CHAPTER 13
COMPENSATING THE MANAGING OWNER
“In many firms, the managing partner title is utilized to describe a person who is really an administrative partner with no real power to ‘manage’ the firm (or other partners). In contrast, a true managing partner is the key person in achieving the firm’s financial and other goals.”
—Stephen Weinstein, CPA
We are often asked, when developing compensation plans for firms, “What’s a managing owner worth?” While we are unsure about the definitive answer to this question, there is a different question we can answer: “What should a managing owner be doing?” Only when a firm has a clear understanding of the managing owner role and the expectations of the incumbent is it possible to determine what the individual should be paid and how.
Determining compensation for the managing owner of a small firm is generally less difficult than determining it for a managing owner in a larger firm because the managing owner in a small firm usually maintains a book of business and is evaluated on similar criteria as other owners. In larger firms, however, where the managing owner may have little or no billable time, compensation becomes a more complex issue.
Some of the issues with which larger firms struggle include:
▮ What happens if the managing owner wants to step down early?
▮ If so, does the managing owner rebuild his or her client base?
▮ What type of security or safety net does the managing owner have?
▮ What happens if owners believe the managing owner is not meeting expectations?
WHAT IS A MANAGING OWNER WORTH?
You can ask 20 people this question and get as many answers. Before you can determine what to pay your managing owner, you need to clarify the role and outline expectations. Does your managing owner serve as the CEO of the firm or as a highly paid administrator? Over the years, we have asked several managing owners what they do. We share three responses.
Example One—Steve Mayer
Steve Mayer, CPA, is the managing owner of Burr Pilger & Mayer, a progressive firm in San Francisco. BPM was founded in 1986 by three 10-year managers from Coopers & Lybrand. Since that time it has grown to 130 employees, approximately $20 million in revenue, three offices, and 16 owners. As a full-service firm, its offerings include HR consulting, IT consulting, and write-up services. It also maintains an SEC practice (20 public companies) and a wealth management practice with insurance and investment advisory services.
This is what Steve had to say:
I have a very strong opinion about the role of the managing owner. Of course, a lot depends on the size of the firm, the abilities of the current owners, and whether the firm is in its first generation or has already made a transition from its founders. I have functioned as the managing owner since the beginning of Burr Pilger & Mayer (BPM). Here are some of my key points on the subject of the role of the managing owner.
The managing owner is the key leader of the firm. He or she sets the tone of the personality of the firm, helps to build the vision, implements the strategic plan, and leads by example.
The managing owner must continue to motivate and challenge the older owners, while teaching and training the younger owners on their future roles in the firm.
The managing owner must be perceived by the staff as the right person to lead the firm. The staff must have confidence in the managing owner’s leadership ability or they won’t buy into the vision.
The managing owner must have the courage to spend dollars wisely and build the correct infrastructure to support the firm’s activities. Whether marketing, internal accounting, IT, human resources, and/or office services, the support staff is critical to the success of the firm. Many managing owners consider this overhead. We consider these costs the glue that keeps BPM together.
The managing owner needs to be an excellent client service owner—creative and a strong advocate for the client. Others in the firm must be impressed with the technical ability of the managing owner in serving clients, otherwise he or she is just another person with a “do as I say and not as I do” approach to life.
The managing owner must be a hard worker but demonstrate balance in life. A workaholic serves no purpose, nor does someone who is golfing every day. The balance between working at the office, family life, vacation, and community service is vital to the balance of life.
I believe that until the firm is over 200 people, the managing owner needs a decent-sized book of business. It is difficult to maintain a large book of business and perform the other roles of managing owner, but $750K to $1.5M is doable depending on the size of the clients. It is also important to set the example on collections, realization and cross-selling to clients.
The managing owner must set the tone for the firm’s involvement in the community. Every company should have as a building block of its existence a commitment to the community. I believe a CPA firm is uniquely situated to have all its owners and most of its staff involved in the community to get the firm’s name out there.
The managing owner needs to make sure the firm, through its annual events or just its day-to-day operations, is a fun place to work. Parties, firm activities, special days off, and office decorations—all add to the firm’s personality. To attract and retain good people, the firm needs to be a fun place to work.
The managing owner needs to have a system of accountability for all employees (including owners) that measures and evaluates certain standards of performance. These performance indicators need to be measured daily, weekly, and monthly, depending on their purpose.
Managing owners need to be passionate about their roles as managing owner. They must want to do the job, and at the same time, the firm must want them to be the managing owner.
The managing owner needs to be focused on developing the next managing owner. The goal should be to develop someone who can do the job better than the existing person. Firms that do not accomplish the proper transition between managing owners will not be competitive in the future, and many will not survive the next generation.
Finally, the managing owner needs to be able to make tough decisions in a thoughtful, decisive manner. Any decision must be in the best interests of the firm and can never, not ever, be made based on how it affects the managing owner. The level of integrity on personal benefits to the managing owner must be beyond reproach.1
Example Two—David Morgan
David Morgan, the co-managing owner of Lattimore Black Morgan & Cain, P.C., the largest locally owned CPA firm in Tennessee, had this to say:
The role of managing partner (MP) cannot simply be to warm a seat in the corner office resting in an “ivory tower” of personal accomplishments. It is critical to the success of an organization that the MP’s role be one of leading with values, providing vision for the future, and involvement with personnel and clients.
LEAD WITH VALUES
In Lattimore Black Morgan & Cain, we display our core purpose and our core values in prominent places throughout our offices. However, as MP it is my responsibility to make sure we really believe and live by our core values. Ours include:
▮ Respect and concern for our clients and for each other
▮ Extraordinary competence
▮ Absolute integrity
▮ Continuous innovation and learning
▮ High expectations and accountability, and
▮ Commitment to a balanced quality of life
MPs must set the example for others to follow. If we do not adhere to our core values, how can we ever establish a culture in which all employees are expected to follow these values? Occasionally, we may find an employee that does not embrace the values of the organization or is unable to meet our high expectations. In these situations, to preserve the culture of the firm, it is often necessary that the person leave our organization. These are tough decisions, but when handled properly, demonstrate a respect for all involved and a genuine concern for the overall organization as well as for the departing individual. It is the MP’s responsibility to ensure that such actions are carried out amicably and professionally.
Absolute integrity must be consistently demonstrated by the MP. The old saying “do what I say, not what I do” does not apply here. People mirror what we demonstrate and there is no substitute for anything less than absolute integrity. If the firm is to truly embrace the core values which form the firm’s culture, this must be a top-down approach beginning with the MP. Our firm has an ongoing process by which we survey both clients and staff to support and strengthen our core values. The utilization of an independent survey provides us with honest and unbiased feedback from our clients and employees. Based on this information, when we see areas that need improvement, we immediately address the issue and work to make it “right.” Unchanging core values can co-exist within an ever-changing environment. Our values provide the framework necessary to embrace the constant change that is necessary for success.
STRATEGY AND GROWTH
The MP must always be thinking ahead. No successful business can remain static; it is either moving forward or backward. While the MP often gets involved in the day-to-day tactics of executing strategy, we must also be thinking strategically and spending the time necessary to evaluate the best place to allocate scarce resources of time and money. Many firms simply live for today, enjoying their success to the fullest by draining the firm through current compensation for the owners. Firms like these can be very successful in the short run, but are doomed in the long run as this approach provides little opportunity for growth. We must allocate resources for the young “stars” in our organization because they represent our future. Positioning the firm for the future requires a strong commitment to investing in technology, new people, and new services that will provide for future growth and firm success.
If you embrace the concept that growth is necessary to retain the best people by providing them opportunities for outstanding careers, the MP should be involved in all major business development opportunities. This involvement demonstrates to prospective clients they are important to the firm and there will be a commitment of resources to ensure they are served well. This involvement by the MP also demonstrates to the entire firm the importance of developing new business.
THE VOICE
The MP is the firm’s public voice. Whether it is telling the firm’s story in a short and concise manner at a mixer with attorneys or communicating the firm’s vision for the future to all employees at an annual “State of the Firm” meeting, the MP must be a good communicator. When approached by the media, he or she must use good judgment in what is communicated, understanding that sometimes it is best to remain silent. It is always important to remember the MP represents a large group of clients and other key stake-holders that often have differing or competing objectives and it is important to honor each of them.
TALENT SEARCH
The current upheaval in our profession is providing great growth opportunities for the well positioned firm. To take advantage of these opportunities, the MP must help attract top level talent to the firm. Entry level personnel recruitment can be delegated to others, but many firms are beginning to involve the MP in the latter stages of recruitment. When it comes to experienced talent, however, the MP must be involved. For recruits who have the potential to significantly impact a specific practice area, the MP must communicate the vision of the firm so they clearly see opportunity and how they could fit into that vision. This is especially important as personnel are recruited to spearhead new practice areas.
PROBLEM SOLVING
While many of the MP’s duties can be stimulating and fun, some are not. One of the greatest challenges comes when MPs must function as the “Complaint Department.” Problems need to be addressed quickly and effectively to prevent them from growing into larger issues. Unfortunately, many professionals tend to avoid conflict resolution, hoping the problem will just go away. MPs must maintain an open door and be ready to assist in resolving employee and client issues alike. They must also maintain open eyes and ears to recognize small problems before they become larger ones. This is not to suggest that responsibility should not be delegated so employee issues are handled by immediate supervisors whenever possible. However, when problems escalate, MPs must step in and assist in resolution. The same approach applies to client problems. MPs must assume the role of counselor, mediator, facilitator, and peacemaker. Often when a client is unhappy, professional egos can come into play and rather than “fixing the problem,” some individuals try to “affix the blame.” The MP must bring an objective viewpoint and remove emotion from situations to prevent them from escalating into more severe issues.
Finally, MPs must remind themselves and owners that success is never final. They must create a culture that embraces change, including the change that will one day occur when a new MP takes over.2
Example Three—Tom Feeley
Tom Feeley, the managing owner of Feeley & Driscoll, P.C. in Boston, provided us with eight tasks that rank high on his list.
1. Feeley says, “Managing owners should monitor and create reports on client profitability. Each client is rated, A, B, C and D. The A clients made more money than ever; B clients made good money; C clients had small losses but are in control; and D clients are out of control. Most of the clients that come into Feeley & Driscoll are C or D type clients. Feeley is successful because we make these clients A or B type clients.” How many of your clients have you brought to the A or B level?
2. Managing owners need to enforce CPE. Feeley says, “Forget the 40-hour-a-year rule. Make your owners and staff spend more than 100 hours a year developing new skills and competencies.” How many hours per year do your owners spend developing new skills?
3. According to Feeley, “Managing owners need to make sure their owners and staff take annual vacations. In today’s high-pressure environment, our people need to have a healthy balance between work and life. Vacations are critical for the high level of client service that is needed throughout the year.” How can you help revitalize your people? Do all your owners take annual vacations?
4. Managing owners should spend time counseling and coaching owners and fast-track people. How much time do you spend doing this during the year?
5. Managing owners should constantly be talking about the firm’s strategic vision and its competitive advantage. Feeley encourages all managing owners to remember the old MBWA (managing by walking around) technique. How many hours per week do you spend walking the halls in your firm?
6. Managing owners need to teach the art of collaborating. For whatever reason, accountants are not good collaborators. “They don’t get others involved with ‘their’ clients,” according to Feeley. Collaborators learn from others. They do not let their egos get in the way. They are not afraid to bring other professionals into contact with their clients. How good are you at collaborating?
7. Managing owners need to get the message out to all staff members. They need to be seen often and communicate regularly. How much time do you spend with staff members during the course of a month?
8. Managing owners worry about the firm’s culture. They strive to nurture it into what it is supposed to be. They often ensure the firm is performing upward evaluations and skip-level interviews (interviews in which people are not giving feedback to their immediate supervisors, but rather their supervisor’s supervisor). What do you do to ensure that everyone is living your firm’s values?”3
If your managing owner is not doing these eight things, perhaps he or she is merely an administrative owner.
WHAT IS AN ADMINISTRATIVE OWNER?
While the administrative owner often maintains the title of managing owner, he or she is generally not involved in the activities we previously described. Rather, administrative owners handle the firm’s administrative responsibilities (for example, budgets, facilities, reports and record keeping, human resources issues, technology, and so on). They operate like managers, who concentrate on tasks and activities and ensure things get done, rather than like leaders, who focus on vision and strategy and clarify what needs to be done.
WHAT IS A REAL MANAGING OWNER WORTH?
In the corporate world the CEO is usually the highest paid individual in the company. According to Carl A. Leonard, a consultant at Hildebrandt International, it is not a coincidence that the highest paid person in a business entity is almost always the chief executive. Why? This person has the most influence over the success or failure of the business. He suggests that owners in law firms (and we agree that owners in accounting firms) seem to accept this proposition for their business clients, but often fail to see why it should apply to their businesses.
Owners in many CPA firms do not recognize the leadership value a good managing owner can bring to the firm. While none of the three managing owners we quoted above mentioned profits, you can be sure these firms are highly profitable. Effective leadership provides the firm with a competitive advantage and, above all, profits. In many firms, owners often want to evaluate their managing owners based on the number of billable hours or new business they generate. Leadership is often not high on the list.
WHAT ARE MANAGING OWNERS PAID?
The answer to this question depends, in part, on whether the managing owner operates at the executive or administrative level. In most firms with which we have worked, the executive level managing owner is the highest paid owner. When this is not the case, they usually still remain in the top quartile even when the managing owner has little or no book of business. Under new compensation systems the managing owner is often compensated with a base plus a bonus tied to achieving overall firm goals. The bonus can be 100 percent or more of the base salary. In other firms, the managing owner receives a base plus a specific dollar amount (in the form of a stipend) for taking on the managing owner role as well as a bonus.
FINAL THOUGHTS
A strong managing owner with vision, drive, charisma, courage, and strong leadership skills often helps a firm achieve significant long-term results. Without a strong managing owner, firms often struggle—emotionally, operationally, and financially. Coral’s grandmother, while never having been a managing partner, had the common sense to know the secret of being successful in the position (or any other). Here is one of her favorite sayings that would aptly apply to the role of managing owner today, “Honey, no one notices when there’s no dust on the furniture. They only notice when there is.” Similarly, a managing owner is invisible when things go well and very visible when they do not.