Partner Comp Systems: The Bonus

Most multi-partner CPA firms structure their partner comp systems to pay at least two tiers of income, most commonly the base and a bonus. Many firms have a third tier for interest on capital, but we won’t address this in today’s blog.

Base and bonus defined:

Base: Compensation for a partner’s historical value to the firm, frequently measured by client base managed, a track record of practice development, sometimes high levels of billable hours and lastly, one’s leadership role in the firm. Some refer to the base as one’s “street value:” the compensation a partner could get from another firm if they left with their clients.

Bonus: Primarily a reward for “what have you done for the firm lately,” focusing on performance for the current year.

Firms treat the base/bonus combination in one of two ways:

• The base and bonus are mutually exclusive. Separate criteria are established for the payment of each income tier. Partner bases are set at the beginning of the year and rarely change during the year. At the end of the year, the firm closes its books and determines the size of the bonus pool, which is essentially what is left over after paying the base and interest. The bonus is then allocated to each partner.
• The base is really a draw and the bonus is a final distribution, adjusting the draw to one final income number for each partner.

What determines which bonus concept is chosen?
Differentiating the base from the bonus requires a degree of sophistication often not seen at smaller firms. Characteristics of firms that differentiate the base and bonus are:

• The firm needs to devise a way to measure each partner’s current performance. Common methods are a formal, written goal setting program and/or partner evaluations.
• The firm has to be profitable enough to be able to create a large enough bonus pool. Firms that struggle to generate “surplus income” will tend  to pay the vast majority of their income to the partners as base compensation because the partners need the income throughout the year to live on. Truly profitable firms (say, income over $300,000 per partner) can afford to pay a large enough base throughout the year to satisfy the partners’ day to day living needs AND can afford to set aside a meaningful bonus pool, say, 20-30% of total income.

Major factors that impact the bonus allocation:

• What did the partner do to enable the firm to have a “good year?”
• Did the partner hit any “home runs?” A good example would be bringing in a huge, new client.
• Achieving formal, written goals.
• Other intangibles such as staff mentoring, leadership roles, delegation, adherence to the firm’s core values and policies, teamwork and loyalty.

Our new release CPA Firm Partner Compensation: The Art and Science discusses how today’s firms successfully incorporate performance metrics with subjective judgment to incentivize partners.