4 Reasons You Might Get Angry with Your Partner Comp Consultant (But It’s Not Their Fault)
A good consultant knows “the buck stops here.” They may provide great service and solutions, but if their clients aren’t happy, then the consultant’s performance is less than acceptable.
Two criteria determine a consultant’s effectiveness (or otherwise). First, good advisors solve a problem (“How do we bring an ancient buyout agreement up to current best practices?”) or provide guidance on an issue (“What kind of a firm governance system should we adopt as we continue to grow?”). In other words, they do the job they were hired for.
Second—and here is where some consultants fail to meet expectations—the consultant advises the client to adopt a recommendation, but the client insists on doing it differently. The consultant implores the client to abandon the misguided solution or approach, but alas, the client’s mind is fixed. Months down the road, after implementation, the client experiences the very pitfalls the consultant warned of.
In the second case, who is at fault? The client, for not taking the consultant’s advice and instead adopting a practice that was doomed to fail? Or the consultant, for failing to pound the table and persuade the client to follow their recommendation? I suggest that, mostly, the client is at fault, but the consultant is partially to blame for not being able to persuade the client to choose the “right” path. I’m sure consultants will object to this position, citing the old saw “you can lead a horse to water but you can’t make it drink.”
As consultants who work with dozens of CPA firms on partner compensation every year, we frequently encounter situations where the client does not adopt all our recommendations. The client might adopt most of what we recommend but choose to waive a specific part of the overall solution.
Below are four examples of firms that may not totally follow one or many parts of the overall recommendation, and thus may feel some anger towards the consultant because of the poor outcomes that ensue.
1. There are only so many hours in the day for leadership and client service. It’s kind of a trap. A partner has built up a substantial client base for 20 years. They are highly respected by their fellow partners. Then, they get anointed as the firm’s next MP. How can they possibly be effective as an MP if they continue to manage their huge client base? It can’t be done unless they work 3,500 hours a year. There simply is not enough time in a 2,450 hour year (the average total work hours of CPA firm partners, per the Rosenberg MAP Survey) to earn a grade of “A” on both. Wise MPs transition a meaningful amount of their clients to other firm members, thus freeing up the time needed to manage the firm properly (often 500 to 1,000 hours a year) and truly treat the firm as their #1 client.
But two things thwart this best practice: (1) An MP may fear that if their client base is substantially reduced, their compensation might be negatively impacted (most common if all partners are paid based on a strict production formula); and (2) the new MP absolutely loves working with clients and doesn’t want to give it up.
The CPA firm might be angry with the compensation consultant because the compensation system (1) did not require the MP to transition clients properly and, as a result, they manage the firm poorly; (2) the system did not handsomely reward the MP for their management time; and (3) the system did not protect the MP’s comp from decreasing due to a reduced client base and billable hours. The consultant may have recommended all these concepts, but the client chose to disregard them.
2. Evaluating and compensating partners. Three problems rear their ugly heads whether a formula or a subjective system (i.e., comp committee) is used to allocate partner income: (1) The client agrees with the consultant that there should be formal performance criteria, but they are vague on what those criteria are; (2) the firm weights the “big three” production criteria of Finding, Minding and Grinding so heavily that it minimizes its recognition of all other factors (mainly “intangibles”); and (3) the partner’s performance in critical intangible areas such as mentoring, training and helping staff learn and grow and firm management is ignored. The consultant’s recommendations include methods to avoid the problems above, but the firm disregards the advice.
When firms fail to address the problems outlined above, the partners get frustrated, which may lead to anger with the consultant. Partners who are skilled at managing and growing clients they did not originate, mentoring staff and managing the firm may feel that the reward for their vital contribution is insufficient.
CPA Partner Compensation: The Art and the Science explains ►partner comp 101 ► the 12 systems used by all firms ►how to design your firm’s system ►open vs. closed systems ►the role of “book of business” ►differences between large and small firms’ systems ► the MP’s compensation ► trends and controversies and ►overall best practices.
3. Formula vs. a subjective comp system. Around 50–70% of firms with five or more partners use a subjective system for allocating income (the two choices being comp committee and MP-decides), whereas 16–26% use a formula. The bigger the firm, the more likely they are to use a subjective system. There must be a reason for this huge differential, right? Formula systems are deeply flawed because they motivate partners to do things that are not in sync with the firm’s core values and strategies. Formulas reward partners for doing things that are best for them, often at the expense of the firm. Subjective systems rely on the good judgement of a small group of highly credible people and do a good job of balancing individual production with intangibles and goals achievement.
But some firms fixate on formulas. They feel linking partner comp and traditional production (finding, minding and grinding) is good for the firm “because that’s how the firm makes money.” The partners may think that formulas prevent arguments—but they’re wrong! CPAs are numbers people, so formulas appeal to them. The partners are unable or unwilling to leave their compensation up to the judgement of others. Despite their consultant’s pleas, such firms insist on using a formula to allocate income.
There was an old appliance commercial that claimed the product promoted was superior to the competition. The actor acknowledged that people might choose a competitor’s inferior product, but ended the commercial by saying, “You can call me now (buy our product from the get-go) or call me later (when you become unhappy with the inferior product you bought and now wish to purchase our appliance).”
That’s the case with firms who, against the consultant’s recommendation, choose a formula instead of a subjective system to allocate income. A few years later, they discover that instead of the formula avoiding arguments, it actually created them because the partners argued about the components of the formula and the weighting of the various factors. This could make the firm angry with the consultant for “allowing” the firm to make the bad choice. But was it really the consultant’s fault?
4. Serving on the comp committee is not an equal-opportunity privilege. Democracy is great, but not necessarily meant for everyone. Many partners suffer under the mistaken belief that their firm should be operated by a group of collegial, professional partners striving together instead of running the firm like a real business. But democracy inhibits effective CPA firm governance. As Tony Kendall, MP of six-office Mitchell & Titus, says: “I can’t manage this firm if I have to take a vote every time I want to make a decision.”
Many firms adopt the compensation committee approach to allocating partner income at the urging of their compensation consultant. Roughly 20 key decisions need to be made in operating a comp committee. We can’t detail them all here; you can find them in our book, How to Operate a Compensation Committee. One of the decisions is how to select the committee. Some firms are so driven by the notion of democracy that they want every partner to get a chance to serve on the committee, so they rotate CC members. This is a terrible mistake.
If the partners don’t trust the judges, the comp committee system won’t work. Thus, every member of the CC must enjoy a high degree of credibility and trust from the partner group. Sorry to say that in a firm with many partners, there is often at least one partner that the majority of the partners are not comfortable entrusting their compensation to. This doesn’t mean that this partner is a poor performer. It’s quite possible for this kind of partner to be an excellent, productive client service partner.
Here’s a great example. I consulted with a 10-partner firm that wanted to change from a formula to a three-person comp committee. I helped them devise a plan for the transition, walking them through the 20 decisions referred to earlier. I concluded the project by leading the committee’s meeting to allocate income. It went very well. During that meeting, as the group evaluated each partner, one was singled out for performance so seriously poor that the group debated whether to terminate this person. They decided to retain the partner and created a game plan to help this partner improve.
Now fast forward to the next year. The firm again asked me to lead the meeting. Prior to the meeting, I asked the MP who was on the committee. He told me that the new committee consisted of himself, a returning CC member and a new member elected by the partners. And who do you think the new member was? You got it—the partner who almost got terminated the previous year. When I heard this, I implored the MP to intervene and avoid having this poor performing partner on the committee. Thankfully, he was able to orchestrate this delicate change.
The moral of the story: Don’t adopt a requirement to rotate CC members because it’s possible that a non-credible partner will end up on the committee.
I strongly encouraged this firm to avoid any provision for mandatory rotation of the committee members. The firm adopted almost every recommendation I made, but they insisted on opting for democracy and you can see how badly it turned out. Thankfully, they didn’t blame me for the fiasco of seating the non-credible partner on the committee. But they could have avoided a complicated, delicate situation if they had listened to me in the beginning.
No one partner compensation system applies to all firms. Both subjective judgment and quantifiable methods and tactics must be employed to result in an outcome that satisfies the partners and is perceived as fair. Tailor your partner comp system specifically for your firm: here's how.Learn More