Managing Human Resources in a Small Firm
Motivation Through Performance Evaluation

By Suzanne N. Cory, Stephanie Ward, and Shirley A. Schultz

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OCTOBER 2007 - How does an accounting firm survive when it doesn’t want to be the biggest, it just wants to be the best? Being the best could mean smaller profit margins resulting from added incentives provided for employees to keep them happy, or it could mean just the opposite—happy employees and healthy profits. As reported in the Wall Street Journal, the Bureau of Labor Statistics “expects employment of accountants to grow ‘faster than average’ (or 18% to 26%) between 2004 and 2014.” Furthermore, the AICPA 2005 Private Companies Practice Section (PCPS) survey found that recruiting and retaining talent is the top concern of the CPA firms of all sizes polled nationwide. Managing turnover costs, while important to all firms, is especially important to local and smaller regional firms.

Employees are often enticed away from smaller firms by the lure of greater salaries and fewer hours, which larger firms or industry employers can offer. Smaller firms can either counter with higher salaries and more benefits, thereby decreasing firm profits, or they can turn to other human resource management techniques aimed at developing talent to benefit employees and clients alike.

Case Study

This case study illustrates how a local accounting firm responded to the critical issue of talent retention by establishing a performance management system that focused on motivating employees to achieve their best so that the firm could maintain its reputation for exceptional client service. The Hanke Group, P.C., located in San Antonio, Texas, has developed a performance management system that integrates the firm’s strategy into its daily operations so that all employees (referred to as team members) understand how their individual contributions are essential to the firm’s success. Four key objectives run throughout the entire performance management system: 1) retain and motivate team members; 2) minimize turnover; 3) eliminate performance evaluation “surprises”; and 4) develop team members’ skill sets.

The firm’s management has discovered that the top team members have the most impact on providing service to clients. The recruiting and selection processes focus on identifying unique individuals who will thrive in their community-minded, best-service-driven environment. The firm relies on its successful internship and recruiting processes to identify future team members who will become top team members. Yet the firm understands that without proper direction even the brightest team members may not reach their full potential. Top performers have a considerable effect on the firm’s overall performance. Losing those team members would have a significant adverse effect on the firm’s ability to be passionate about being the best, creating value for its clients and people. Likewise, keeping a team member who is not motivated to provide the best value for clients is not in the best interests of either the firm or the team member. While minimizing turnover is crucial, keeping team members who don’t agree with the firm’s strategy is even more detrimental.

To keep key team members motivated, reduce turnover, eliminate evaluation surprises, and improve team members’ skills, the Hanke Group’s performance management system includes development plans initiated by team members. These plans identify how each team member fits within the firm’s culture and how each specifically contributes to the firm’s success. This process, which helps determine whether the Hanke Group is the best place for an individual to succeed, is informative for both the team member and management. At the same time, the system continually provides information specific to each team member’s development, eliminating surprises. Team members have an ongoing understanding of their performance ability. Should it become necessary to sever ties with a team member who does not fit well, that individual should not be surprised about the decision. These attributes promote the core belief that it is essential to create environments in which employees thrive.

To understand the firm’s current success and solid management, it is necessary to consider its history and the events that brought the firm to decide to develop a comprehensive, people-focused system.

The Firm

The Hanke Group is a professional corporation primarily serving clients throughout south Texas. William F. Hanke founded the firm as a sole proprietorship in 1929. Today, the firm has seven shareholders and employs more than 70 people. Revenues have grown steadily, increasing from just under $2 million in 1994 to $10.5 million for the fiscal year ended May 31, 2006.

The firm is organized into four separate business units to provide optimal client service: 1) commercial services, including manufacturers, retailers, and distributors in various industries, plus employee benefit plans, oil and gas, and other commercial service providers; 2) service industries, including medical, dental, engineering, architectural, legal, advertising, public relations, and entertainment; 3) real estate and construction, including general and trade contractors, commercial and residential builders, and commercial and residential land developers; and 4) wealth strategies, including high-net-worth individuals, corporate executives, and large family groups. The firm has identified these four business units as service areas where it performs especially well. Each unit annually develops and executes its own business plan that supports the firm’s overall strategic goals. Team members are placed in a business unit to gain expertise, allowing them to focus on becoming a dedicated team member while matching their talents to the needs of the unit. Effective performance evaluation is crucial to the sustained viability and growth of each business unit.

The Need for Change

The performance evaluation system previously used by the firm was rather unstructured, with some team members receiving little or no performance feedback. For example, if an audit team member worked at least 80 hours on an audit, then the senior in charge would forward a performance report to the audit manager. But it was possible for staff members who were continuously assigned to smaller audits to receive little information about their performance in a timely manner because those audits did not meet the 80-hour mandatory evaluation requirement, or because the senior in charge of the job neglected to complete the evaluation. Individuals assigned to tax or consulting services often suffered the same fate. The evaluation of team members was not a regularly scheduled activity with company-wide understanding of its importance. Goals were not clearly set for team members at all levels within the firm.

It became necessary to implement a better performance evaluation program that would encourage active participation at all levels within the firm. The director of human resources researched various options for replacing the existing system with one that would be more structured, yet not so complex that the firm would have difficulty implementing it. Her research indicated the necessity of revising the system. Through these efforts to identify performance management plan options, the HR director contacted the PKF North American Network (PKF-NAN), an organization of CPA firms of which the Hanke Group is a member.

The Current System

The PKF-NAN is an association of independent firms that helps members strengthen their individual practices with a variety of methods and resources. The Hanke Group is one of three member firms in Texas. (There are 89 members total, and 49 have only one office.) One resource available to PKF-NAN members is the performance and career excellence (PACE) approach to employee evaluation.

According to Jack M. Stein, the Hanke Group’s president and CEO, “At our July 11, 2005, annual firm retreat, the Hanke Group’s management team concluded that unless we were able to improve our recruitment, development, and retention processes, our firm was not going to be able to continue to meet its goal of exceptional client service. We agreed to commit substantial economic and human resources to this end. One key to improved development and retention of team members was the adoption of the PACE program.”

The firm implemented PACE during the first quarter of its 2005/2006 fiscal year. The program’s goals were to motivate team members and provide a structured performance management system within the firm’s culture. Careful planning for the first year was considered to be an essential ingredient for successful implementation. A timeline (Exhibit 1) showing key transitional milestones was incorporated into the PACE user guide.

The guide provided the paramaters necessary for the firm to focus staff evaluations on 10 competencies and four contributions (Exhibit 2). Furthermore, the expectations for each competency and contribution are explained for each level of staff. As team members’ expertise increases, their expected competencies and contributions are increased accordingly. The firm’s expectations, by experience level, are clearly delineated.

To incorporate the system into daily activities, each member of the firm is assigned a development advisor who serves primarily as a mentor. Whenever possible, this assignment is based in the business unit to which the team member has been assigned. Additionally, each team member has at least one supervisor who actively participates in each assignment and annual performance review. Annually, each team member is responsible for completing an individual development plan that includes annual goals and a timeline for reaching those goals. The individual development plan is then discussed with the development advisor and approved by the supervisor and the director of human resources. A development progress check occurs quarterly between team members and their development advisors.

The individual annual development conference, considered to be a “key conversation,” occurs after team members have received summary results of their annual performance review. Strict adherence to a performance cycle timeline is encouraged so that all individual development plans have been completed by the end of the first quarter of the fiscal year. By the end of the second quarter, all interim development progress checks have been performed, and related forms have been submitted to the director of human resources. By the end of the fiscal year, the formal review process has been completed and team members have begun determining their goals for the upcoming fiscal year’s development plan. The system now provides continuous, structured performance feedback that is anticipated by all parties and is supported by top management.

Finally, it is the responsibility of team members to determine when they are ready for promotion. At that time, a team member secures a promotion sponsor, who must be a member of management, and completes a specialized form referred to as the “path to promotion.” The completed form is submitted in turn to the director of human resources, the team member’s development advisor, the business unit management, the discipline director (audit, tax, or consulting), and, if a team member is seeking promotion to manager, to the CEO. The team member performs a self-evaluation, which is compared with the evaluation provided by the sponsoring manager. This approach allows team members to progress at their own rate of achievement rather than waiting for previously specified time periods to elapse.

Learning Points

Stein said, “We have just completed our first year using PACE for professional development and feedback. Our initial feedback is positive; however, we know there is more work to be done in the area of advisor training and goal development.” Because the Hanke Group is incorporating feedback from its team members, the performance management system is a continuous improvement tool for the firm, making it more valuable in future years as the firm strives toward its “being the best” objective. Qualitative results from the first year’s implementation of PACE were informative and varied. In particular, managers said they had little understanding of how to rate team members, resulting in a lack of consistency in ratings. Some managers found they had limited understanding of how to appropriately rate a team member’s performance based on the rating’s description. The HR director is incorporating this information to improve the system and will be developing a program to train managers how to rate team members consistently and fairly using PACE.

This training, while costly, will increase management’s ability to accurately assess team member performance in a way that is meaningful to the team member, management, and the firm. Additionally, this provides team members with a clear connection between their daily efforts and the firm’s short-term and long-term goals. Having partners and managers actively engaged in the evaluation process tells team members the importance of the system. Hearing those same leaders discuss the system’s results and advocating the changes for improvement will reiterate the vital role that each member’s performance plays in the firm’s continued success.

The second year of implementation is now underway, and the HR director has high hopes for its continued success. She expects that PACE will help achieve the firm’s goals of retaining and motivating team members, minimizing turnover, eliminating performance evaluation surprises, and developing team members’ skill sets. Assessment of PACE’s impact will continue, and revisions will be made as deemed necessary.


Suzanne N. Cory, MBA, PhD, CPA, is a professor of accounting, and Stephanie Ward, MBA, PhD, is an assistant professor of human resources and the Greehey Scholars Program director, both at the Bill Greehey School of Business, St. Mary’s University, San Antonio, Texas. Shirley A. Schultz is the director of human resources for the Hanke Group, P.C., San Antonio, Texas.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 



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