Incentivize the behaviors you want. That was the theory behind GRF CPAs & Advisors' decision to change its partner compensation model several years ago. Firm leaders knew that if they wanted their partners to operate as a cohesive team, they needed to stop paying partners in ways that drove individualistic behaviors.

More than five years later, GRF President and Managing Partner Jackie Cardello, CPA, says that while the process was a lot of work, the results "absolutely" have been worth it.

What did GRF change, and how have the firm's fortunes improved? Find out from Cardello and GRF partner Elinor Litwack, CPA, in this episode, produced in partnership with the Small Firm Philosophy podcast.

What you'll learn from this episode:

• The limitations of formulaic, "eat-what-you-kill" compensation models.
• Other goals that can be added to the model other than financial metrics.
• The advantages to bringing in a third party to help with the process.
• What behaviors the new compensation model incentivized.
• How a compensation committee works.
• What firms should know before they start on this path.

Play the episode below or read the edited transcript:

To comment on this episode or to suggest an idea for another episode, contact Neil Amato at Neil.Amato@aicpa-cima.com.

Transcript

Jeff Drew: Welcome to a special episode of the small firm philosophy podcast produced in partnership with the Journal of Accountancy podcast. I'm your host Jeff Drew, a manager with the AICPA's Private Companies Practice section. The AICPA and its Firm Services teams have launched a project called Transform the Business Model, and for accounting firms, one of the key components of the business model is partner compensation. How do you determine what each partner is paid? Does your compensation model incentivize the behaviors and decisions that will help the firm thrive. If not, what can you do? Our guests today have experienced the process of changing a partner compensation model with their firm, GRF CPAs & Advisors, a regional firm based in the Washington, D.C., area. Joining us today are the firm's President and Managing Partner, Jackie Cardello, and Elinor Litwack, a member of the PCPS Executive Committee who became a partner at GRF right around the time the firm's partner compensation model redesign was completed. Thank you both for joining us today.

Elinor Litwack: Thanks for having us.

Jackie Cardello: Yeah, Thank you for having us.

Drew: Jackie, I'm going to hit you with three questions real quick. Why did you change your firm's partner comp model? What pain points were you trying to address or what objectives were you trying to achieve? And can you also compare and contrast the former partner comp model with the one you now have?

Cardello: Sure. Pain points and things that we were trying to change: We were trying to incentivize certain behaviors, and what we were seeing was we weren't operating as a cohesive team, as a one firm, under the one-firm concept. And there were individual behaviors, very individualized practices, almost a silo effect. We had started with what we call a purely formulaic, or some people like to call it, eat-what-you-kill model, which is based purely on a book of business. That tends to drive very selfish behaviors, and we wanted to change that.

We were wanting partners to do more, helping other partners with business development, mentoring, recruiting and retention, training all kinds of staff development, helping out on the administrative side with internal projects in each department, and that was one of the things that we wanted to change. We found that in order to drive those behaviors, we had to incentivize the partners by changing the compensation model so that they would get credit, if you will, for behaviors other than simply bringing in business and building your book of business.

Drew: Elinor, as a non-partner under the former model, did any of the issues with the comp model trickle down to you?

Litwack: The comp model itself was not known to me at the time. But what I do remember is that you would have partners working on things or running things that weren't necessarily in their sphere of expertise. Like if you were a nonprofit person and you brought in a corporate tax client, you had to put that in your book of business or else you wouldn't get credit for it. It's a weird dynamic with a customer relationship where you're doing something that your firm is an expert in, but you don't necessarily have that personal expertise as a partner, and also for your team on that engagement, it creates frictions because it's the wrong person is running it. If I look back to the eat what you kill model based on what I know now, I think that that's what it generated, which is, if I bring something in, I have to put it in my book. Another partner is not incentivized to help me with it. I'm not incentivized to give it to another partner, even though they'll do it better and maybe even in a more profitable way because I need it in my book.

Drew: Jackie, how did you adjust the model for that situation exactly, where someone brings in something that's not in their area of expertise, that might be a good example of the type of changes you made?

Cardello: Sure. We went to a goals-based model and there is a part of the compensation that is based on metrics. First of all, we started giving partners goals, and we started evaluating them and holding them accountable. We didn't have goals before. It was just inherently chase business, build your book, and we added two other layers of goals other than just the financial metrics. We added team development and succession planning and then also the firm's strategic goals. The example that you're talking about would fall under either one of them, either strategic or the team development and succession planning, and we actually gave partners goals to transfer a certain amount of business. They would get credit for bringing business in on the business development side, but then we also credit them if they bring it in and pass it off to another partner in their department or even another department. It's recognized by their goals, and are they meeting those goals and are they doing these actions whereby it didn't used to be recognized at all, and as Elinor said, there was no incentive to pass it off to someone else who could do it better or have the right expertise.

Drew: That makes a lot of sense, especially with your firm. You're a large nonprofit business within your firm, you also work with government clients and with business. You've got a lot of specialized areas to work with. Jackie, let's give a timeframe for our listeners on how this worked. When did you start the project and how long did it take to implement?

Cardello: We started the project and I want to say we first started having this conversation in, I want to say 2015, somewhere thereabouts. Obviously it took a while to get partner buy-in. One of the ways we did that was using an external consultant. We thought that was really important because they didn't want to hear the message, and if I'm the messenger or some of the other partners who are in favor of the change or the messenger, the message wasn't being received. Whereas if we bring in a third party who has expertise in the profession to say, here's what you should do. You should change your comp model. Here's how you should change it, and here's why. It actually was a much better received message. But it took us, I would say at least a year to actually get pen to paper, start writing it, constructing it, figuring out how we're going to do it. We did use a consultant to do that, to help walk us through every step, and our first full year under that model, 2017. That's when we implemented it, I want to say in the spring of that year and by the end of the year we were on the new comp model.

Drew: During that process, aside from trying to win over to the partners who are skeptical about this whole new way of doing things, what other obstacles did you run into? Or were there any surprises or anything that going back, you would approach differently?

Cardello: Surprises – not really, not in a negative way. The surprises were that once the partners went through the first season under this comp model, there was an appreciation for it. There was acceptance as they went through the goal-creating process and then the evaluation process. We were surprised at how little complaining we had. We thought we would have a whole lot more. That when that first year ended and the allocation was done, we thought we would have a lot more partners complaining, and we were also under an open compensation system then, so the equity partners knew what each other made.

We were surprised at how little upset there was. Then not as surprising was that over the years, we've seen it work. It is working. It is driving the behaviors that we want, and it is de-incentivizing the behaviors that we don't want, and it has changed the partner behavior so that we are acting as one firm.

Drew: Now, Elinor, what year did you become a partner?

Litwack: 2020.

Drew: 2020. What has your experience been like coming in, into this system as a partner?

Litwack: I was prepped for it in the year leading up to partner that I would have a goal sheet and some of it is for financial metrics and there are other types of metrics, but I really didn't believe that it was acting as wonderfully as Jackie says that it is. Basically regardless of whether you have goals or not, when you're coming in as a new partner, you feel this pressure and stress to prove yourself, so No. 1 is having a goal sheet which helps you have a vision for what you're trying to accomplish that year and where you're going to be held accountable, but also to have a goal sheet where it's not just numbers and I'm not just a money factory.

Everybody has different goals and incentives based on what they're good at, and I was thrilled to be part of a partnership that runs that way because at the end of the day, everybody brings something else to the table. Somebody could be a phenomenal people developer, but a terrible business developer, or they could be a technical person, but not so good on the people side. But if you're going to have a successful partnership, you need all of those people at the table.

You need diversity of thought, of skillset, and so one way to hold everybody accountable and make sure that you're pulling the best out of them is to have a system like this. I'm lucky that I came into it as this was the only goal system that I knew. Even since I joined back in 2020, it's had tweaks over the years, but I think it's something that we're proud of and we love sharing with other firms because it's a change that's very tangible and not as hard of a leap as they might think it is, and it has tremendous benefits for a firm.

Drew: How many partners do you have?

Cardello: Right now we have 22, 14 equity partners.

Drew: Now, the changes that you've seen in behavior, and I'm very impressed anytime that someone can say they got a bunch of partners to go through a season with something new and not complain too much, that's very impressive. How has that translated into bottom line, in the overall performance of the firm financially?

It's actually driven the bottom line. We've experienced incredible growth. When I took on the role as managing partner, I want to say we're about a $22 million, $23 million firm moving toward mid-20s. This year, we're projected to do upwards of close to $50 million. I think that it increased. Initially, we weren't sure. We thought we'd have some down years and we've also increased our investments and personnel and salaries across the board, staff-evel and technology.

But what it has done is, as Elinor said, you take each partner's highest and best use and you capitalize on that. Rather than have a bunch of partners where you're expecting them all to be just like one another, a bunch of clones, they all have to be business developers, they all have to be technical, they all have to be mentoring staff or not, some that didn't want to do it or weren't good at it, we take a different approach. We take the approach of, if this partner is really good at this, we're going to give them a heavily weighted goal in that area.

We're going to capitalize on that behavior and that skillset. By doing that, you're having a team where each person is doing the things that they are best at doing and not focusing on things where they're a little weaker. It's showing in the form of bringing in more business, better client service, developing better leaders. Our succession is incredible. It's incentivizing young leaders who are coming up through the firm and becoming partners like Elinor. When you have that and you're compensating the young leaders appropriately, incentivizing them, you've got people who are ambitious and hungry and who want to go out and work and build the firm.

Drew: Elinor, are you an equity partner, or is there a step process?

Litwack: There's a step process. I'm still an income partner, but that's a whole other podcast on how we move from non-partner to partner and then how you move from income to equity.

Drew: How long does that take? Just out of curiosity.

Litwack: It's not guaranteed, so not everybody will be an equity partner. Generally, if you are on that path, I believe it takes three to five years. Right, Jackie?

Cardello: Yeah. That's about right. We have some that it's taken longer. In our path to partner document that we have developed, which we share with staff of all levels if they're interested in being a partner, there is the criteria to become an income partner, and then once you've been an income partner for a minimum of three years, there's other criteria that you have to meet to become an equity partner. It is not solely based on meeting the three year. There are other things in that and it's in your goals. Which goals are you meeting?

Which ones are you exceeding? Are you consistently exceeding most of your goals? We do look at that. Also it has to make economic sense. We'll look at each department and determine, this person is meeting the criteria in these areas, but right now we're a little top heavy in the partner department. Maybe we need to wait another year to bring this person in as equity because we have an equity partner retiring out.

We've actually found that we've been promoting partners to income partner quicker than we thought because we've had a need, because we have been growing so rapidly, so we've had a need for partners and we've had the good fortune of having some very strong leaders that we've been able to bring into the partnership and we do have several senior equity partners retiring out, so I do foresee that there is going to be ample opportunity for those top performing income partners who wish to get to the equity level.

Drew: Has all of this growth been organic?

Cardello: It has been organic. Yes.

Drew: That is impressive.

Cardello: We've been very fortunate. Well, I should say we've been very hard working and fortunate to have a comp model, like I said, that is driving the right behaviors, and it also attracts other individuals from other firms who are looking to find a new home to our firm because they like the way our comp model works.

Drew: I was going to ask if that was something you are using in the recruiting process.

Cardello: Absolutely. Part of the reason for the growth is we've recruited what I call our strategic strikes at high levels, and it is very difficult to get someone at a manager or senior manager, or even we've had partners come from other firms. That helps with this organic growth because they're bringing over a skillset that we need, that we were seeking to build and a niche area, and the fact that we have the comp model that's goals based is very attractive to a lot of partners.

Drew: What would you say to the listeners today who are managing partners or partners in other positions of influence on their firms who are looking to try to take this process on and transition and overhold their partner comp model? What advice would you have for them?

Cardello: Well, the first thing I would say is definitely utilize a consultant. Find an expert in the area and use them and it is expensive, but it is worth every penny. You don't want to go about it alone. You need someone who has expertise in how comp systems work, knowledge of various different comp models, and how to help you structure it. Then my second piece of advice would be patience. When I said I was surprised at how little complaining, it didn't mean we had zero. We had one or two. You're always going to have one or two that don't want to be held accountable and they don't like the evaluation.

But in the beginning, but for the most part, everyone was toeing the line, and even those individuals who were resisting have or are slowly coming around. It is working, but patients as well and just helping the partners to understand how the system works and everyone has to buy in and trust the system. You also have to have a really good committee that everyone trusts.

Litwack: I was going to say we didn't point out the logistics of this, but we also have an executive committee among our partner group, which we didn't always have. Jackie, I think it might've even launched with the new compensation system, with a new partner goal system.

Cardello: It actually launched when I took over as managing partner. That happened before the new comp system.

Litwack: But that is the committee that then reviews the goals for each partner and how they land at each year, because there's still a subjective aspect to it. You get a report card, but it's not A, B, C, D, somebody has to measure it and discuss it with each partner. That group is the group that decides how each partner scored and measured against each goals because they're not all monetary. You have to have some subcommittee that's not just a managing partner or just the COO. You need somebody to actually analyze the goals and then tie it back to partner compensation.

Cardello: Yes, exactly. Very well said, Elinor.

Drew: How many people are on that committee?

Cardello: Five.

Drew: Five?

Cardello: Yeah. You're required to be an equity partner to be on that committee, with the exception of our executive vice president who is not an equity partner, who is a standing member of the committee, and they are all elected. The full partner group gets to take part in that voting process, including the income partners.

Drew: That's good.

Cardello: We do have terms and we do rotate. As Elinor said, they take part in goal-setting evaluations. But we also lean very heavily on each of the department leaders to help set the goals for the partners in their departments and then receive the feedback on their goals and their performance. We also just recently this year utilized an upward evaluation which we found very helpful, and that goes out to all staff, and they're asked to evaluate each partner they work with. Then we also use input from our administrative team, our operations team, our chief technology officer, our chief marketing officer, human resources director, internal accounting group to find out, hey, are these partners following policies? We have questions about for example, if a partner were treating staff poorly, we would hear about that. Usually, you hear about it through the grapevine but also through HR. If they're not following IT policies, doing the training, doing everything they're supposed to do there to keep the firms safe. There's various different mechanisms for checking to see that goals are being met. Then we also have a conversation with the partners during evaluation and ask for them to provide support to show us that there was a goal you were working on. Here's what you did to achieve it and here's, I can show you this. To show you what I did to work towards this goal and to meet this goal.

Drew: Elinor, what is your experience been dealing with getting feedback on the goals in your performance, what's that experience like for you?

Litwack: It's a process, and it's a series of meetings that take place around the beginning of the year and then at the end of each partner goal year. Also, our partner goal year is different than the calendar year for logistical reasons and everything else that goes on after calendar year at accounting firms and other professional service firms. The goal setting process, as Jackie said, the department heads are heavily involved with the partners in their department and setting those goals because you have a departmental goal, and then you have the department heads goals, and each individual partner's goals has to tie into the overall departmental goals.

If your department is supposed to grow say 15%, you're going to need all your partners to have goals that tie into that, or if you're trying to recruit or retain talent, you need to figure out how you're going to get there. Usually, that comes down to the individual partner goal sheets. There's that goal-setting process, and then throughout the year we're each responsible for measuring our own goals and seeing if we're on track to get there. Sometimes they do evolve. Like I know of a few situations where a partner set a goal and then they had to be agile and pivot in a different direction. Like sometimes the goal is actually not what the right thing is to do.

The example I'm thinking about is a goal that we were going to implement a specific technology by the end of the year — well, things changed. It wasn't the best route anymore. We didn't want that partner to think that he had to implement it or else this compensation was going to get docked, no, the goals evolve, and that's why it's like a narrative and a conversational evaluation, not a pass-fail situation.

You have the goal setting and then we monitor our goals throughout the year and then come the end of our partner goal year, which is October, November, come like September, we start putting together our own report cards. I pull up my goal sheet, I start writing, putting charts together, basically making a case for yourself and showing the executive committee how you met each goal. Then they review each goal sheet independently, discuss it, and then we have meetings with Jackie, the managing partner, with our department heads. It's like a partner evaluation meeting. It's a pretty formalized process.

Drew: Well, we are just about at the end of our time. That has gone by very quickly, I'm sure a lot quicker than it did to implement it, even with a relatively well-behaved partner group. But I just wanted to thank you both for joining us today, and is there anything I should have asked you but didn't?

Cardello: The only thing I can think of is, you've covered a lot. You were very thorough, but if you were to ask me if I had it to do all over again, was it worth it, absolutely. As you can tell, it sounds like a lot of work because it is, it's not just crunching numbers at a formula and saying, here's the pie, and here's how we're splitting it up. It is a lot of work. It's a lot of work for the partners and the evaluators and the executive committee, but it is well worth it.