This article originally appeared in the July 2018 edition of INSIDE Public Accounting. To subscribe to INSIDE Public Accounting Monthly click here.
The accounting profession struggles with hiring the right people for the right positions, developing their skills, moving them into partnership and then, possibly, to the top job as MP.
Some common succession challenges: a weak bench of partners who are unprepared – or unwilling – to lead the firm; an MP who fails to give up clients to manage the firm; an MP who stays in the role too long; or a firm that is too siloed, makes the path to partnership a mystery or does a poor job with leadership training. The list goes on.
More than half the nation’s accounting firms, 59%, do not have a written succession plan in place and the average MP age is 56, according to IPA’s data from its 2018 survey of more than 500 accounting firms. Typically, MPs retire after their term, or serve in a limited advisory capacity.
But what about firms that are elevating younger professionals to the MP role? IPA spoke with two firm leaders who are in their early 40s. These MPs, who would have 10 or more working years ahead of them after serving in the top job, face an unintended financial consequence. To manage the firm well and give leadership opportunities to others, they must delegate client work, but once they return to the partnership as client-serving professionals, they face the prospect of building a book of business all over again.
One firm, Green Hasson Janks (now GHJ) of Los Angeles, has created an insurance policy of sorts for Tom Barry, who became MP in January 2018 at age 43: a two-year minimum compensation agreement after completion of his term. The compensation is not guaranteed – he still needs to meet performance expectations – but it gives him time to rebuild his client list without taking a huge financial hit.
The idea came from consultant Jennifer Wilson of ConvergenceCoaching and then-MP Leon Janks, who had led the firm for 12 years.
Barry says he was hitting his stride after 13 years as a partner. But with a wife and four young children at home, “I had to sit back and say to myself, ‘So I’m going to walk away from a sure thing to take a job that is, frankly, not as sure of a thing and that I hadn’t done before.’ ”
Even so, citing “either arrogance or ignorance,” he says he didn’t think he needed an insurance policy. He likened the arrangement to hiring a new employee who wants to negotiate an exit clause. “Fundamentally, it didn’t resonate with me.” In the end, though, because Janks and Wilson were “adamant” that it was in his best interest, Barry and Janks signed a Memorandum of Understanding, separate from the partnership agreement.
His book of business – once about $2 million, is now under $500,000, he says. He transitioned half his compliance work and focuses mostly on advisory services. And after only six months as MP, Barry is surprised by how quickly processes change and the details of client service fade. Keeping up with the technological advancements in auditing is a challenge. “All of a sudden I’m the old guy who doesn’t even know how to use them.”
Consultant Carl George encourages agreements like Barry’s. The two-year timeframe “makes a lot of sense,” he says. “It takes more than one year to get back in the groove and ramp up. Two years is just right, three years or longer is an onus on the rest of the partnership.”
George, the former MP of Clifton Gunderson, consults on succession issues and is considering similar contracts for younger MPs at client firms. “It’s only fair, if we expect the right people to step up.”
A 41-year-old MP, who preferred to remain anonymous, says the concept of a safety net has been raised within his firm and within the firm’s accounting association. Although no decisions have been made, this MP believes a compensation arrangement makes sense to soften the financial blow of rebuilding business. At his firm, he is still expected to carry a significant client load, and with the demands of firm management, it’s easy to feel that neither job is being done well.
George agrees that the juggle doesn’t always work out. Some firms, particularly smaller ones, are forced to keep client work with the MP for profitability reasons. “At some point, it becomes a conflict because you’re really serving two different masters. You’re serving the firm and you’re serving clients and traditionally clients always win out and the firm comes second,” he says. “In my opinion, it should be just the opposite when it comes to making leadership and strategic decisions.”
Could a minimum compensation arrangement encourage more Gen X-ers to seek the top job? George notes that minimum compensation agreements may become more common as the “massive changing of the guard” continues with baby boomer retirements. “I happen to believe it’s a good tool and it gets the worry off the table.”
