Brand, Pay, and Perception: What the Data Tells Us About Private Equity Today

When private equity firms invest in accounting firms, they're ultimately acquiring two assets: client relationships and the teams that serve them. But if those teams are unhappy or misaligned with the deal, the value of the acquisition can deteriorate quickly -- and right now, online, accountants' perceptions of private equity are often skeptical at best. In this session, Big 4 Transparency draws on its proprietary database to reveal what really happens when firms take on private equity investment. We'll examine the data behind these deals, uncover the impact on retention and morale, and explore strategies for keeping employees engaged through transition.

Transcription: 
Transcripts are generated using a combination of speech recognition software and human transcribers, and may contain errors. Please check the corresponding audio for the authoritative record. 

Dominic Piscopo (00:19):
This is going to be coming from a very different perspective here: brand perception and what the data tells us. We've spoken a lot about the partner's perspective on a private equity deal, how the transactions happen, as well as the private equity buyer's perception of where things are at. However, one key point that we haven't talked much about is the perspective of the employee of the firm being acquired. So that's what we're going to be digging into today. A short summary of what we're going to be covering: what is the current perception of private equity today? What are the realities shown in data? As mentioned, we collect a lot of data from employees, and we're going to do a deep dive on employees specifically as it pertains to private equity in the industry.

(01:19):
What separates highly satisfied PE-backed firms from less satisfied firms and how to keep accountants engaged through your private equity transition. So before we talk about that, who am I and why am I on stage while there's polling going on in the other room? I'm going to walk you very quickly through my journey and why I've come to represent the employee at some of these firms. I started off at Deloitte and honestly, I had the best experience anyone could get at a Big Four firm. I had a fantastic time there, but I was a bit of a square peg in a round hole. As an analyst, I was very entrepreneurial and realized very early on that was not going to be rewarded, and compensation was also a huge factor in why public accounting ultimately did not work for me. I didn't really know about the existence of all these innovative, wonderful firms out there that are a little bit more flexible.

(02:31):
I'm a CPA myself and I got really interested in entrepreneurship, so the next thing I built was a business entirely centered around spreadsheets—that's just how it goes. What "Big 4 Transparency" is today: there's definitely a disconnect where some of the partners here may not be familiar with it as much as your staff are. Your staff are very likely using this. We're the largest crowdsourced database of accounting salaries on the market. We're used by over 300,000 accounting professionals who want to figure out what they should be compensated and what they're worth in the market, as well as to plan their next career moves. They're looking at this to understand how they can optimize their earnings and which firms are paying the most. We started collecting a lot of data on this and, luckily in hindsight, I'm a very nosy person. I put in a couple of extra fields which are the basis of this presentation today, largely around hours worked. This is self-reported by users anonymously on the site. We're also going to be talking a lot about job satisfaction. We have over 20,000 rows of data that have been cleaned, standardized, and collected over the last four and a half years.

(03:54):
With that large of a sample size, we're able to find a lot of very interesting developments in the industry. The time that this project started coincides quite well with the time of private equity involvement ramping up within the profession. When you're buying or transacting with an accounting firm, what are you really buying? We look at valuation metrics like EBITDA and revenue—Bob Lewis really keyed this up for me in a nice way—you're looking at that to figure out what the firm should be valued at. However, what you're really buying is the future of the firm. That is largely dependent on the employees within that firm.

(04:51):
Yes, the partner group being happy and treated properly is incredibly important. But as we've seen in those pyramid-shaped diagrams in previous presentations, there are a lot of people well below that level, and they're a big part of what you're buying. Their relationships with the clients matter and their engagement with the firm matters a lot. An engaged employee is going to be active in selling for your firm. They're going to want to grow to be a part of that. Whereas a disengaged employee is just out to do the compliance work; they're not going to be actively looking for opportunities to move that forward. It's extremely important that we keep these people engaged during the acquisition.

(05:46):
First of all, private equity at face value is not really being welcomed by the profession. Just the name puts some people on edge and it's not widely understood. Back to the importance of the employee: I'd be curious to poll here—just by show of hands—would you say your main constraint right now is demand for your services? No hands. And would you say that your main constraint right now is the ability to satisfy that demand? Okay, so that's incredibly important as part of this transaction. What are people saying? Let's start there.

(06:42):
Private equity at face value is not being welcomed. I did not scour the internet for this; these were the first five examples I could find in 10 seconds. There's a million more discussions around this and people don't necessarily understand it. "Doctors are wasting their breath warning accountants about private equity culture crisis." "Are they selling their soul to private equity?" "What is private equity and why is it bad for public accounting?" That sounds like a nice discussion in the context of a regulatory discussion. "Can we ban private equity?" "Don't be like X, run from private equity." There is an absolute lack of understanding of what this means. It's not just that accountants are ignorant, but it's actually a problem with the positioning in the market and a lack of education on what's going on.

(07:37):
The other thing that's important to note is accountants are very reactive and quite mobile. We chose this profession for a reason: stability. A lot of us were probably like, "I want to be involved in business, but I'm going to pick the safe thing." Selling to accounting firms, I've realized we're very slow to adapt to certain new things. We see discussions like, "Should I run? A private equity firm bought a stake in my firm." They're quite mobile based on the opportunities that exist, especially at the manager and above level. We're seeing that employees have more options and bargaining power than ever. It doesn't take much for them to potentially take flight. "Do I want to wait this transition through? I actually have seven recruiters who messaged me about a non-private equity backed firm." There's a very strong chance people will do that.

(08:55):
I didn't want to overwhelm you with data here, but there's actually a loyalty tax being offered to managers. One of the fields we collect on Big 4 Transparency is whether you're an internal or external hire. Externally hired managers are paid on average 13.7% more. That tells you how many options they have and how competitive the market is to bring in that level of person. They've got options. But the reality is not all bad, and that's what's important here. The perception is that private equity is going to come in and there will be horror stories. Those are old stories; that's not the story in the accounting industry. This is a growth story. This is growth capital. This is not someone coming in trying to squeeze all the juice out. This is capital to be able to go to the next level technologically, offer more services, and acquire firms.

(10:13):
The reality is not what the perception is. Looking at the data we collect, we focused on the 2022 to 2024 time period. These are the average salary increases in dark blue at non-PE backed firms and light blue at PE-backed firms. That's not the starting salary; that is actually what a first-year senior is making in 2022 versus 2023 versus 2024. That is very rapid wage growth even in the non-PE category, but in the PE category, that's pretty impressive. The profession is coming a long way to address the shortage, and wages have been increasing quite dramatically.

(11:09):
We're seeing PE as a segment increasing significantly more. Let's keep these numbers in mind. If I'm a manager, it's an extra 1% a year of wage growth being added on top of my merit increase. Overall average is 1.4%. So the salaries are going up more. We know there's big money coming in, that makes sense. But the lifestyle is probably going to be terrible, right? Because they have this reputation that they're going to squeeze people. Based on our US data—roughly 15,000 data points—the average weekly hours worked shows only a 2% spread. If I'm there for two years and my wage growth is 3% higher, that's actually a pretty good tradeoff: being paid 3% more for working 2% more.

(12:13):
What are we so scared about then? There are probably other intangibles. Once the dust has settled on a private equity deal, job satisfaction is only 2% off as well, possibly driven only by perception. Once you get into a gap that small, you start to look at things as small as just perceptions. The reality is actually not that bad once the dust is settled on the deal. Where am I driving with this? What's actually really interesting is when we move on to that next point—and it's not even all firms—some PE firms are outperforming the rest of the cohort of non-PE firms on job satisfaction. When I did a ranking in the spring, the top-rated firm by job satisfaction was roughly a seven out of 10, which is high for the industry, but it beat other firms by roughly 3%.

(13:27):
That's a strong indicator that it's possible to do this. This slide is really interesting: it shows us something about the perception. We aligned the timing of all the private equity deals that have happened since we've been collecting data and aligned them to when the deal happens. That second point at the start of the bubble—the first drop off—is the quarter before and the quarter where the deal happens. Private equity actually knows how to pick 'em because the ranking before rumors of the deal came out was above the overall general accounting market. 7.5 out of 10 was the average response. When the rumor and the announcement of the deal came out, that tanked pretty heavily. Within the next two quarters, it leveled out a little bit, and then at the end of the first year, it went back down and actually started a recovery.

(14:39):
In some deals more than six quarters after, it actually was around a 7.0. The point is that once things are running within private equity, the job satisfaction responses are not really different. However, this bubble is a problem. Why is this a problem? This circle represents, within just this room, probably tens of millions of dollars. Let me explain. We talked about the mobility and resistance to change of accounting professionals. They've got options. They've actually got recruiters offering them more money than what they're making to leave the firm. It doesn't take too much for them to want to make that jump; they're just looking for a reason to go. When your job satisfaction declines like that, they are going to leave.

(15:39):
There's more cost than just the inability to satisfy the work. You're probably paying that 13% premium for a first-year manager to backfill that role. You're probably paying high recruiter fees. Technology is playing a bigger role than ever. Once upon a time, you went from firm to firm with pen and paper—that was easy to do. But now, when a tech stack gets involved, that's a very high cost to get that employee ramped up because they need to learn how to use your practice management system, your audit software, and a whole new set of client files. You're compromising the relationship that exists with existing clients.

(16:33):
For the first little while on a new file, they're just trying to keep their heads above water. They're selling no work for you and there's no possibility of them expanding on a client file because they're new to this. This perception gap is costing firms millions of dollars because of the fight-or-flight response triggered in people when they hear private equity is coming in. As part of what we do with Big 4 Transparency, it's not just data collection; there's also a media side. We have a podcast where I've recorded about a hundred interviews with leaders in the industry. That includes people in this room who are on the private equity buyer side and those who have been bought by private equity.

(17:18):
Based on that, we're trying to pick up the narrative of what's so scary to people. What are we reacting so strongly to? The whole idea is learning how to bridge the gap. These are some of the preliminary findings. We're launching a very in-depth research project on this, teaming up with multiple US universities who are going to be doing qualitative interviews to pinpoint what people are afraid of and what messaging makes the difference between you being the firm that outperforms on job satisfaction or the firm that sees a mass exodus.

(18:14):
Clear communication on the deal is a huge piece of it. In a lot of the private equity deals we dug into, there was a lack of clear communication of what this deal would mean for people. Some of them were the earlier private equity deals where it was just an unknown to the industry. You can't really blame people for that. But now we have the data and the track record. There's no reason to not be communicating what this means. Come in with a plan to show value. What's in it for me? That last chart was a pretty good starting point: your wage is going to go up 1% more a year. Over time, your salary might actually be 50% higher than it was previously. That's huge. That's value.

(18:56):
Accountants understand money and finances. There needs to be clear communication of what's in it for them. We have leaders here in the ESOP space—that's a great way to do it. There's equity, phantom equity, and all these different options, but they need to be communicated very clearly in a way that will keep people motivated. I've spoken to a future panelist; they do a markup on the equity every single quarter and communicate that value to everyone who holds equity—and they give equity to everyone, I believe, down to the manager level.

(19:58):
They mark the equity every single month and they have a portal you can log into. Imagine if you have that level of commitment where your little "addiction" is checking the value of the company you work for. That's going to get you thinking differently about the value of what you're building. Hit the ground running with changes. Some of this gap in the Q3 and Q4 area is also the non-delivery of promises. We've heard people say, "Yeah, this firm's going to come in, we're going to use this capital, everything's going to be so much better. We're going to automate all of the little things you don't want to be doing." Often people get antsy. There are great promises, but if they aren't panning out, people get disappointed again and job satisfaction reflects that.

(20:53):
Make those changes quickly. Private equity is very much a growth story. This is not necessarily a case of coming in to lay people off, although there might be a little bit of that if it's a big firm absorbing a smaller firm. Reorganize fast. If I know cuts are coming and you don't tell me what that's going to look like and it drags on for six months, I'm assuming I'm on the chopping block. People are always going to assume the worst. Make those changes very quickly and follow through on commitments.

(21:47):
We're going to be exploring the impact of a well-implemented equity plan or phantom equity plan. Communication is a huge piece of that. Based on preliminary discussions, we have a leading hypothesis on what drives the difference between the highest-rated and lowest-rated by job satisfaction post-private equity deal. If you're not communicating the value, that's actually worse than just not giving the value, because you're bearing the full cost of the dilution of the equity you're offering without getting the engagement. If you're paying the compensation but it's recognized as zero on the other side because of poor communication, that's a huge problem.

(24:01):
Transparency is the solution. You want to communicate that value as much as possible. Don't just share that value with the managers. When I started at Deloitte, every single person in my cohort said they'd be a partner. People are aspirational; they think about that next level. If you're only communicating the investment value of shares to managers and up, anyone below manager doesn't really care. They're just looking at base compensation versus competitors. A lot of your firms are doing exceptionally well, so talk about it.

(24:55):
The Citrin Cooperman deal, I think, was a 3.7 return in three and a half years. That's a phenomenal return to be communicating to people. We're going to be exploring the differences between a platform model and a full-blown integration model later on to understand how that plays into job satisfaction. That's kind of the gist of it. We do have time for questions as well, so I'll be monitoring those. Thank you all for your time.