Why Accounting Firms Are Struggling to Offer Competitive Salaries

November 4, 2024
Jason Berwanger
Growth

Accounting firms struggle to pay competitive salaries due to stagnant engagement fees, unsustainable models, and outsourcing challenges. Learn how firms can change.

In the complex world of accounting, one would assume that the individuals responsible for managing the financial health of businesses would be well-compensated. However, the reality often paints a different picture. A recent discussion among accounting professionals highlighted a troubling trend: despite the significant workload and responsibilities, compensation in the industry remains stagnant. This issue stems from several factors, including the reluctance of firms to increase engagement fees, the unsustainable business models, and the misguided attempts to cut costs through outsourcing.

Key Takeaways

  • Reluctance to Increase Engagement Fees: Accounting firms are hesitant to charge clients higher fees, resulting in limited salary growth for employees.
  • Unsustainable Business Models: The current business models of many accounting firms are not sustainable, leading to financial strain and inadequate compensation.
  • Outsourcing Challenges: Attempts to cut costs through outsourcing have backfired, further complicating the financial landscape of accounting firms.

The Reluctance to Increase Engagement Fees

One of the most glaring issues in the accounting industry is the reluctance of firms to increase engagement fees. As highlighted by a professional in the field, a significant engagement only saw a $5,000 increase from the previous year, which is minimal given the scale of the work involved. This hesitancy to charge clients higher fees has a direct impact on the salaries of employees.

The Impact on Salaries

When engagement fees remain stagnant, the revenue generated by the firm does not keep pace with inflation or the increasing cost of living. Consequently, the firm struggles to provide competitive salaries and meaningful raises to its employees. For instance, one professional noted that despite receiving a 5% raise, their hourly bill rate increased by 18%, and engagement prices only increased by 5%. This discrepancy highlights the financial disconnect within the industry.

The Fear of Losing Clients

One reason firms are hesitant to raise fees is the fear of losing clients. In a competitive market, firms worry that higher fees may drive clients to seek cheaper alternatives. However, this fear often leads to a race to the bottom, where firms undercharge for their services, ultimately devaluing the work of their employees.

Unsustainable Business Models

Another critical issue plaguing the accounting industry is the unsustainable business models that many firms operate under. The traditional model of billing clients by the hour is increasingly being questioned for its efficacy and fairness.

The Hourly Billing Conundrum

Hourly billing has been the cornerstone of accounting firms for decades. However, this model has significant drawbacks. It incentivizes longer work hours rather than efficiency and quality. Employees often find themselves working extensive hours to meet billing targets, leading to burnout and dissatisfaction.

The Need for Value-Based Pricing

A shift towards value-based pricing could address some of these issues. Instead of billing clients based on hours worked, firms could charge based on the value delivered. This model encourages efficiency, innovation, and higher quality of work. Moreover, it allows firms to charge more for high-impact services, thereby generating more revenue and enabling better compensation for employees.

Outsourcing Challenges

In an attempt to cut costs and maintain profit margins, many accounting firms have turned to outsourcing. However, this strategy has often backfired, leading to a host of new challenges.

The Pitfalls of Outsourcing

Outsourcing can lead to a loss of control over the quality of work. When tasks are outsourced to countries with different regulatory standards and work cultures, the consistency and reliability of the work can suffer. This not only affects the firm's reputation but also places additional strain on in-house employees who must rectify any issues that arise from outsourced work.

The Legal Constraints

Moreover, certain aspects of accounting cannot be outsourced due to legal constraints. For example, the legal profession has strict regulations against offshoring, a principle that could be beneficial if applied to accounting. Keeping critical tasks in-house ensures better quality control and adherence to local regulations.

The Human Cost

Beyond the financial and operational challenges, the current state of the accounting industry takes a significant toll on the well-being of its employees.

Burnout and Job Dissatisfaction

The combination of long hours, inadequate compensation, and the pressure to meet billing targets leads to high levels of burnout and job dissatisfaction. Employees often feel undervalued and overworked, leading to high turnover rates and a lack of long-term commitment to the firm.

The Importance of Work-Life Balance

To attract and retain top talent, accounting firms must prioritize work-life balance. Offering flexible working hours, remote work options, and mental health support can go a long way in improving employee satisfaction and productivity.

The Path Forward

Addressing the financial disconnect in the accounting industry requires a multifaceted approach. Firms must be willing to reevaluate their pricing strategies, business models, and employee welfare policies.

Reevaluating Pricing Strategies

Firms need to overcome the fear of losing clients and be willing to charge fair prices for their services. Transparent communication with clients about the value delivered can help justify higher fees. Additionally, adopting value-based pricing can align the firm's interests with those of its clients, fostering long-term relationships and sustainable growth.

Innovating Business Models

Moving away from the traditional hourly billing model towards value-based pricing can revolutionize the industry. This shift encourages efficiency, innovation, and higher quality of work, ultimately benefiting both the firm and its employees.

Prioritizing Employee Welfare

Investing in employee welfare is crucial for the long-term success of any firm. Competitive salaries, reasonable working hours, and a supportive work environment can significantly improve employee satisfaction and retention. Additionally, firms should provide opportunities for professional development and career advancement to keep employees motivated and engaged.

Embracing Technology

Technology can play a vital role in addressing some of the challenges faced by accounting firms. Automation and artificial intelligence can streamline routine tasks, freeing up employees to focus on higher-value work. This not only improves efficiency but also enhances job satisfaction by reducing the burden of monotonous tasks.

Building a Sustainable Future

Ultimately, building a sustainable future for the accounting industry requires a commitment to change. Firms must be willing to adapt to new pricing models, invest in their employees, and leverage technology to stay competitive. By doing so, they can create a more equitable and rewarding environment for their employees, ensuring the long-term success of the industry.

FAQs about Accounting Firm Compensation

Why are accounting firms hesitant to increase engagement fees?

Accounting firms often fear that increasing fees will drive clients to seek cheaper alternatives. This fear leads to a reluctance to charge higher fees, which in turn limits the firm's ability to offer competitive salaries to employees.

What is value-based pricing, and how can it benefit accounting firms?

Value-based pricing charges clients based on the value delivered rather than the hours worked. This model encourages efficiency, innovation, and higher quality of work, allowing firms to charge more for high-impact services and generate more revenue.

How does outsourcing affect the quality of work in accounting firms?

Outsourcing can lead to a loss of control over the quality of work due to different regulatory standards and work cultures in other countries. This affects the firm's reputation and places additional strain on in-house employees who must rectify any issues that arise from outsourced work.

What steps can accounting firms take to improve employee welfare?

Accounting firms can improve employee welfare by offering competitive salaries, reasonable working hours, flexible working options, remote work opportunities, and mental health support. Additionally, providing opportunities for professional development and career advancement can enhance employee satisfaction and retention.

How can technology help address the challenges faced by accounting firms?

Technology, such as automation and artificial intelligence, can streamline routine tasks, freeing up employees to focus on higher-value work. This improves efficiency and job satisfaction by reducing the burden of monotonous tasks.

By addressing these critical issues, accounting firms can create a more sustainable and rewarding environment for their employees, ensuring the long-term success of the industry.

Jason Berwanger

Former Root, EVP of Finance/Data at multiple FinTech startups

Jason Kyle Berwanger: An accomplished two-time entrepreneur, polyglot in finance, data & tech with 15 years of expertise. Builder, practitioner, leader—pioneering multiple ERP implementations and data solutions. Catalyst behind a 6% gross margin improvement with a sub-90-day IPO at Root insurance, powered by his vision & platform. Having held virtually every role from accountant to finance systems to finance exec, he brings a rare and noteworthy perspective in rethinking the finance tooling landscape.

Book a demo

Learn how we cut accounting close timelines by 75% and identified 6% of revenue margin erosion opportunities for one of the fastest growing companies.

Get Started