1. PARTNER COMPENSATION FOR A NEW MILLENIUM 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 - - 7 consecutive years 22 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. The Rosenberg Associates The Rosenberg MAP Survey – Accounting Today calls it “generally accepted as the barometer for CPA firm practice management.” The Rosenberg MAP Survey – Accounting Today calls it “generally accepted as the barometer for CPA firm practice management.” The Management Catalyst – quarterly newsletter sent to 3,000 CPA firms nationwide, free of charge The Management Catalyst – quarterly newsletter sent to 3,000 CPA firms nationwide, free of charge

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

6. Watch for MVP Slides MVP

7. Final Groundrule I take questions during the presentation

8. The Rosenberg Associates Best Practices From Rosenberg 1. Performance - based 2. Practice development plays a meaningful role 3. Integrate with strategic planning, goal setting and performance evaluations

9. The Rosenberg Associates Best Practices 4. Teamwork rules: Partners do what the firm needs them to do 5. Multi - tier: Return on capital Return on capital Base Base Incentive bonus Incentive bonus

10. The Rosenberg Associates Best Practices 6. MP has more impact than other partners 7. Reward intangibles 8. Flexible

11. The Rosenberg Associates 9. Leadership vs. Management vs. Administration* Lead Identify challenges Identify challenges Focus people on challenges Focus people on challenges Build strong culture Build strong culture Finding new things Finding new things Guarantees firm’s future value Guarantees firm’s future value Worth MORE than your billing rate Manage Plan and implement Plan and implement Impact partner behavior Impact partner behavior Establish partner accountability Establish partner accountability P&L management P&L management Solve problems quickly Solve problems quickly Worth your billing rate Administer Focus is on the day to day Focus is on the day to day Monitor/report on results Monitor/report on results Operate systems Operate systems Policies and procedures Policies and procedures Support practice personnel Support practice personnel Worth LESS than your billing rate * Originally presented by Bob Bunting, modified by Rosenberg

12. The Rosenberg Associates Compensation Systems 1. Equal 2. 2. Not performance-based

13. The Rosenberg Associates Are All Partners Created Equal? AnnualFees High To Low Ratio Income / Partner # Ptrs/ Total > $10 million 3.2$435,00015/140 $6-10 million 2.6$369,0007/53 $4-6 million 2.0$363,0005/32 $2-4 million 1.8$272,0004/22 Highest paid partners out-earned lowest paid by 2.3 to 1 ratio (Firms over $2M). From 2009 Rosenberg MAP Survey

14. The Rosenberg Associates Compensation Systems 1. Equal 2. Ownership percentage Not performance-based

15. 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

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

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

18. Recap of Ptr Comp Systems Recap of Ptr Comp Systems SystemBest For:Greatest Advantage Pay equal Small firms Just getting started “Appears” to avoid arguments Ownership percentage No one NEVER a fair way to reward performance Formulas “Eat what you kill” firm and/or Low level of trust Natural appeal to CPAs Paper & pencil Firms that don’t like formulas but can’t make the leap to trusting one person or a committee What’s more fair than the collective wisdom of all the partners? MP decides Firms with a highly credible or dominating MP Credibility and fairness of MP Comp committee 8 or more partners Embraces performance- based comp, recognizes intangibles The Rosenberg Associates MVP

19. 6 Things To Be Taken Into Account in Allocating Income 1. Finder 2. Minder 3. Grinder 4. Capital invested 5. Management (not administration) 6. Intangibles including goal setting, living core values, fulfilling your role The Rosenberg Associates MVP

20. Partner Compensation Systems 2Ptrs3-4Ptrs5-7Ptrs 8-12 Ptrs 13+ Ptrs 2009Total2008Total Comp Committee 5%10%25%49%73%32%29% Formula20%41%38%28%14%31%33% Paper & Pencil 0%3%5%1%3%3% Ownership Pct 5%7%4%3%2%4%5% MP Decides 18%11%11%12%3%11%8% Pay Equal 30%8%4%3%2%7%9% All Decide 22%20%13%4%3%12%13% Open93%83%81%69%50%75% Closed7%17%19%31%50%25% 2010 Rosenberg MAP Survey THE ROSENBERG ASSOCIATES LTD. www.rosenbergassoc.com MVP

21. Partner Compensation Systems Changes in Past 4 years 5-7 Partners 8-12 Partners 13+ Partners 200920072005200920072005200920072005 Comp Committee 25%21%19%49%45%39%73%72%58% Formula 38%40%47%28%33%39%14%19%38% All other systems 37%39%34%23%22%22%13%9%4% Per 2010 Rosenberg MAP Survey

22. The Rosenberg Associates Formula Complications Inherited wealth

23. The Rosenberg Associates Formula Complications Hoarding Hoarding

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

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

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

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

28. The Rosenberg Associates Formula Complications Bring a partner along on a sales pitch

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”

30. The Rosenberg Associates 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

31. #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) * 2009 Rosenberg MAP Survey

32. 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?

33. 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%

34. The Rosenberg Associates 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.

35. The Rosenberg Associates The declining importance of “book of business” 4 Reasons 1. Stresses teamwork and the one- firm concept 2. Intangible factors must be considered also

36. The Rosenberg Associates The declining importance of “book of business” 3. Partners freely transferring clients to others 4. Institutionalizing clients; creating “multiple touch points”

37. The Rosenberg Associates 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

38. 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

39. The Rosenberg Associates Comp Committee: Keys to Success 1. IF THE PEOPLE BEING JUDGED DON’T TRUST THE JUDGES, THE SYSTEM WON’T WORK. PERIOD. PERIOD.

40. The Rosenberg Associates Comp Committee: Keys to Success 2. RULES GOVERNING THE DECISIONS MUST BE CONSISTENT AND WELL UNDERSTOOD; PARTNERS MUST UNDERSTAND WHAT BEHAVIORS AND RESULTS TRANSLATE THE MOST TO BIGGER REWARDS. THINGS MUST BE CLEAR THINGS MUST BE CLEAR

41. The Rosenberg Associates Comp Committee: Keys to Success 3. A SINCERE EFFORT MUST BE MADE BY THE JUDGES TO COLLECT ALL PERTINENT INFORMATION AND STUDY IT. DON’T ALLOCATE COMPENSATION BASED ON REPUTATION, INTUITION, PERCEPTION, ETC.

42. The Rosenberg Associates Comp Committee: Keys to Success 4. JUDGMENTS THAT ARE EXPLAINED AND COMMUNICATED ARE MORE READILY ACCEPTED THAN THOSE THAT ARE NOT. MVP

43. The Rosenberg Associates Make-Up of Committee Small Small MP is permanent member MP is permanent member Voted or appointed Voted or appointed All members must be credible All members must be credible Not everyone gets a turn Not everyone gets a turn

44. Data Reviewed by Committee 1. Partner evaluations 2. Self-evaluations 3. Upward evaluation by the staff 4. Achievement of goals 5. Production statistics 6. Input from MP, PICs, dept. heads 7. Paper and pencil (non-binding)

45. The Rosenberg Associates Comp Committee: Important Decisions 1. Determining the # of CC members 2. How long is a CC member’s term? 3. Should the CC be the same as or different from the MC/EC? 4. Who evaluates partners: CC or MC/EC? 5. Performance criteria: What will be looked at? What will be looked at? Will criteria be weighted or looked at subjectively? Will criteria be weighted or looked at subjectively?

46. The Rosenberg Associates Performance Criteria 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 Top 50 firms largely stay away from weighting one vs. the other. MVP

47. The Rosenberg Associates Comp Committee Operation: Important Decisions 6. How will CC communicate with each partner? 7. How the CC actually allocates the $$$: MP recommendations + group “tweaking”MP recommendations + group “tweaking” CC does a paper and pencil exercise, then tweaksCC does a paper and pencil exercise, then tweaks Some sort of ranking/performance gridSome sort of ranking/performance grid

48. The Rosenberg Associates Important Comp Committee Decisions 8. 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

49. 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

50. Examples of Intangibles Mentoring and development of staff Mentoring and development of staff Earning respect and credibility of personnel Earning respect and credibility of personnel A good delegator A good delegator A team player A team player Overall leadership Overall leadership Adheres to firm policies and rules Adheres to firm policies and rules

51. The Rosenberg Associates Strategic Planning and Core Values Partner Evaluation Partner Compensation The Convergence of 3 Aspects of Management MVP

52. The Rosenberg Associates Strategic Planning and Core Values Partner Evaluation Partner Compensation The Convergence of 3 Aspects of Management MVP

53. The Rosenberg Associates 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

54. 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 What do you think?

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

56. 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

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

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

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

60. The Rosenberg Associates QUESTIONS

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