Mitchell Langbert

Linking Employee Performance, Compensation and Accounting Firm Performance

Why today's CPA firms need to re-focus on incentives and the linkage between performance and rewards.

February 17, 2011
by Mitchell Langbert, PhD

Accountants are well paid, but high pay does not necessarily imply a match with how well the firm performs. According to Marc Rosenberg of Rosenberg Associates, in 2009 entry level CPAs earned as much as $60,000 and senior-level partners in national firms earned nearly $400,000. To get the most out of employees-paid-well, firms need to link firm-level performance goals with job descriptions. Increasingly, job descriptions emphasize competencies or skills rather than tasks, duties and responsibilities. That is old hat to accounting, which views the CPA certification as fundamental. The meaning of skills has widened, though. Accounting educators increasingly emphasize competencies such as interpersonal skills. (G. L. Sundem. 1998. The Accounting Education Change Commission: Its History and Impact. Unpublished Manuscript.)

Once jobs are linked to performance goals through job analysis, the problem becomes employee selection and motivation. Selection techniques include ability tests, work samples and job tryouts along with more frequently used unstructured interview methods. Motivation techniques include goal setting, incentives, job design and organizational culture. Compensation in the form of promotions and merit pay is widely used and other kinds of incentives also might prove useful.

Most firms think in terms of senior employee pay based on incentive formulas that integrate billable hours, business developed and clients serviced, but Rosenberg points out that the trend has been toward judgmental, merit-based approaches. This is understandable if formulas fail to capture important dimensions that require compensation. But equity or fairness benefits from objective measures that are content valid, that is, that express an irrefutable link between performance and results.

The picture I am painting is that firms tend to think in terms of the traditions of scientific management modified by today's human resource (HR) management practice. Precisely a century ago, Frederick Winslow Taylor developed his scientific management system, which included factors like employee selection, training and incentives in the form of his differential piece-rate plan. (F. W. Taylor, The Principles of Scientific Management. New York: WW Norton & Company, 1911.) Taylor emphasized the importance of a "mental revolution" that aligns employees' and managements' goals. Taylor applied his scientific management system to manufacturing firms. Yet in modified form, it has been foundational to the management of all kinds of work.

Taylor omitted three dimensions of analysis:

  1. Organizational culture,
  2. Group norms and
  3. Employees' emotions.

Incentives work well if group norms and the organization's culture support productivity and if employees are committed to the firm's goals.

The human relations school argued that performance is chiefly based on emotional and group factors, but subsequent work has found that goal setting, which is part of scientific management as well as compensation, fair treatment, incentives that employees value and high-performing cultures are as important as Taylor claimed. But we now know that HR strategy means holistic, integrated thinking. High-performance work cultures need to integrate motivational thinking and job design with pay. Pay need not be viewed as pandering to lower-order needs (F. Herzberg, B. Mausner and B. Bloch Snyderman. The Motivation to Work. New Brunswick: Transaction Publishers, 2010.) or as theory x (McGregor, D. The Human Side of Enterprise. New York: McGraw Hill, 2006.) but as part of a high-performing culture.

Four Incentive Modes

In motivating performance, accounting firms traditionally rely on what Edward Lazear and Sherwin Rosen call the tournament theory (Edward Lazear and Sherwin Rosen, "Rank Order Tournaments As Optimum Labor Contracts." 89:5, Journal of Political Economy, 1981.). That is, the best performers are promoted to partner. Since, the compensation is rich and associates have a small probability of winning a partnership, promotions serve an important motivational function. As well, firms utilize merit pay and other incentives.

In their textbook Managing Human Resources, Susan E. Jackson, Randall S. Schuler and Steve Werner (S.E. Jackson, R.S. Schuler and S. Werner. Managing Human Resources, 10th Edition. United States: 2009.) note that although employers may say that they emphasize a balanced scorecard approach to measuring results, most emphasize metrics involving financial outcomes and fewer than ten percent reward employees for employee development and learning. Jackson, et al. argue that there are four kinds of incentives:

  1. Recognition rewards are non-cash, public recognition of employee achievement.
  2. Merit pay permanently increases base pay and typically is based on performance appraisal.
  3. Incentive plans involve bonuses over base pay but no permanent adjustment is made.
  4. Earnings-at-risk plans are comparable to commissions.

In earnings-at-risk, employees are paid a percentage of billable hours and might receive lower than average base pay.

Performance Appraisal

Performance appraisal linked to merit pay has been criticized for lacking validity, i.e., it can be subjective and not significantly related to objective performance measures. W.E. Deming, the noted quality expert, argues that merit pay based on performance appraisal is one of "seven deadly diseases" because managers lack both information about performance and objectivity with respect to their employees (Deming, WE. Out of the Crisis. Cambridge, Mass.: MIT Press, 1986.).

Organizational psychologists have noted numerous threats to the validity of performance appraisal such as the halo effect, under which one employee characteristic dominates all appraisal dimensions and recency error under which behaviors displayed later in the appraisal period dominate those displayed earlier. If firms are eager to link employee performance with results, careful attention needs to be paid to the performance appraisal system. It needs to link to objective output measures. Supervisors need to be thoroughly trained.

One technique that has a good track record is management by objectives, under which managers and their employees jointly set performance targets and employees are rewarded for achieving those targets. Other approaches are essays based on the critical incidents method (CIM). CIM involves recording exceptionally good and bad examples of employee performance during the year and basing appraisals on those performance dimensions. Dimensions for performance appraisal can be based on the critical incidents method and applied to behaviorally anchored rating scales.

Group vs. Individual Incentives

In part because of Taylor's influence, most firms have emphasized individual incentives through promotion tournaments and merit pay. Deming, though, forcefully argues for group-based incentives. These can involve bonuses paid to audit teams or firm-wide productivity bonuses through variations on the Scanlon, Rucker and Improshare plans that have been implemented in manufacturing environments. Profit sharing also is an important candidate for compensation practice in accounting firms.


In the past decade the Sarbanes Oxley Act enhanced demand for accounting services. Employees' performance may not have received the attention it warranted. In the current economic malaise and with the winding down of the Sarbanes-Oxley boom firms need to re-focus on incentives and the linkage between performance and rewards. There are many options for doing so. As well, there is much opportunity for creativity from the HR department.

Rate this article 5 (excellent) to 1 (poor). Send your responses here.

Mitchell Langbert, PhD, is an associate professor at Brooklyn College. Widely published on the subject of human resource management, Langbert has consulted and served as an expert witness.