Team Incentives for Accounting Practices using Xero Practice Manager

With talent tight and practices struggling with capacity, accounting practices are more incentivised than ever to acquire and retain high performing team members. Partners and Directors are increasingly looking for monetary and non-monetary ways of doing this. Non-monetary (intangible) incentives are widely advertised:

• 4 and 4 1/2 day work weeks
• Organisation culture
• Team functions/events
• Additional leave entitlements
• Vehicles, holiday homes
• Ad-hoc individual and team bonuses

These are all valuable tools and currencies for attracting and retaining your team. But what about monetary incentives?

For incentives to incentivise they must be:

• Timely: The effort a person exerts must align with the reward for the same period.
• Easy to understand: People need to be able to plan and predict in order to change their behaviours to generate the outcomes they want. If your people can't estimate the impact of a behavioural change or decision in their head on the metric incentivising them, they won't be incentivised.
• Reliable: If we are using a metric to incentivise a team or individuals performance, the numbers produced must be infallible. This means providing the level of detail required where your team can TRUST the numbers being produced. It also means ensuring that the metric you are using and any adjustments being made to it is objective and free from human error both in the measurement and any adjustments.
• Visible: In order for incentives to change behaviour people need to be able to see the impact of their past efforts toward a target. Like navigating a boat, this is so they can course-adjust their habits, actions and behaviours in order to get to their destination.
• Mutually Agreed/Achievable: Even if an incentive achieved all of the above, it would still need to be achievable and mutually agreed in order to change behaviours. People can be just as easily disincentivised by a target or objective they don't perceive as achievable or 'fair'. When it becomes clear a target won't be achieved in a period, particularly due to external events outside their control, this will act as a strong disincentive for a team or individual until they receive a 'clean slate' in the next period.

A Note on Control

Perhaps the most important of all of the above principles of incentives is Relevance. Relevant incentives have a strong link between efforts and outcomes. People need to feel that they are in control of their own destiny. For this to occur three things must align:

• Responsibility
• Authority
• Accountability

If we create incentives, targets or measures that people feel they do not control because they are not responsible for the outcomes, lack the authority to act or influence the outcomes, or are not held accountable for the outcomes; this incentive would not be relevant or motivating.

The Hard Truth of Individual Incentives

There is no timely, easy to understand, reliable way to measure the value your team generates for your practice. If a metric is reliable to measure, it is not easy to understand; if is easy to understand, it is not reliable to measure; timliness also gets traded for reliability and vice versa; and all of them are subject to creating perverse incentives. The best you can hope for as a practice Partner or Director is to make an informed trade-off that guides the right kind of behaviours.

Why invoiced value by team member is not meaningful

Before we look at what you CAN do as a Partner or Director to measure the value your team generates for your practice. Here is two items of required reading:

Invoiced value by Team Member

Revenue vs Invoiced values by Team Member

Option A: Billable Targets

Billable targets are the easiest form of individual incentives and a good place to start if you don't have anything already. These include client hour (time) targets, productivity targets or billable amount targets, these largely amount to the same thing so any one of these three will do.

Pros:

• Timely: Time is measured on the timesheet date which is in the same period as the incentive date.
• Easy to understand: Everyone in professional services understands that Time x Rate = Amount. Productivity is the percentage of client time over actual total time (excluding leave) and is slightly less well understood, but easily explained and measured. People can easily calculate the gap between where they are and where they need to be and adjust their behaviour for the remainder of the period (both upward and downward).
• Reliable: Because of it's simplicity, it is very difficult to get these type of metrics wrong. It is also fairly difficult to 'game' Time x Rate = Amount without working long or perhaps not timesheeting some hours.
• Visible: Because these metrics are easily measured, they don't require many inputs and can be provided on a near-live basis even with the most rudimentary of practice reporting tools.
• Mutually Agreed/Achievable: It is very easy to see if these type of metrics are achievable because Time x Rate = Amount. We know the total contracted working hours, we know someone's rate and we also know what an expected productivity might be to arrive at an expected Billable Amount for period. Both team and managers need to understand what the implied expected non-billable (internal) time looks like day-to-day and week-to-week to determine if this metric is achievable/realistic.
• Relevant: Time, Productivity and Billable Amount are all within a persons control (their implied rate less so). Because individuals are responsible for their time, they have the authority to prioritise their work and efforts they can be accountable for their Billable Amount achieved.

Cons:

• Fixed Fees: Very few accounting practices are invoiced 100% in-arrears or on the time/cost basis these days. Billable Amount (and its derivatives) therefore are not the best representation of expected invoiced value for your practice. Even in a 100% time/cost invoiced practice, there is an upper limit to what we can invoice a client so Billable Amount does not always represent this. Billable Amount does not account for the effect of write on's/offs which are the difference between the value of effort put into a job (Billable Amount) and its invoiced value.
• Leave Adjustments: Leave both planned and unplanned is excluded from the productivity equation so you never have to adjust an individuals productivity target for leave. An individuals productivity % should not change for the remaining period they are at work. For Billable Time or Billable Amount targets however these will need to be adjusted for leave. If an individual's not at work they will be unable to achieve these targets. Leave adjustments require a person to do the adjusting in a transparent and reliable way and the adjusted target needs to be communicated/made visible to the individual in order to incentivise them.
• Non-billable team members: Billable targets work great for billable team members. It is the job of billable team members to generate revenue for the practice. It is the role of Managers, Partners and Administrators to keep the billable team members focussed on client work. Billable targets for these people are less relevant because it is not aligned with their role. Other incentives might be more appropriate here.
• WIP: A practice is unlikely to either invoice out or write on/off all of its time in any given period. This means there will be time (effort) in one period with invoice (reward) in another.
• Cost: There is no accommodation for a persons cost in salary/wages. We've discussed how Billable Amount does not equal Invoiced Value but there is also no expectation of a gross profit margin here. There is an implied relationship between the Billable Rate and Direct Cost rate of a team member but this may vary person to person depending on their employment contract. People with higher Billable Rates will tend to be more skilled/experienced, will also tend to have a higher Direct Cost rate and a higher billable target.

Option B: Revenue Targets

We know now that Revenue does not equal Invoiced value and that an invoiced value by person is not possible. What about a Revenue Target per person? Revenue is Billable Amount generated in a period adjusted by the Net Write-ons/offs recognised in that period. It is the closest and most reliable representation of a persons contribution to a practice for any given period:

Pros:

• Timely: Because Billable Amount is recognised on the timesheet date rather than an invoiced date the revenue target aligns much closer to the effort. The lumpiness of invoicing is mostly removed by measuring Revenue.
• Reliable: Because Revenue is Billable Amount (recognised on the timesheet date) adjusted by Write ons/offs (recognised on the write on/off date), a detailed drill down is able to be provided at any stage throughout the reporting period and after that shows how Revenue is arrived at and the clients and jobs that contribute/subtract from it.
• Open Jobs: Above we discussed 'easily understood' and 'visible' as principles of a good incentive. Once people understand what a write on/off is, why they happen, how they are distributed and how this effects their Revenue, what do they do about it? The Open Job Report in Link Reporting is the only report in the accounting industry that allows your team to anticipate and act to prevent future write-offs from occurring. The Open Job report aligns Job Budget with WIP data and the job-task detail required for your team to intervene earlier when their jobs are not going to plan. For a Revenue target to work, your team must use and understand this report.

Cons:

• Easy to understand: In order to understand Revenue a person must also understand Write ons/offs, when these are recognised, why they happen and how they are distributed. These are not 'easy' concepts but they need to be explained and understood well in order to incentivise behaviour.
• Interim Invoicing: Interim invoices are any invoices that are not yet attributed to people and services. These include fixed monthly fees, 100% invoiced in advance, deposits and progress invoices. Because these invoices are not yet attributed (or attributable) to people, they will not form part of the revenue calculation. This means that people who tend to work on clients, engagements or services invoiced on this basis are less likely to have their efforts attributed to them in the same period as their timesheets. Interim invoices are attributed to people on the wash-up date which at the latest is the job completion date. This is the only reliable time where we know the portion of the invoiced value to attribute to the people who worked on a job. These will appear as write ons/off in a future reporting period.
• Write ons/offs: Write ons/offs are a key part of the Revenue equation. They are their own transaction occurring on their own date which is either the invoice date or the wash-up date. Multiple wash-up dates can occur throughout the life of a job. Wash-ups are the process of distributing unallocated interim invoices across the time/disbursements incurred so far. This means that prior-period ghosts can come back to haunt you in a current period. Can write ons/offs be recognised on the related timesheet date? No. This would break the WIP equation which is how you reconcile Revenue to Invoiced values and it would mean you and your team would always be living in a 'peachy present' because current period write-offs wouldn't be seen in the current period (they'd be associated with the related prior period timesheet).
• Visible: Because Revenue relies on the distribution of write on/off values across team members at a specific write on/off date, this is not able to be arrived at on a live basis due to the calculations involved. The best that is physically possible is a near-live (maybe hourly) basis and the best that is currently available with the best practice management technology is overnight sync/calculations with daily reporting.
• WIP: The higher your practice WIP balance, the greater the 'lag' between Revenue and Invoiced values and therefore the greater the lag between Revenue (effort) and reward (invoices) when incentivising your team. WIP is a large question mark in our practice performance. The bigger your practice WIP balance, the bigger the question mark when measuring your practice, partner, client, group, job, team, individual and service performance.
• Projected Write-offs: Because write ons/offs only occur on the write on/off date there is an 'projected write on/off' value on some of your jobs. An example of this is where we know we are 'cruising for a bruising' on an open job with a $5k budget, $2.5k invoiced to date but $4k billable value to date with 6 months of the year to go. We might have a projected write off on the job-tasks completed so far of approximately -$1k. This will be the value of the job-task budgets vs the billable value incurred against each job-task (creating a negative remaining budget) adjusted by write ons/offs already recognised. This -$1k 'projected write-off' will likely be attributable one or more people who have worked on the job so far. It has yet to be distributed via a wash-up and likely won't be until the completion of the job. This means though that we know about a future write-off and we likely know who it's going to be attributed to, but when we look at their individual performance they are reaching/exceeding their Revenue target because the write on/off has yet to be recognised. If you've only been in the job for 3-12 months you'll appear to be a high performer until your chickens come home to roost (they always do).
• Leave: Like Billable Amount targets, our team can't contribute to reaching their revenue target when they are on leave. An adjustment must be made to any revenue target for both anticipated and unexpected leave. This requires an objective adjuster and the visibility to communicate the adjusted target ahead of time.
• Incentive Credits: If you live by the sword, you die by the sword. It is possible when measuring Revenue to provide and pay-out incentives to our team for hitting revenue targets only to find in later periods that write-offs were incurred. Revenue would be (accurately) adjusted down in the future period and those people may not hit the future period targets as a result. This is all fair but what about the incentives already paid out on the benefit of the doubt of Billable Amount turning into invoicing? Would you ever request prior bonuses to be returned? Probably not. This is a consequence of WIP creating a lag in our practice performance. Reduce your WIP and your will reduce the risk of this occurring.
• Pricing: Pricing is the most common of the three reasons for write-offs (pricing, processes, people). Because Revenue is adjusted by write ons/offs, pricing problems become people problems. Your team will be less likely to want to work on or for under-priced clients and jobs because this will be more likely to contribute to write offs. You could have a method for adjusting or 'claiming' for these situations at the end of each reporting period but you would be trading off reliability here. Any back-dated adjusted to a revenue target due to allowances for under-priced jobs would also fail the timelines test because your team didn't have the information to change their behaviour. Here we have an un-avoidable mis-alignment of responsibility, authority and accountability where individuals are responsible for a job but lack the authority to price or re-price a job and are still held accountable (via a revenue target) for the success of that job.
• Multiple People on Jobs: It is very rare that a single person contributes to a job. The Open Jobs report in Link Reporting is a must if you are using a Revenue target for your team members. Because multiple people contribute to the completion of a job it creates a joint sense of collective responsibility but this is not in alignment with individual targets. What this means is that where one person may blow-out a job budget, everyone who worked on the job is likely to suffer via a distributed write-off on a write-off date. This will effect their individual revenue values and their ability to meet their target. Here have an unavoidable mis-alignment of responsibility, authority and accountability where people are individually accountable for collective responsibility and only one of them has any authority to act on it (the job manager).

See also this article re any dollar or hour targets for a period:

Adjusted Revenue, Billable Value or Billable Hours Targets for Individuals

Option C: Individual ROI

By now, you're probably looking for a silver (or golden) bullet to end your team incentive misery. Unfortunately Individual ROI isn't it. Below is the required pre-reading here:

The Treadmill to Nowhere: Why using fixed staff costs for calculating staff ROI % is a bad idea

Avoiding the Death Spiral: Actual Costs and Excess Capacity

Pros:

• Costs: This the only team incentive metric that incorporates a persons cost and better aligns their efforts with our practices profits (not revenue).
• No Adjustments for Leave required: Because the ROI calculations exclude leave. An Individuals ROI % does not change when they go on leave. (Unless you have fixed the cost which we discussed above is a bad idea).
• Directly attributed to wages/salaries: Because ROI % is directly attributed to a persons wages/salary it is very easy to align the interests of the practice with the interests of the individual by saying 'if you can achieve Y, then we can afford to pay you Z'.
• Reliable: Like the Revenue calculation, all the inputs to the ROI % allow for detailed drill-downs to for time, write ons/offs and direct costs. Your people can see exactly how their ROI % for a period is calculated.

Cons:

• Non-Billable Team Members: ROI % doesn't work well for non-billable team members including Managers, Partners and Administrators. You can set a (lower) ROI % for them however this distracts from their primary purpose which is to enable our billable team members to focus on client work. Other incentives may be more appropriate here.
• Understandable: Because ROI includes the direct cost of a persons time, ROI % is one step less understandable than a Revenue target. From 'Treadmill to Nowhere' above we also need to be able to communicate that the direct cost used in the ROI % is not what they see at the top of their payslip and why. This can be difficult but substituting this only puts your team on a treadmill to nowhere.
• Training: If you have never measured individual ROI % before in your practice you will quickly find that some of your people have already been set up for failure. Their wages/salary is not reflective of their level of skill/experience. It's a difficult and demoralising hole to dig your way out of and you'd be tempted keep just to switch jobs to practice that doesn't measure individual ROI %. This problem lies with us, the Partners/Directors and requires the creation of a structured training/coaching plan to improve their individual ROI %. This will likely involve short-term sacrifices in productivity for both the trainee and trainer but with the benefit of medium-term gain in enhanced ROI %.

A look to the future: What are the best practices doing?

Despite all the con's listed, a rolling individual revenue target (adjusted by leave) reviewed quarterly is probably the best option available right now. For this to work, your people need the visibility provided by the Individual Performance and Open Jobs reports in Link Reporting.

The most innovative practices in this area right now are combining practice capacity information with practice reporting information to set two revenue targets for their team:

• Revenue target
• New services target

Each team member has a revenue target for the scheduled work assigned to them. This is a combination of existing clients on fixed monthly fees as well as billable work invoiced in arrears. Individuals are empowered to meet with clients at annual review meetings and are provided the space (capacity) and expectation (target) to offer new services to existing clients. This is a developing area so watch this space or get in touch to find out more.