What is performance-based pay?
Many tax and accounting firms are converting their staff from hourly rates or salary to commission-based payment systems. Commission is no longer found only in the typical sales environment. Instead, employers of all types are focusing more and more on their staff’s performance to evaluate pay.
The reasoning for this type of pay is equivalent to what is already happening in many firms. Performance reviews and evaluations of employees are being assessed constantly in the business world, so it is only logical to make this the central motivation for your employees and create a more efficient practice.
Pay for performance may help you, the employer, to assess your firm’s overall performance, as well as help assess the individual performance of your team members. As employees meet the goals of their employer, they will find rewards.
- Helps set tangible goals for your employees
- Measures metrics regarding meeting monthly and/or yearly goals
- Helps employers easily recognize when an employee should be rewarded or reprimanded
- Gives staff goals to work toward – for example, a bonus, staff trip or conference
- Involves complex reporting
- Requires training in order to understand the system
- Entails change, which some employees may find difficult
- Takes time to accurately keep track of system
- Necessitates making sure your key indicators are appropriate
Every firm has different key metrics when it comes to staff. For example, a traditional or larger firm may decide that an employee’s billable hours is the key to their metrics, while a lifestyle-based practice may not want to tie the happiness and productivity of the firm to people working more hours. The Journal of Accountancy published “Pay Your Staff for Performance” that focuses on a base pay model, plus productivity and new business bonuses. While no harm is done in a new business bonus of 10 to 20 percent of first-year revenue, few staff members will be the right personality fit for the sales’ needs of that request. The downside of this model is the lack of work-life balance. This is why converting to value pricing may be imperative for a lifestyle-based practice.
Common metrics or key performance indicators (KPIs) used per staff member include:
- Bookkeeper dollar-per-hour production rate
- Monthly revenue
- Project backlog
- Billable hours or amount per billable hour
- Drops reason (e.g., closed, fired, price, service): 12-month rolling average
- Client count
- Realization rate (the difference between what you record as time and what percentage of that time is paid by the client)
- Meaningful client monthly contact
Case study: Meyer Tax Consulting LLC