Using balance scorecards to determine compensation

by Gary L. Boomer

Compensation, and particularly partner compensation, is a topic that will create considerable debate in most firms. Everyone has an opinion - and generally those with the strongest opinions are the least informed.

While there is no one way to determine partner compensation, most firms use a variety of formulas and methods of participation in the process. The Balanced Scorecard, as introduced in "Boomer’s Blueprint" in the Nov. 4-24, 2002, edition of Accounting Today, is valuable if properly applied to reward excellence and achievement of goals. It is also customizable.

The first decision your firm must make is whether you desire to tie rewards to performance. Entitlement is disappearing with the "effort economy," as the "results economy" becomes the standard. So performance should monitor more than just financial goals - it should include elements for process improvement, client satisfaction and learning. While all of these elements are important, your strategic plan should dictate the most important behaviors.

There is no way to avoid the debate over intrinsic versus extrinsic rewards and motivation. Intrinsic rewards may produce fulfillment and a sense of pride, while extrinsic rewards hold the possibility of sharpening the focus on what must be done to succeed.There is no single answer that will work for all firms. A compensation plan is a work in progress at best, but can produce the desired behaviors, and the balanced scorecard is a valuable tool to assist in the process.

Linking the scorecard to compensation is an added bonus that completes a win-win equation. Partners and staff have the opportunity to develop an in-depth knowledge of the firm’s strategy, and to define their role in achieving that strategy.

Remember that what you get is what you measure! Don’t try to operate the firm with only one gauge - charge hours. Partners and employees will be motivated to achieve the goals you establish for them.

Better yet, involve them in the process of determining their goals. You may also quickly become aware that your firm doesn’t currently have a reliable data source for measuring performance, particularly in the process, client satisfaction and learning areas. These will have to be developed.

Your current practice management system probably only has some of the required data. It is also extremely important that you do not try to measure too many items. Seven items appear to be the maximum number that anyone can focus on at any given time. Starting with fewer items and increasing the number of items measured is advised based upon experience to date within the accounting profession.

The tendency among accountants is to weigh the financial measurements more heavily than the processes, client satisfaction and learning measures. According to Paul Niven in his book, "Balanced Scorecard: Step by Step," the average is 40 percent for financial and 20 percent each for the other three categories (across all industries).

Leading and lagging indicators should both be measured. Revenue is a lagging indicator while number of sales calls or proposals is a leading indicator.

Based upon Niven’s step-by-step approach, developing a firm scorecard is the first step. The next level in an accounting firm is the partners or owners and finally the managers and staff scorecards.

Cascading the balanced scorecard to the individual staff level will require time and experimentation. It is most advisable to get partner buy-in first.

Because the world of work is evolving toward knowledge rather than machines, focusing on competencies makes sense. While many industries have already squeezed the last drop out of processes and re-engineering out of their systems, in my opinion, the CPA profession has not.

I base my opinion upon the fact that all firms have multiple databases with redundant data and continue to use many of the same processes in financial statement and tax return production that they used 20 years ago.

The computer is still mostly being used as a high-speed typewriter in many firms. There is still ample room for process improvement in most firms, especially in the core business areas.

Along with standards and processes comes the need for learning and training. Establish curricula and programs that include expected results on scorecards and you will be surprised at the change in attitude as well as the increased return on investment.

If you fear measuring the wrong things, you can avoid any potential problems by waiting until the second year of the balanced scorecard to link pay for performance to the process.

I don’t recommend this approach, however, as it is too cautious for my style. I prefer to do the necessary homework and do it right the first time or at least get it close. If your existing compensation plan were perfect today, you would probably not even be considering the balanced scorecard.

Planning, communicating, designing, reviewing and judging are all-important aspects that require management’s time. We have found that the time commitment was reduced considerably by using two concepts and forms that were introduced by Dan Sullivan of The Strategic Coach, a Toronto-based management consulting firm for entrepreneurs.

Sullivan’s first concept is the positive focus exercise and the second is the quarterly game plan. All partners and employees should complete both forms.

The positive focus lists the top accomplishments, reasons why the accomplishments are important, further progress needed and any specific action steps. The person completing the form feels a sense of accomplishment and their confidence is immediately increased. People make better decisions and strive for a higher level when their confidence is high.

The game plan then lists the top projects for the next quarter, as well as the desired results and specific action steps. Once a person has completed these forms a few times, the process goes very quickly.

The supervisor then simply determines that the game plan conforms to the balanced scorecard. It may be necessary on occasion to adjust priorities, but for the most part, the system supports the employee and the employee relies on the system.

Here is a brief action plan to use if you are considering implementing the balanced scorecard.

• Develop a strategic plan for the firm.
• Name a small BSC task force led by the chief executive or managing partner.
• Re-confirm your firm’s mission, vision and value statements.
• Develop a firm scorecard based upon the firm’s strategic plan. (See example in previous "Boomer’s Blueprint.")
• Develop partner scorecards. (See example in previous "Boomer’s Blueprint.")
• Complete the positive focus and game plan forms.

As with any management initiative, this plan is about progress, not perfection. Good luck!