FAQs about team member compensation and performance measurements

On December 31, I received this E-mail question from John Loebmann, general manager of a 15-member accounting firm.

Hi Ron,

I stumbled across your blog about a week ago and I am very excited about the possibilities of value pricing. I am the general manager of a small accounting practice (15 employees) and we are looking to overhaul the way the we do business.

I think that value pricing is the way to go, however, before I order your book I had a couple of questions. I believe I understand the value pricing theory and while I have a lot to learn about the methodology, the one question that keeps nagging at me is how does this impact the compensation and performance management aspects.

I read the table of contents and index and could not find anything related to compensation. I would be very interested in your recommendations regarding compensation with respect to:

• base salaries
• bonuses
• targets—team, individual
• adding new clients

In addition, I would also appreciate any recommendations regarding performance management:

• objectives
• criteria
• job descriptions

Thank you very much and I look forward to discussing this with you further.

Best regards,

John

Hi John,

Thank you for your E-mail, and I'm glad you found our Web site. We hope you visit often, become a member, and eventually end up as one of our "Trailblazer" firms.

Regarding your questions, let me first say that the theory of Value Pricing is intimately intertwined with the methodology. There is nothing as practical as a good theory. Many firms fail in their attempts to implement Value Pricing not because they don't execute properly, but rather because they truly don't understand the theory. Hence I applaud your attempt to first understand the theory behind what we are advocating—the "why to" is much more important than the "how to." Many people doubt this, but trust me when I say it's emphatically true.

If you truly want to "overhaul the way we do business" then you have to answer two questions: What type of future do we want to create? The next question is: Are we willing to pay the price? Commitment is everything. Once you answer these questions the "how to" is merely plumbing; you will figure it out as you go.

The reason you won't find much in my books regarding compensation of team members is there is no one standard framework on "how to" do this. Every firm is different, with various cultural influences that effect compensation. Our mission with Value Pricing is to get you a larger pie to distribute internally, which is the sort of problem most firms would love to have.

Because value and pricing exist outside the four walls of your firm, that is where we put our focus. How you distribute and share the profits internally is up to the leadership of your firm, and no one model exists.

I will say this: firms that Value Price and don't do timesheets have essentially replaced "billable hours" with revenue for determining base compensation. Some firms do not try to allocate revenue to individuals, as this contradicts the idea of being one firm. I agree with this method, but most firms still insist on allocating revenue per person.

Value Pricing firms tend to put less emphasis on base salaries and more emphasis on firm-wide profitability. Some deploy a team-based profit sharing plan as well, while still others recognize outstanding individual achievement with bonuses, etc. Some pay for bringing in new customers, other make that function a basic expectation of one's job.

As for your second question on performance management, I'm not big into job descriptions. In a knowledge economy, jobs don't have value—only people do. Hence, we strive to develop the talent a firm does have by focusing on their strengths and ignoring their weaknesses. That's hard to do if you pigeon-hole people into a job description.

We are strong advocates of utilizing Key Predictive Indicators, which differ from Key Performance Indicators (made popular by the Balanced Scorecard). The difference is enormous: a Key Performance Indicator is nothing but a measurement, and it's lagging. Since we can't lose by weighing ourselves more frequently (or accurately, for that matter), these indicators don't offer much help to change outcomes.

What firms need are Key Predictive Indicators. These are measurements, or judgments, tied to a theory, which allows us to test a cause and effect relationship. In other words, KPIs are a theory—they can predict, or control, the future. They are leading indicators, which measure the success of your firm the same way the customer does. There's not a customer on the planet that defines the success of their CPA by how many hours they charge.

This is a very short description of KPIs. For more information, start with my latest book, Measure What Matters to Customer: Using Key Predictive Indicators. This book details KPIs used by knowledge firms, rather than measuring lagging indicators.

You may also want to read my three-part series, published by the ACCA and available for free download in pdf: Burying the Billable Hour; Trashing the Timesheet; and You Are Your Customer List. These are shorter versions of my book, The Firm of the Future.

Eventually, you'll want to delve into pricing in depth; my Professional's Guide to Value Pricing, Sixth Edition and Pricing on Purpose: Creating and Capturing Value will take you through the methodology of implementing Value Pricing.

Warning: This is a enormous cultural change, and it's not for wimps. Nor will it happen overnight. It's also not for people not committed to entirely changing the way they run their firm. VeraSage is committed to helping only those truly committed to this change. It's only by working with the early adapters that we can change the culture of our entire profession from thinking they sell time to understanding they sell intellectual capital, while capturing more of the value they create for the customers they are privileged to serve.

I hope this helps, John, and let us know if we can be of any assistance as you overhaul your firm and become a true Firm of the Future.

Sincerely,

Ron Baker