Linking Employee Compensation to Performance

Firms use compensation as a standard reward for performance in areas such as meeting billable hours expectations, performing at a high technical level, delivering exceptional client service, taking on additional training or leadership duties, or mentoring staff.   

Just as importantly, firms use compensation to give employees something to look forward to. Employees are motivated to exceed expectations when they know they will be rewarded for their efforts.

So how do we implement this? 

Outline expectations. Unless the firm outlines performance expectations, employees may be left guessing what is expected of them. For the sake of clarity, I recommend firms create guides or frameworks, commonly called competency frameworks, to outline what they expect of each level.  

These tools describe both technical and non-technical knowledge, skills, and abilities (KSAs) required for each position at your firm. Non-technical KSA categories at CPA firms often include client service, people development, and marketing and business development. Examples of competencies that could fall into these categories include: 

These frameworks should be available to all employees in one central location so they can be used in performance evaluation discussions or for general reference throughout the year.  

Be SMART. Another great tool for linking compensation to performance is the use of goals, particularly SMART goals:

• S – specific 
• M – measurable  
• A – achievable
• R – relevant
• T – time-bound  

For example, a tax accountant may have a goal to file as many returns as possible by the April filing deadline. While this is a great goal to have, it is too vague to be considered a SMART goal.

As a SMART goal, that might be stated as: “File at least 75% of my client’s tax returns by the April 18 deadline in 2023.” The goal now includes a specific percentage of returns, and it is achievable, relevant and time-bound by the deadline.  

CPA Partner Compensation: The Art and the Science explains ►partner comp 101 ► the 12 systems used by all firms ►how to design your firm’s system ►open vs. closed systems ►the role of “book of business” ►differences between large and small firms’ systems ► the MP’s compensation ► trends and controversies and ►overall best practices.

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Monitor performance. I encourage firms to set goals with all employees. Employees and their supervisors can then monitor progress through formal semi-annual or annual performance check-ins—or, even better, quarterly check-ins.  

Bonuses are another way to encourage and motivate employees to meet or exceed expectations. Many firms tie bonuses to the same, or similar, metrics used to determine base compensation and may include production, intangible, and goal achievement.  

 Concluding Thoughts 

While thinking about your employees and how to measure and reward employees is common, it’s just as important to think about expectations as they relate to your partner group as well. Despite being held to higher standards than regular employees, partners can use these measurement tools when determining their compensation as well. When helping firms design their partner compensation systems, we often recommend goal setting as a means for allocating the variable components of each partner’s income to emphasize the importance of setting and achieving goals as a leader and shareholder of the firm.