Remuneration policy with the right incentives

Berry Wammes, CEO of the Netherlands Institute of Chartered Accountants, is responsible for regulation, policy and international affairs. Before he joined the  Netherlands Institute of Chartered Accountant, he was head of Public Relations at PTT Post and later worked at KPMG. dr. Wammes describes in this article the change in the remuneration policy within the accounting profession.

In September the Future Accountancy Profession working group presented its plan for the improvement of audit practices. This plan, entitled ‘In the Public Interest’, consists of a number of measures aimed at the creation of a culture in which quality once more plays a central role.

The route of the problem is that in recent decades a culture has arisen, with profit and income maximization as its fundamental principles. That culture has been a significant factor in a series of incidents; breaking through to not let this happen again this will require measures which, amongst other things, address remuneration policy. Remuneration must depend primarily on the quality of the work, not on commercial success. The implementation of high quality audits is nevertheless the accountant’s key task. Therefore this must determine the way the earnings model within accountancy organisations is organized. In turn this will also affect the incomes of accountants.

The assumption is that the remuneration system is based on reward as well as punishment. If the emphasis is placed on punishment, there is a risk of creating a culture of fear, and that is not a culture in which professional quality and a high quality audit can thrive.

This means that accountancy organisations must develop an internal remuneration system, in which the rewarding of quality is dominant. Furthermore, that remuneration structure must apply to all levels within the organisation. However the remuneration model for accountancy organisations with a so-called PI license (Public Interest Organisations) will not be determined by the partners. This is established by a soon to be introduced Supervisory Board. This Supervisory Board appoints the management and remunerates on the basis of quality performance.

Therefore, how the remuneration is composed is relevant. The appreciation and remuneration of an individual accountant must be strongly influenced by the quality of his work and the organisation’s long term objectives. This ensures that the incentive underlying the structure of remuneration is in line with the organisation’s objectives. The assessment of the guidance and coaching of members of the audit team and the results of file reviews will also be important criteria in this respect.

Management

Managers of accountancy organisations receive remuneration independent of profit and which will be established by the Supervisory Board. This remuneration consists of a fixed amount, plus a variable sum, which can add up to a maximum of 20% of annual salary. This variable element is dependent on the long term objectives set by the Supervisory Board, of which the quality of the audit is a significant element.

Partners

For partners too, the quality of their work defines their paycheck. Performance in terms of commercial objectives plays no role if a partner is assessed negatively on audit quality. Alongside quality, focus on the long term is a significant criterion in remuneration policy. By not paying out remuneration in full immediately, but linking it to a claw-back scheme, the focus is on the long term and quality is further enhanced. Specifically; a component of a partners’ paycheck is deferred for six years. If during that six year period it becomes evident that the partner concerned has taken his eye off the ball, resulting in social damage, the amount covered by this scheme will not be paid out. These withheld amounts will not be distributed amongst the remaining partners, but will be invested in specific measures aimed at improving quality, in consultation with the Supervisory Board.

Career

Remuneration extends further than just salaries or profit distribution amongst managers and partners in any particular year. Criteria for promotion and career opportunities are also important elements in the remuneration of people. Fundamental criteria is performance with a focus on quality. Performance which focuses on quality is also central to this. Professional expertise, professional skepticism and quality of work should be the crucial elements within the organisation’s promotion policy.  This also applies to the criteria for the appointment of partners. Such professional expertise and experience must be conditions for the appointment of partners.

Transparency

The remuneration policy and the individual remuneration of the directors of accountancy organisations are published in either the annual report or the transparency report, or they are published on the website of the accountancy organisation. This also applies to criteria regarding profit distribution amongst the audit partners.

Obviously, remuneration is also partly dependent on the firm’s profitability and therefore the partners and employees all have an interest in that profitability. This is inherent in the choice to carry out accountancy work within a private commission. However we consider that as a result of the aforementioned measures, implying the remuneration structure will be arranged in such a way that its guiding principle is to provide incentives which are primarily aimed at audit quality. With the firm’s profitability as the starting point, individual remuneration is primarily influenced by the quality delivered. This will have a great effect on conduct.

Berry Wammes

CEO Nederlandse Beroepsorganisatie van Accountants