EXECUTIVE SUMMARY
| -
INCREASING THE PRODUCTIVE,
efficient, billable use of
each staff member’s time well into the 1,500 to
2,000 hour annual range is the key to a firm’s
bottom-line improvement.
-
ANY FIRM THAT BILLS AND COLLECTS
less than an average of 2.4 times base
salary for staff time should consider a plan
based on performance. The plan has three
components: a competitive base salary and, when
earned, a productivity bonus and a new business
bonus.
-
THE PRODUCTIVITY BONUS PLAN
provides an incentive to staff members
to boost billable time by working productively,
seeking additional assignments, spotting
opportunities for additional work with existing
clients and meeting the budget on fixed-fee
engagements.
-
A
NEW BUSINESS BONUS
equal to 10% to
20% of the first year’s fees from a new client,
paid as collected, can stimulate substantial
staff interest in practice development. The
bonus pays for itself roughly 20 times over—a
return on investment of 2,000%.
-
TO SUPPORT THE PRODUCTIVITY BONUS,
a firm needs only an additional
net-billed-fee summary/worksheet for each staff
member each firm fiscal year. It takes less
clerical effort than an overtime system does
because the calculations are made yearly rather
than monthly or weekly.
-
NO BONUS IS PAID when the
calculation produces a negative result. A firm
should pay the productivity bonus within 30 days
of the close of the fiscal year.
| ROBERT B.
SCOTT, Jr., CPA, is a professor of management at the
Gabelli School of Business at Roger Williams
University in Bristol, Rhode Island, and a practice
strategy and growth consultant. His e-mail address
is rbs@alpha.rwu.edu
. |
ush, you husky,” is meaningful encouragement
to sled dogs, but the rest of us need something more. Ask
managing partners which incentives best inspire strong staff
performance and opinions range across the board. Some
practitioners credit cash bonuses as motivators, and others
cite the effectiveness of flexible work arrangements,
lunchtime yoga classes and office concierges. Still, every
CPA knows the bottom-line profits of an accounting firm
depend on staff productivity times adequate billing
rates—and hard-working staff members who show initiative and
use time efficiently are the key. The typical sole
practitioner with more than 10 years’ experience,
earning $100,000 to $200,000 per year, will log an
average of 1,710 billable hours per year. Another
40 billable hours per year will push his or her
firm into the top 25% in profitability in its
class. Source: Texas Society of CPAs’
1999 MAP survey.
| The principle seems
simple, but profitability is more sensitive to variations in
these factors than many practitioners realize. Because staff
members ultimately make the call on how much effort to put
into their work, a carefully crafted bonus plan can improve
performance by linking staff efficiency to systematically
applied rewards. Using the approach described here, large
and small firms can attract, retain and motivate the
high-quality staff necessary for success in an intensely
competitive professional environment.
KEY ELEMENTS OF PROFIT PERFORMANCE
The formula for
increasing profits based on revenue from billable staff time
starts with the building block of the employee’s hourly
wage. A standard hourly billing rate is about .0018 times
the employee’s base annual salary, rounded up to the nearest
dollar. This yields a $90 per hour billing rate for a staff
member earning $50,000 per year ($50,000 X .0018 = $90),
consistent with most guidelines in the profession.
Operating statistics for a variety of small and midsize
CPA firms and data from the recent national MAP survey
published by the Texas Society of CPAs suggest that a
typical firm bills an average of approximately 1,400 hours
annually per staff member and collects 90% to 95% of that.
Expressed another way, the typical practitioner or small
firm bills and collects an average of roughly twice salary
and fringe benefits annually for each professional employee.
Out-of-pocket breakeven is approximately 1.2 times base
salary (because of fringe benefits) or 667 standard
hours—about $60,000 annually for a $50,000 per year
employee. In exhibit 1, below, collection (the
average percentage of standard fees collected for billed
time) is presented in units ranging from 100% (ideal) to 60%
and compared with a range of billable hours from 2,000 total
(ideal) to 1,000 (below average). At 1,400 billable hours
with 90% collection, the contribution margin generated by a
$50,000 per year staff member is $53,400 (after deducting
the $10,000 fringe benefit). Each additional 100 hours of
charged time (at 90% collection) generates $8,100 of
incremental margin.
Exhibit 1: Staff Contribution Margin
(in thousands) |
Calculations are based on a
$50,000 per year salary; $10,000 per
year in fringe benefits; and a $90 per
hour billing rate. |
| At fee
collection percentage
| Billable
hours | 100%
| 90%
| 80%
| 70%
| 60%
| 2,000
| $120
| $102.0
| $84.0
| $66.0
| $48.0
| 1,900
| 111
| 93.9
| 76.8
| 59.7
| 42.6
| 1,800
| 102
| 85.8
| 69.6
| 53.4
| 37.2
| 1,700
| 93
| 77.7
| 62.4
| 47.1
| 31.8
| 1,600
| 84
| 69.6
| 55.2
| 40.8
| 26.4
| 1,500
| 75
| 61.5
| 48.0
| 34.5
| 21.0
| 1,400
| 66
| 53.4
| 40.8
| 28.2
| 15.6
| 1,300
| 57
| 45.3
| 33.6
| 21.9
| 10.2
| 1,200
| 48
| 37.2
| 26.4
| 15.6
| 4.8
| 1,100
| 39
| 29.1
| 19.2
| 9.3
| (0.6)
| 1,000
| 30
| 21.0
| 12.0
| 3.0
| (6.0)
| |
Source: Robert B. Scott, Jr.
| |
At 1,400 hours and 90% collection, each percentage point
of improved collection yields another $1,260 of incremental
margin. The difference between 1,400 hours at 90% collection
(just above breakeven) and 1,800 hours at 97% is $43,740 of
additional margin—that’s profit—on one $50,000 staff member.
Increasing the productive, efficient, billable
use of each staff member’s time well into the 1,500 to
2,000 hour annual range is the key to a firm’s bottom-line
improvement. It is easier said than done, of course. In a
strong job market, salary buys compliance only with minimum
work standards, and employees can shrug off demands they
find excessive. Overtime pay rewards hours clocked—maybe
even inefficiency—not performance. Discretionary bonuses
often are arbitrary in nature and influenced by personal
factors; many employees resent them. There is a way to make
your staff care, though—by systematically linking their
extra effort to a cash reward.
PERFORMANCE-BASED COMPENSATION
Any firm that bills and
collects less than an average of 2.4 times base salary for
staff time should consider a plan based on performance. The
plan costs nothing unless a worker’s revenue exceeds that
worker’s cost plus a fair contribution to overhead and some
partnership profit. Bonuses are paid out of incremental
profits. The plan has three components: -
Competitive base salary.
-
Productivity bonus.
-
New business bonus. Each staff
member is paid a competitive base salary and, when earned, a
productivity bonus and/or a new business bonus. Here’s how
to mesh the elements of the plan.
Base salary. Make each staff
member’s base salary competitive with quality firms in the
practice area. Don’t make the mistake of trying to
substitute bonuses for base salary. Bonuses always should be
in addition to competitive salaries; otherwise, they don’t
offer staff members additional incentive. Continue to make
annual adjustments to base salary exactly as if there was no
bonus program.
Productivity bonus. Pay each staff
member an annual productivity bonus based on this simple
formula, applied to each staff member individually: net fees
billed for staff member’s time, minus staff member’s base
salary multiplied by 2.4, divided by two. It looks like
this—
Productivity bonus = | Net fees
billed – (2.4 X base salary) |
| 2 |
Here’s what it boils down to: A $50,000 per year staff
member whose billing rate is $90 per hour gets to keep half
of everything she generates over $120,000 ($60,000 equals
her salary plus fringe benefits; $60,000 is the firm’s). Two
thousand billable hours will bring in $180,000, of which
$60,000 is performance-based revenue. The productivity bonus
splits fees in excess of 2.4 times base salary with the
staff member on a 50/50 basis and earns her a $30,000
bonus—she gets half of the gravy (see exhibit 2, below).
Exhibit 2: Effort Times Hours Yields
Dollars |
Calculations are based on a
$50,000 per year salary; $10,000 per
year in fringe benefits; and a $90 per
hour billing rate. |
Net
fees | Standard
hours |
Bonus
| Bonus %
| Compensation**
| Contribution
|
Contribution %
| $72,000
| 800
| $0
| 0%
| $50,000
| $12,000
|
17%
| 90,000
| 1,000
| 0
| 0
| 50,000
| 30,000
|
33
| 108,000
| 1,200
| 0
| 0
| 50,000
| 48,000
|
44
| 126000
| 1,400
| 3,000
| 6
| 53,000
| 63,000
|
50
| 144,000
| 1,600
| 12,000
| 24
| 62,000
| 72,000
|
50
| 162,000
| 1,800
| 21,000
| 42
| 71,000
| 81,000
|
50
| 180,000
| 2,000
| 30,000
| 60
| 80,000
| 90,000
|
50
| 198,000
| 2,200
| 39,000
| 78
| 59,000
| 99,000
|
50
| |
*Based on hours at 100% collection.
**Does not include fringe benefits
(assumed to equal 20% of base salary) or
new business bonus. |
Source: Robert B. Scott, Jr.
| |
Exhibit 3, below, graphically illustrates productivity
bonus results at various levels of staff activity for an
individual staff member with a $50,000 base salary. The
revenue value of various levels of billable standard hours
is presented in amounts ranging from $50,000
(unsatisfactory) to $150,000 (good); and bonuses, bonus
percentages, compensation, contribution margin and
percentage contribution margin are depicted.
Exhibit 3:
Charting a Staff Member’s Enterprise Zone
|
Calculations are
based on a $50,000 per year salary;
$10,000 per year in fringe benefits; and
a $90 per hour billing rate.
|
Individual staff member
cost-volume-profit analysis
|
|
Source: Robert B. Scott, Jr.
| |
The plan pays nothing for average or slightly above
average performance, such as when the $50,000 per year
employee generates less than $120,000 in fee revenue for the
year—the equivalent of 1,333.33 standard hours at 100%
collection. However, above that level the bonus plan begins
to provide a powerful incentive to staff members to boost
billable time by working productively, seeking additional
assignments, spotting opportunities for additional work with
existing clients, meeting the budget on fixed-fee
engagements and otherwise working in ways that serve the
interests of their employers. For example, at 1,600
standard hours an employee with a $50,000 base salary and a
$90 billing rate (see exhibit 2) will generate 1,600 X $90,
or $144,000 in fee revenue: $144,000 – ($50,000 base salary
X 2.4) = $24,000 of fees in excess of 2.4 times base salary.
Splitting this amount evenly between the firm and the
employee results in a $12,000 bonus (24% of base salary) to
the employee and a $12,000 profit increase to the firm. At
1,800 standard hours, or $162,000 in fees, both the bonus
and the profit increase rise to $21,000. Contrast this with
straight salary, salary plus overtime, salary plus arbitrary
bonus or other compensation schemes traditionally used in
the accounting profession. How would you prefer to be paid?
The productivity bonus approach makes it possible for
profits and staff compensation to increase by equal amounts
simultaneously. Because the firm retains half of the gain
and pays the other half as a bonus, in effect staff members
“earn” their bonuses twice over. The method doesn’t have a
down side, although it does require firm owners to share
profits with employees. Owners reluctant to do so may think
compensation is a zero-sum (if you get more, I get less)
game. However, a plan such as this can put additional money
in everybody’s pocket by increasing the size of the profit
pool. It is simple and fair: You pay for results, not
promises.
NEW BUSINESS BONUS
A new business bonus
equal to 10% to 20% of the first year’s fees from a new
client, paid as collected, can stimulate substantial staff
interest in practice development. Such a bonus amounts to
splitting the profit on a new client, for one year only,
with the staff member who brings the business in the door.
Used in conjunction with the productivity bonus, a new
business bonus can help staff members to think more like
practice owners, in the sense of always looking for new
clients and more efficient ways to do things. Staff members
who appreciate the financial dynamics of the profession also
recognize the need for growth, staff training and high staff
utilization. However, if you use artificially low first-year
fees to obtain new clients, a new business bonus isn’t
practical for your firm. A 10% new business bonus to
a staff member amounts to 5% or less of the net present
value of the profits on a client that lasts five years. So
if offering the bonus results in a new client that lasts
five years, the bonus pays for itself roughly 20 times
over—a return on investment of 2,000%. And since it is a “no
new clients, no bonus” policy, there is zero risk. It’s like
betting after the race is over. Even if the client leaves
after a single year, the return is more than 400% in most
practices.
ADMINISTRATION
Assuming that the firm
has an accurate and timely client billing procedure and that
the firm’s fiscal year-end falls during the slow season
(avoiding cutoff and similar problems), administration of an
incentive plan of this type is not difficult. In fact, it
takes less clerical effort than an overtime system does,
since the calculation is made once each year. Administration
of the productivity bonus requires only preparation of a
net-billed-fee summary/worksheet for each staff member each
firm fiscal year. The new business bonus is based directly
on collections from new clients and is easy to compute and
pay. As jobs are closed out (final billed) for the
year, the administrative partner or manager determines the
net-fee collection percentage and the net billed fee
attributable to each staff member who worked on the job.
(Staff net fee collection percentage times an individual
staff member’s accumulated standard time charges for a job
equals the net billed fee earned by that staff member on
that assignment.) The net billed fee earned on each job is
posted to the staff member’s net-billed-fee
summary/worksheet. At year-end the staff member’s
net-billed-fee summary/worksheet provides the basis for
calculating his or her productivity bonus. (No bonus is paid
when the calculation produces a negative result.) Remember,
under this plan, employees have been exerting themselves for
months to reap the benefits of their good performance, so
pay the productivity bonus within 30 days of the close of
the firm’s fiscal year. A firm that wants to offer
meaningful incentives to inspire staff performance should
consider the productivity and new business bonus system:
“Cash, anyone?”
Practitioners Talk About Compensation
Staff compensation is a frequent topic of
discussion among CPAs. Three experienced
practitioners share their views.
Charles Rae, Jr.
Rae & Co., Fishkill, New York
RaeCPA@worldnet.att.net
Charles Rae has been a CPA
since the early 1970s, working in large and small
public accounting firms as well as in private
industry and education. Rae started his own firm
in 1978 and believes retaining quality employees
is a paramount challenge every firm faces in an
increasingly competitive environment. He continues
to look for better ways to reward staff
excellence. “The biggest obstacle for some
firms is psychological,” says Rae, who has always
been comfortable with an incentive policy. “Not
everyone wants employees to participate fully in
profits and benefits, which is a 1960s
perspective.” Tax staff at Rae’s firm can earn
bonuses based on tax return revenues they produce.
Additional tax professionals are being recruited,
and supervisors will be able to earn piggyback
bonuses based on revenues generated by junior
staff. “I want to encourage good use of newer
staff,” Rae says. Rae, who thinks C
corporations provide the widest range of
opportunities for advantageous tax treatment,
plans to form such an entity. The firm will
transfer all tax preparation functions to it,
offering tax-free benefits such as medical and
travel reimbursement, pensions and cars to his
employees. “It will reduce my dollar outlay and
put more in the employees’ pockets,” he says.
Depending on how developed a practice is, Rae
thinks other compensation components, can work
well. Deferred bonuses for remaining with the firm
for a stipulated period of time encourage new
staff to stay put. The bonus formula described in
the article spurs hard work and new business
development for a young practitioner starting his
or her firm. Older practitioners contemplating
retirement may wish to defer payment of a portion
of bonuses earned under a plan to encourage staff
retention until a retirement game plan is securely
in place. “Every practice is different,” says Rae,
“so there’s no standard formula.”
Margaret Bellucci
Black Point Associates, LLP, Brookline,
Massachusetts
mmbell745@aol.com
In 1992 Margaret
Bellucci, CPA and partner of a firm, teamed up
with Mary Thornton, a former registered nurse with
an MBA, to establish Black Point Associates, a
cross-disciplinary firm offering high-end
consulting services to the behavioral health
industry. They first focused on strategic
planning, efficiency and cost studies, but
industry concerns and their own professional
instincts soon led them into the burgeoning field
of regulatory compliance assistance. The 1996
Health Insurance Portability and Accountability
Act (HIPAA) created a wealth of compliance
concerns. Bellucci and Thornton recognized a fresh
professional market and moved quickly. Along the
way, they had growing pains. In 1997
Bellucci and Thornton added three experienced
partners to the team: an IT specialist, a PhD
psychologist and a generalist/strategic planner.
Black Point Associates became a high-powered
“boutique” with a loose organizational structure
and no administrative staff. Each partner was
supposed to market his or her skills and the firm
overall, and was to be paid based on the revenue
generated. That was the theory. “It was a total
failure,” says Bellucci. Some partners couldn’t
market well and couldn’t understand the
entrepreneurial model—they expected work to be
handed to them as if they were employees. One by
one, the partners bailed out. On their own
again, Bellucci and Thornton searched for a
joint-venture partner to complement their
strengths. It took 18 months to locate
psychologist Derek Jansen. After working on a
trial basis, Jansen was invited to join Black
Point as a partner. Bellucci is a
specialist in federal cost accounting compliance
and administrative matters. Thornton is the
operations guru and author of a popular book on
behavioral health industry regulatory compliance
strategies. Jansen combines professional knowledge
of behavioral health services with a thorough
understanding of billing, coding, and service
documentation standards. Their client-base is
nationwide and growing. The current
organization and compensation scheme is simple.
Billing rates range from $1,500 to $1,900 per day.
Bellucci and Thornton keep 90 percent of their
time charges, as collected, as compensation. The
rest stays in the firm. Jansen, who is purchasing
an equal interest in the firm, retains a lower
percentage, which will increase as his ownership
interest grows. Compensation is based on
individual engagement charges, motivating each
partner to seek new engagements. The next
challenge, according to Bellucci, is to leverage
the strengths of Black Point by adding layers of
professional staffing without sacrificing the
sense of “new era” entrepreneurial success
currently enjoyed. Bonus compensation will be part
of the new growth. “This is a compatible and
successful team,” she says. “We have a real
opportunity to think about the value each of us
brings to the firm and to structure our roles and
compensation for the future.”
Stephen Fay
Fay & Associates, PC, Quincy,
Massachusetts
smf@faycpa.com
Steve Fay started his
practice in 1996, after leaving a partnership
position with another firm. A CPA with a law
degree, Fay is proficient in a broad spectrum of
auditing, accounting, tax, estate and management
consulting areas. He knows his success depends on
an excellent staff, and their success depends on
him. “We’re all in this together,” Fay
says, “and that has to be reflected in the
compensation structure.” Employees at Fay &
Associates, PC, participate in a 401(k) plan
featuring a 50% matching component as well as
profit-sharing and new business bonuses. The new
business bonuses are discretionary rather than
formula based. “Some new clients simply are more
valuable to the firm than others,” says Fay. “And
more than one staff member may be involved in
bringing them in.” For example, a new $40,000
client typically will generate a 10% to 20% bonus,
which might be paid to one staff member, split
among several or added to the profit-sharing pool.
Fay’s key bit of advice for other
practitioners: “Give staff a sense of ownership.
Employees need to feel that they are being
compensated as if they were owners. If they bring
in profitable business that enhances the bottom
line, they should be rewarded.” | |