversy 1. Partner charge hours 2. Should business origination always trump everything else? 3. Interest on capital 4. Bonus vs. year-end distribution

54. The Rosenberg Associates Pearls of Wisdom “If you’re weak at client service and good citizenship, you flunk and you’re out.”

55. The Rosenberg Associates Pearls of Wisdom “Don’t be a pig and don’t do something stupid.”

56. The Rosenberg Associates Pearls of Wisdom “If you’re a jerk, go find another home.”

57. The Rosenberg Associates Q & A Phone: 847-251-7100 marc@rosenbergassoc.com 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:

58. The Rosenberg Associates 1000 Skokie Blvd. Suite 555 Wilmette, IL 60091 Phone: 847-251-7100 Fax: 847-251-4622 marc@rosenbergassoc.com