The Lure

Smart compensation plans can keep staff in a tight market.

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When Chip Cargas launched InterDyn Cargas in 1988 in a small bedroom corner with a Macintosh, dot matrix printer, desk, phone, and answering machine, he had a dream-to build a team-oriented place to work where employees shared in the financial success of the company. Today, that dream is a reality, thanks in large part to the compensation structure he implemented at the business software and consulting firm, which has grown to revenue of $6 million a year.

"When I look at compensation, I don't look at it in a vacuum," says Cargas, president and chief executive officer of the 42-person Microsoft reseller with offices in Lancaster, Pa., and Pittsburgh. "I think a lot of companies say compensation is one thing, team building is another thing, and culture is another. We look at this as one integrated system. All of these things, to me, need to be in sync with each other."

While the intricacies of Cargas' compensation plan may be unique, many of the underlying beliefs are growing increasingly common as firms realize that to attract and retain the best employees, they must implement compensation plans that-aside from being competitive in pay-help foster career growth, encourage a team-oriented atmosphere, and are simple to understand and manage.

Partner Insights

"Compensation and motivation are becoming increasingly talked about and becoming of increased concern in many firms, and the reason for that is the scarcity of resources and the need to retain people and the need to attract people," added Jennifer Wilson, co-founder and owner of ConvergenceCoaching, a leadership and marketing consulting firm whose clientele includes CPA and information technology firms.

Unlike many firms, InterDyn Cargas does not offer sales commissions or base pay on billable hours. Instead, it rewards its employees through a profit-sharing plan and an employee ownership option. It was also named as No. 2 among midsized companies as a "Best Place to Work" in Pennsylvania.

Cargas notes that the firm's base salaries tend to be "on the higher side," so associates don't feel too much of a financial crunch if profits sag or the company stock isn't paying out well. Compensation at InterDyn Cargas is designed to have a more long-term aspect (if profits are soaring and stock is paying out well, then associates "should be doing really well in the long term") versus what one would find at an average reseller, where bonuses can swing widely or a sales person may have a lower base salary with the potential to rake in huge bonuses at any point in time.

REDW: Making Pay

Pay for IT Staff

About two years ago, REDW, the largest locally owned CPA firm in New Mexico, faced softening sales and lackluster revenues that threatened the viability of the firm's technology department, one of its newest lines of business.

With the help of Jennifer Wilson, co-founder and owner of ConvergenceCoaching, this one-stop-shop, which offers such services as accounting and business software implementation and support, financial planning, and audit and consulting, was able to implement effective compensation plans that helped turn the technology department around.

Several years ago, the firm's technology services division, known as REDW Technologies, grew out of its traditional CPA practice. Unfortunately, so did its compensation plan.

Initially, the firm paid technology employees based on the same system used for its CPAs, explains Carol Cochran, a principal at REDW. IT associates were salaried employees who received annual raises and performance bonuses. This proved ineffective.

To construct a more effective compensation structure and turn the business around, the department held a strategic planning retreat, where it identified measures of success, such as quality of leads and software renewal revenue, and service revenues, for both software sales and network services, and put together a plan.

The firm decided to reduce compensation at the software sales unit, but gave IT associates a liberal share of the profits on software sales, renewal revenue, and service revenues.

"It very clearly links individual efforts with the strategic goals of the department and provides a direct financial incentive for doing the right things," says Cochran.

The firm also adopted a referral fee policy for referrals from clients or from within the firm.

The moves paid off. In the first year after implementing the new compensation structure, the gross revenues from software sales and support climbed 100 percent.

For those working in the network services and IT consulting unit, the compensation plan is performance-based, hinging on service, new clients, and client satisfaction.

Such challenges are not unique to the industry, and likely are growing increasingly common as firms expand their service offerings in an effort to remain competitive.

"That is the essence of our model here. It is more team-focused, more long-term-focused, more about getting people engaged and involved in the ownership of the company," Cargas says.

Under the profit-sharing plan, 20 percent of pre-tax profits go into a pool and are accrued each month. At the end of six months, that money is paid out to employees. Half of the cash distribution is based on the associate's years of service with the company, and the other half is divided equally among the staff.

To keep the plan as transparent and simple as possible, a spreadsheet is emailed to employees at the end of each month that lists how much money is in the pool at that point in time and what their allocation is at that moment. Of course, it is what is in the pool at the end of the six-month period that counts.

"We are trying to incentivize everybody to think first of what is best for the company overall, so that if you are a consultant and you are asked to go out on a sales opportunity and you can be part of the reason why that deal has landed, you are incented to do that because it will help the profit-sharing of all of us," Cargas says.

Meanwhile, under a component rolled out in 1998, employees can buy company stock. As a result, about 80 percent of the employees are now part-owners of the firm. To reward those associates who have proven to be especially successful and have demonstrated a long-term commitment to the firm, the company also offers a stock bonus. The bonus, which is at management's discretion, is given out twice a year and the money must be used to buy stock.

Such moves have paid off. Cargas says the firm's turnover is "extremely low," coming in at roughly 5 percent per year, on average.

To help other firms implement a similar structure for their employees, Cargas has developed a toolkit that includes a binder and CD. The kit, priced at $250, features such templates as the profit-sharing spreadsheet, and explains the theory behind the compensation plan at Cargas.

A Simple Rule

Whatever the formula that produces the numbers, Taylor Macdonald, executive vice president of channel and sales operations at Sage, believes that the most effective compensation plans are simple: pay based on performance.

"If I hire a consultant and they come to me as a trained consultant and they are going to be successful, what I need to do is put a performance plan in place for them that pays them based on what they produce," Macdonald explains.

He continues that when a firm is hiring, it is critical not only to offer competitive pay, but also to fully explain to a potential employee the upside and downside to performance-based pay-the upside being their ability to make some significant money if they perform as expected.

Otherwise, employees may decide that they can make more money operating their own businesses.

"If [an employee] says, 'I billed 1,500 hours last year at $150 an hour and generated $225,000 for that owner, and I only got paid $50,000,' how long is it going to take that person to figure out that they could bill 1,000 hours at $125 an hour on their own and make an additional $75,000?" asks Macdonald. "You have to let those people know that they will be paid based on their production, and will have the opportunity to make more money so they don't want to go off on their own."

The potential downside, says Macdonald, is having an employee who is not motivated to make more money and is billing a fraction of the hours they should be.

"What I have described is a compensation plan that is right for both the owner and the employee, but most small business owners are non-confrontational and they don't want to deal with the reality, so they don't sit and do the math," added Macdonald. "This is one of the biggest problems with non-CPA IT practices-acknowledging reality and setting up every employee as a profit center."

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