Salary Caps Force Tough Decisions

According to the 2014 IPA Bench Marking Report, profit margins are generally being challenged across most commodity service lines by rising personnel costs and lower productivity, thus forcing firms to increase profitability and productivity at the partner levels rather than using leverage.
While accounting firms don’t use a staff salary cap on a contractual basis, it makes good business sense to use it as an organizational or segment budgeting and planning tool.
According to the last IPA survey, average professional staff personnel costs have risen to 45% of revenues, while firms are finding it increasingly difficult to increase client fees.
Using a salary cap as a formal budgeting tool will force firm leaders to make the tough, but right, long-term business decisions and sustain increased profitability without relying on maximizing volume, especially at the partner level. Using a budgeting type salary cap for the various professional staff levels and business segments will force firms to:

  • Make the tough decisions to replace high-priced (comfort-zoners) and high-level staff with less costly staff from within the firm’s ranks or recruit from other firms. It will be increasingly difficult to carry (while increasing profitability) managers and directors who have peaked in their careers and who will not be part of the firm’s partner succession planning.
  • Evaluate compensation and bonus criteria more carefully. There is an epidemic of high level staff that feel entitled to compensation and bonus increases each year, but are not attaining higher levels of performance, nor are they adding additional value and profitability to the firm.
  • Require partners to delegate more work to high level staff so partners can spend more time with their best clients and practice development efforts.
  • Be more selective in recruiting entry level staff that have the potential to be part of the firm’s succession planning.
  • Provide more effective training to staff at all levels so that they can work on higher billing rate, higher value type services and consulting projects.
  • Institute career development and leadership training to move staff quickly to higher levels.
  • Carefully review the profitability and future potential of each staff person.
  • Grow or establish higher valued-higher billing rate services and niches, and transition away from fee sensitive commodity work.
  • Terminate servicing low profitability clients and be very selective in accepting only high profitable new clients.
  • Put staff in positions to be more focused on their highest and best use of their time.

Too many firms have made growth and size, rather than profitability and succession planning, their strategic priority. In order to successfully implement succession planning and sustain higher levels of profitability, firms need to make the right business decisions and be more proactive in responding to the changing marketplace.