What is a bonus deferral in a public accounting firm?
The business model of public accounting firms is always an interesting topic to talk about. Staffing, compensation, and turnover (by design or by layoff) are constantly being mentioned in accounting publications and forums. Today, I wanted to shine a light on something that I've seen a few public accounting firms offer: deferred bonus options.
What is a deferred bonus option?
Accounting firms typically have one large bonus that is announced at some point during the year, typically right after busy season. Firms will award bonuses to employees based on a variety of factors such as billable hours, achievement of goals, base salary, etc. The structure of each program will vary from firm to firm. Some firms allow employees to defer their bonus to a later date to increase the amount. For example, a firm might offer an employee the option of an $10,000 bonus today or a $20,000 bonus two years from today.
What are the goals of deferred bonus options?
As you might suspect, the primary goal of a deferred bonus option is employee retention. Historically, public accounting firms have faced large amounts of turnover which can have a negative impact on the firm's productivity. Retaining an employee for an extra year or two means that the firm needs to spend less resources training new employees and acclimating them to new client relationships. For the firm, the extra monetary cost is offset by the continued efficiency of engagements with experienced professionals.
Should I take the deal?
As always, determining whether taking a deal for a deferred bonus option is a good idea depends on the terms of the contract. There are three components that you need to consider to properly make this decision:
The payout - Making the decision to stay with a firm for an extra $5,000 is considerably different than making the decision to stay for an extra $50,000. Depending on your own financial situation, these incentives can range from “practically nothing” to “life changing windfalls.” Because it’s significantly easier to get a market pay adjustment by switching jobs, you should run the numbers of a larger deferred bonus against taking the smaller bonus now and switching jobs after it hits the bank.
The duration - Public accounting firms use these programs as retention tools for a reason. The industry is not built to retain everyone, and the work environment of a public accounting firm can weigh on people after enough time has passed. The decision to stay an extra 9 months in public accounting for a bonus is much different than staying an extra 2 years. Depending on your role and career plans, the duration of the deferral is either no problem or the biggest problem. I know some people who had the goal to make manager at their firm before jumping ship, so if they were able to get a bigger bonus that also aligned with a manager promotion timeline then their career plans would not change at all. On the other hand, there are some that might consider leaving next week if they got the right opportunity, and losing out on a bonus might impact their decision making. If you value flexibility in your career, I recommend you keep agreements like these to one year or less.
Additional terms - some firms will also make extra stipulations beyond the retention requirements. For example, I've seen firms that require employees that have deferred their current bonus to also defer any other bonuses received during the deferral period. This stipulation is crazy to me because the employee wouldn't have a clear picture of how those extra stipulations could financially impact them in the future. If your deferred bonus comes with additional terms, I advise you to read the fine print and run all the scenarios before you make your decision.
My opinion
Compensation in career development will always be top of mind for public accountants, and deferred bonus options are a tool that attempts to balance these two very important considerations. Because I value certainty and mobility, I believe that most professionals should not take this option. Usually, the increase in bonus amount and the deferral period are good for those who are planning to stay anyway but questionable for those who might want to jump ship. If you clearly understand your career goals and know that you aren't switching firms for the duration of the deferral period, then go right ahead and get that extra money! For the rest of us though, it's likely that a bird in the hand is worth two in the bush.