Compensation based on fees collected can energize a firm

Incentives for Growth

W ould your staff members be more enthusiastic if they had the power to set their own salaries? One five-person Texas firm decided that staff would thrive under an incentive compensation system. At the same time the firm gives staff responsibility for their own pay levels, it also strives to assist clients in taking greater control over their own business futures.

The firm has used entrepreneurial spirit to create a new framework to alter the way it approaches client service and the kinds of services it performs. This innovative approach can serve as a model for firms seeking to help staff and clients expand business.

STAFF INCENTIVES
Austin-based Bargsley & Associates has a flat management structure. “We have two partners, two staff CPAs and a receptionist. The computers are the clerical staff,” says partner Tom Bargsley. The firm has always sought experienced staff accountants because its clients are mainly closely held businesses with limited staff themselves who are unwilling to take part in teaching junior accountants how to work with a client. “They want answers; they’re not interested in training,” says Bargsley. The staff CPAs — who have both been with the firm for five years — each once owned their own practices, but while they enjoyed working with clients, they disliked the administrative hassle of running a firm.

The firm gives the staff CPAs a percentage of fees collected because “we decided to give them unlimited opportunity for growth,” says Bargsley. “Each client is assigned a primary in-charge accountant, and that accountant gets substantial revenue for the management, care and feeding of the client.” Staff members “have an incentive to grow the client. Plus, we don’t have collection problems. It is a dynamic that has changed the way we work and the way we think about clients.” For example, staff members given this entrepreneurial opportunity are more likely to seek new clients as well as additional ways to serve existing clients. When they succeed at bringing in new business, it not only raises the staff member’s salary but also hikes the firm’s net income, since there are few overhead offsets to the added business.

The staff CPAs continue to receive benefits as before, but they do not have an established base pay; their entire salary is made up of incentive fees for the clients they handle. The CPAs, says Bargsley, love this system because “by removing the barrier of salary, we have also removed the limit to what they can make” — and salaries have increased in each of the five years the system has been used because of added business from both new and existing clients. “We have given them the opportunity to share in some of the firm’s cash flow if they take the responsibility.”

The staff members’ years of experience and background running their own firms have helped in the success of this innovation. For firms creating their own incentive compensation programs, Bargsley recommends working to develop entrepreneurial skills by offering the program on a portion of engagements. This slow beginning will help the firm and staff get used to the program and motivate staff members to take greater control over their salaries and assignments. The program can be rolled out across the firm or among a few firm members who already have exhibited entrepreneurial skills and can act as mentors, Bargsley suggests. The program can be as flexible as the firm chooses. If firm members want to cut back on hours because of personal reasons, they automatically receive lower salaries based on the fewer fees collected for the services they perform during their shortened hours. The system has helped hone the staff’s client selection skills, since they focus on businesses that are more likely to offer continuing challenges and service opportunities. Clients also value having high-level staff dedicated to their businesses.

“If we bring in new employees, we will start them with a salary and phase them into the program,” increasing the incentive portion of their pay as their responsibilities and familiarity with clients grow. Based on his experience, he would expect it to take up to two years to get up to a 100% incentive compensation system. Employees need to get used to working under the system and to develop a level of comfort with a seemingly unstable salary. When people hear about the program, “for a minute they have to think about it because they’re used to a salary safety net. But that safety net is really artificial, because if the firm doesn’t have work, the employees will be affected. Our approach is to learn to keep clients and make them value our services. This system gets staff members focused on that process. It gives them an incentive to go out and assist clients in attaining their goals rather than say, “I’m just doing my client work because I’m on salary.”

All four CPAs in the firm work together to become familiar with the others’ clients and offer ideas on serving them.” When a client has a problem, we all discuss it,” according to Bargsley. In addition, when a firm member with a special skill performs work for another member’s client, he or she is compensated for the hours spent. This compensation and the firm leaders’ emphasis on the team approach prevent staff members from feeling they own a particular client. “If I spend three hours performing a particular service for another CPA’s client, that new business may ultimately increase overall billings to the client,” Bargsley notes. As a result, “there are no turf battles.” When a staff member brings in a new client, he or she is offered the opportunity to take on the work. When the staff member doesn’t have the time or expertise to do so, the client is reassigned, and the person who recruited the client receives a percentage of the first billings for that account. In the future, however, all incentive payments go to the person ultimately managing that client’s work.

A STAKE IN THE ORGANIZATION
The firm launched the compensation program not only to energize staff but also to retain them. “We were trying to think of a way to keep good people and we decided to give them a stake in the organization,” Bargsley says. “When you have people who just sit at a desk doing work for a fixed salary, they get bored and start looking elsewhere to find something your firm can’t offer them.” His hope is that the power to grow a business will satisfy his staff members’ professional and financial aspirations.

It certainly has added to the firm’s bottom line, improving the ratio of net income to gross income in each year the system has been in use. When staff members have an incentive to use their creativity to seek new clients, that adds to the diversity of the firm’s clientele and to its business strength. “When you’re a small firm, it’s possible for clients to outgrow you,” Bargsley says, but that problem is offset when staff are constantly bring in new work.

STRATEGIC THINKING
While the firm provides many traditional services for the closely held businesses and professionals it serves, Bargsley also encourages clients to consider the direction they would like their businesses to take and their plans for getting there. “We ask them to think about their current business needs as well as their exit strategies,” he says. Although the firm’s primary focus remains traditional services, it is working hard to provide new services, such as the following:

Developing an exit strategy. In the entrepreneur-rich Austin area, many clients are approached for acquisition by large national companies. In a typical case, a small business owner might receive an attractive cash offer plus an employment contract. “If they’ve never been offered cash before, they tend to overreact,” Bargsley says. “They think, ‘I may never get this kind of opportunity again’ or ‘I’ve never had an offer this high.’ I always tell them to start by valuing the company and determining what their real goals are. We ask, ‘What’s important to you? What are your personal and business goals?’ We may find out they were really planning to pass the company on to family or employees or they worry about what will happen to key people after a sale.” Bargsley elicits responses, but he doesn’t try to influence them at this stage. “I can’t tell them to take a large offer if selling might put them in a situation in which they won’t be happy. Many times the profit is not the most important consideration.”

The next step is for the CPA firm to formulate a rough estimate of the company’s value, considering the worth of the whole and its separate parts, such as real estate and equipment. Then it’s time for the CPAs to analyze the results to help the owner determine whether the offer is adequate and matches the owner’s goals. “It may be clear they should take the offer. People are increasingly concerned about competition from national organizations in areas that were traditionally dominated by locally owned and operated businesses. But based on our analyses, we may work with the client to restructure the purchase plan or advise them not to sell to this buyer.”

In one case, after consulting with the CPA firm, a client not only was able to demand a higher amount for the operational part of his company but, based on the firm’s advice, he also negotiated to exclude real estate from the deal; it will now be sold separately. “He just didn’t know to ask” for those changes when the purchaser first approached him, Bargsley says, but the firm was able to apprise him of his options. “It’s not a lack of intelligence; it’s just not their background.”

In another situation, a client received an offer from a national organization but, after the CPA firm performed an analysis of the options, decided instead to participate in a rollup, or a merger of similar companies in different geographic locations. Becoming part of a smaller conglomerate gave the small business owners more control over their future and positioned them to go public someday, but at a much greater combined value, Bargsley says, because the new organization includes key territories in the industry. “Instead of being a dealer in their particular product in Austin alone, they were able to become part of a group covering all of South Texas, serving 3 million to 5 million people instead of 1 million. They’ve increased the value of the company by 50%. And the client is even happier with what he does and wants to remain independent.”

Small clients value these services because “they normally don’t have the skill set inside their businesses to look at all areas. They don’t have a $100,000 controller to call on; they call on us.” The firm has performed such business planning engagements for all kinds of businesses, including manufacturing, wholesale and retail and professional groups. “Many have waited too long to look at their exit strategies. Even if they won’t need one for 20 years, if they start thinking about it now, they’ll do a better job of making business decisions. We try to get them away from looking at the business simply as a way of making a living and focusing on how it will function once they’re gone.”

Analyzing credit needs and facilitating financing arrangements. This is a growing service area for the firm. “Although they may be perfectly creditworthy, clients sometimes wait until it’s too late in a process to get their financing, so we get them thinking about their near- and long-term goals so they can begin to consider their future financing needs. That way, before they approach a lender, we have analyzed the need, even surveyed banks to see which may be best, and we help them through the negotiation stage.” The firm also helps business owners consider the long view. “They tend to focus on the need of the moment — such as equipment expansion — vs. the entire need, like a credit line. This has become a good value-added service for clients.”

In order to provide this level of consulting, CPAs must stay up to speed with evolving business trends. To that end, Bargsley has initiated these steps:

1. More education. The firm is increasing its CPE standard to 80 hours a year. “Forty hours a year will help you keep up and get the basics, but you need more to understand client businesses,” Bargsley says.

2. Learning from clients and colleagues. The firm’s team approach to services gives all staff members exposures to many businesses and services. The firm also conducts regular surveys of clients, asking about their most pressing business issues and challenges, in order to create a database of knowledge about their concerns and to target areas for further education or research.

THE BIG PICTURE
When firms seek to give staff greater financial responsibility and to help clients gain more control over their businesses, the key is to look beyond day-to-day tasks and considerations to gain a broader understanding of business opportunities. Bargsley began exploring some of his new service opportunities after he cochaired the Texas delegation to the White House Conference on Small Business and noticed the many common challenges. “Most practitioners will do some business planning on an ad hoc basis, but we found it pays to concentrate on this area because there is a total service picture, much as in personal financial planning.” CPAs who adopt this approach may well find themselves rewarded with happier and more productive staff and more successful and grateful clients.