[IMGCAP(1)]Public accounting is undergoing significant transformation through consolidation of small and midsize firms. Much of the consolidation is occurring through mergers and acquisitions by regional and national firms at an incredible rate.
Firms that have existed for more than 50 years have been acquired or are considering being acquired. One predominant reason is the dearth of younger professionals in place to successfully continue the practice and its legacy in order to fund the buy-outs and retirement obligations of the existing partners. There may be other incentives or motivations for acquisitions, but in my view, this is the principal motivation.
So, this begs the question, why is there such a gap between the elder partner population and the next generation to carry on the business? Some blame the lack, or diminished pool, of accounting graduates. Some unfairly accuse the Millennials (they seem to get singled out for just about anything) for seemingly lacking the same drive, patience, and initiative that propelled previous generations to achieve partner level.
My view is that Millennials or other younger generations possess the same drive, patience and initiative as my generation. The difference is they are more outspoken and demand a life that better incorporates work with social or family life.
To further exacerbate the gap problem, many newer partners who suffered a long wait for partnership and made many sacrifices, including lower compensation and work/life imbalances, are now deserving of the “big payday” that was promised. This setting can naturally lead to tension in the ranks. The good news is the solution lies within the public accounting profession itself. Many small and midsize firms I speak with would prefer to have the firm maintain autonomy and continue its legacy into the future rather than be acquired and become subject to new firm policies, restrictions, new systems and new demands of a larger organization. Continuing the firm, however, requires the next generation of potential firm leaders to share in and commit to the same vision.
As with every successful organization, that vision must be articulated from the top with conviction and accompanied by a strong, achievable plan. In many cases, implementing a strong, achievable succession plan requires major restructuring of compensation arrangements and a serious look at employee and partner work deployment.
Below are 10 recommendations for solutions to the partner succession gap problem. Not all of these recommendations will be met with instant acceptance, I’m sure. The new mindset I am advocating is an evolutionary process.
1. A Vision Statement
Many businesses, including CPA firms, have adopted a mission statement. A mission statement would typically set forth the firm’s commitment to client service, ethics and the general public’s trust. Even firms that are committed to organic growth and continuity without being acquired should prepare a precise vision statement describing their vision for the future and how they will get there. This vision statement should then be communicated to their professional employees at all levels. A well-crafted vision statement will help build confidence and trust in the leadership and allow employees to support and understand the direction of the firm.
2. Forward-looking Compensation Arrangements
Many employee compensation arrangements reward past performance, usually the previous year’s performance. The employee’s performance for the last 12 months is communicated in an annual review. In this regard, raises and bonuses are backward-looking and the employee needs to wait a full year for a performance evaluation. Many of the larger firms, especially the Big Four, have adopted project-by-project reviews. Although these reviews are commendable for providing more frequent employee appraisals, in many cases, the project review does not provide any accompanying compensation reward.
I believe bonuses are more meaningful and appreciated when given contemporaneously with a specific assignment, or for work that went well beyond expectations. During the annual review, the employee review should focus on the future, including paths to promotion and potential compensation levels that can be achieved along the way at each level. In this regard, the employee can set reasonable goals and timeframes for achieving those goals. In addition, such forward-looking compensation permits an inside view of the firm’s overall compensation structure, which in most cases has always been very secretive. The employee will be better equipped to evaluate his or her long-term commitment with the firm. The firm also will benefit because the open dialogue should allow the firm to better gauge the employee’s intentions for the long term.
3. Understanding the “Business” versus “Profession” Dichotomy
Employees at all levels need to understand they are an integral part of a business that seeks to make a profit for its owners. Justification for working long hours and under serious time deadlines cannot be explained away simply by saying this is what the profession demands and to be a “professional” such dedication is expected. Employees need to understand how their billing rate and hours worked translate to the bottom line. As an employee moves up the ranks, at some level, possibly senior manager, I believe the firm should share its financial statements with the employee, with the exception of any partner’s individual compensation or share of profits. Such transparency should provide a deeper understanding of the rewards and struggles of operating a CPA business.
4. Partner Workloads and Appearances
I hear it all the time from partners that partner workloads are too heavy and appear to be unmanageable. The appearance of overworked partners is not healthy for the firm or the affected partner. This unhealthy appearance—manifested both verbally by some partners and visually—has not gone unnoticed by the younger staff. My younger mentees confide in me that the partner work/life style they witness is incongruent with their values and goals.
Today’s partners, who are admittedly overworked, need to re-evaluate their own work schedules and responsibilities. At a minimum, partners need to present an executive style that allows time for mentoring, teaching and employee socialization. The self-driving workaholic who is emotionally stressed and “burnt-out” will not motivate others to move forward in the firm.
5. An Honest Employee Evaluation Process
Employee evaluation systems range from a casual, unwritten, once-a-year sit-down with the employee to a structured, written self-evaluation. There are advantages and disadvantages to each of these approaches. We will not analyze and debate these approaches in this article. Whatever evaluation process is utilized, the success of any evaluation process is that it must be honest. Usually by the third or fourth year, a firm has formed a sufficient impression and has accumulated enough data points on an employee to evaluate the employee’s future with the firm.
It is a disservice to the employee and to the firm to keep an employee beyond the realization point that the employee will not work out long term. Negative employee reviews and discussions can be unpleasant and do not come naturally to most. I would recommend that partners and managers who conduct employee reviews undergo training in this area. It is important and appropriate for time and resources to be devoted here.
6. An Effective New Partner Identification Process
Partner selection is more of an art than a science. It involves the evaluation of business acumen skills, technical abilities, character traits and socialization abilities. Making partner is probably the most important life event for the employee as well as the firm. A new partner identification process is critical and should not be based upon favoritism or reactions to employee ultimatums. There should be consensus among the existing partners in establishing new partner criteria within the business and cultural framework of the firm. This consensus should set be forth in a written policy statement that should guide the firm’s selection of the next partner or partners. This new partner policy statement should also be reviewed and re-evaluated every five years or so to ensure it reflects the current firm environment.
7. Onboarding and Mentorship
There is nothing more disconcerting to new hires than to arrive on the first day and have no-one from leadership or management to welcome and greet them. In my career, I have experienced disappointing first days on the job where my direct report was not at work or my new employer was not prepared with an office or a cubicle for me to start work. I can remember spending my first few days in a conference room waiting for space to be cleared.
The larger firms generally do a good job of “onboarding” new hires with general meetings about firm policy and administrative matters. However, I have personally experienced and have heard complaints that in some cases, once released from the onboarding session to report to the assigned work areas, the new hire is effectively abandoned until someone assumes responsibility to properly situate the new hire. A welcoming environment sets the right cultural tone and makes a lasting impression on the employee.
The welcome should not end on the first day or first week of employment. A dedicated mentorship program is key to enhancing the employee/employer relationship, where a reciprocal understanding of firm values integrates with professional development. A trained mentor should be assigned to each new hire in the first week. The mentorship program should be flexible enough to rotate new mentors or reassign mentors who provide a better fit for an individual employee. Some firms have even hired professional mentors or coaches for specific levels to achieve certain goals, such as transitioning from director/manager to partner.
8. Leadership Training for All Levels
I firmly believe in leadership or management training starting at the first level where supervision is required as part of the job function. CPA firms generally do a great job of providing continuing professional education and technical training. Often, however, the “people skills” aspect is either ignored or wrongly assumed to be common sense or innate. Leadership training could include, for example, written and oral communication skills, business development skills, interviewing techniques, effective employee evaluation, and skill sets necessary for each level of advancement.
Too often the time and client stresses of the job take precedence, leaving little time and effort for leadership enrichment training. Many CPA firm managers and partners lack the necessary training in the “softer skills” to be effective “people managers,” resulting in the loss of valuable staff. Leadership training should be afforded the same priority and resource dedication as technical training.
9. Thorough Exit Interviews
A thorough and honest exit interview is just as important as the welcoming/onboarding process. The exit interview should be mandatory for both employees who are involuntarily terminated and employees who voluntarily leave. Understandably, there are rare situations where an employee is terminated for egregious acts and must be escorted out without much discussion. If handled appropriately, the exit interview—conducted by at least one member of leadership, and not just human resources—is an important tool to learn deficiencies that exist within the firm and to repair a relationship that may have been damaged. Many former employees go on to become very good firm clients.
10. Transparent and Regular Firm Business Meetings with all Levels of Professional Staff
This last recommendation is by no means the least. Regular meetings—possibly at the beginning, midpoint and end of the year—with higher-level staff to discuss the state of firm affairs brings the team closer together. These business meetings should be as transparent as possible. For example, it is important for the staff to understand firm revenue, growth rates, collection issues, hiring levels, how billing rates translate into bottom line profit, and the direction or vision for the future.
Many managers have confided in me that their lack of knowledge or awareness of the future of firm and the firm’s financial stability or viability creates anxiety and mistrust. In addition, key employees are very interested in how their contribution to the firm enhances the growth and financial success of the firm. These regular “business meetings” can help impede migration of key employees who are in search of promotion opportunities. Open meetings where staff can ask questions help foster an environment of trust and put an end to destructive rumors. Admittedly, confidentiality is a challenge with such transparency and should be dealt with appropriately.
In a service business such as public accounting, the old adage that employees are the firm’s greatest resources is more important today than ever. An increasing number of firms have succession gaps and are missing the next generation to continue the firm and allow the retirement of the existing partners. It is evident that unless the accounting profession takes bold corrective action, this trend may continue.
The recommendations outlined in this article should provide a starting point, or at least prompt some serious discussion among the partner ranks.
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