5 Secrets of Great CPA Partner Compensation Systems

If partner compensation isn’t THE most frequent topic on conference agendas, it certainly is near the top.  Why is this subject so enduringly fascinating?

First, partner compensation is the single most sensitive subject to partners.  It’s depressing and disturbing when a partner feels the income allocation is unfair, performance is unrecognized or he/she doesn’t have a clue how the system really works.

Second, to quote Andy Grove, former Chairman of Intel: “If people are concerned about their absolute level of compensation, then they can be satisfied.  But if their focus is on relative standing, then they can never be satisfied.”

Third, partners are forever in search of the Holy Grail of partner compensation.  The better mousetrap.  The one best system that’s lying out there, somewhere, waiting to be discovered.

It’s downright hilarious that CPA firms think their profession is unique to the business world when it comes to firm management and compensating key people (the partners).  Here are some observations based on my experiences consulting with hundreds of CPA firms on partner compensation (firms with annual fees over $20M are much more effective at these practices than those under $15M):

Compensation systems must be performance-based. What can be more sensible?  One should be able to earn more money by accomplishing more and conversely, one’s pay should suffer if performance is lacking.  When performance doesn’t impact compensation, it demotivates the better performers and encourages others to coast.  Sooner or later, mediocrity prevails.  However, a fair amount of firms continue to allocate part or all of their income based on a pay-equal split, ownership percentage or other method that fails to align pay with performance.   Money isn’t the best motivator and it certainly isn’t the only motivator, but it does matter.

Helping staff grow must be an important factor in allocating income. It’s indisputable that CPA firms need highly trained staff with leadership skills.  Firms often cite the adage that their people are just as important as their clients.  The partners are the only ones who can develop and mentor the staff.   Yet rare is the firm compensation system that gives even token recognition to the impact made by partners in retaining, training and mentoring staff and helping them grow.

Strategic planning should play a critical role. Partners’ contributions to the firm in achieving its strategic plan, vision and goals should be an important factor in allocating income.  But we rarely see these efforts acknowledged.  It’s no wonder that CPA firms struggle with strategic planning:  there is very little incentive for partners to do what their firm needs them to do.

Compensation levels of partners should reflect both historical and current performance. It’s common for partners to build up impressive personal production statistics, especially the sacrosanct “book of business,” and then essentially rest on those laurels, contributing relatively little to the firm’s growth and improvement in subsequent years.  The best way to address this is by splitting compensation into two parts:  a base, recognizing historical or cumulative achievements, and a bonus that rewards current performance, the latter essentially serving as a “what have you done for us lately?” factor.   For this to work, the bonus must be meaningful.  In other words, a partner should definitely “feel” the impact of a small or zero bonus.  What is meaningful varies with a firm’s profitability.  At firms with average profitability, the bonus should be at least 20% of total compensation.  At highly profitable firms, the bonus should be 25-40% of the total.

Individual production shouldn’t be weighted so excessively as to render all other accomplishments unimportant. At many firms, when it comes to allocating partner income, Finding (client origination), Minding (size of client list managed) and Grinding (billable hours) trump other important aspects of partner performance.  Intangibles such as firm management, helping staff advance and grow, teamwork, loyalty, creating specialties, delegating work, technical skills and being a good corporate citizen are frequently overlooked. One of the main reasons for this is CPA firms’ steadfast adherence, either consciously or subconsciously, to the principle that it’s more important how a partner performs individually than as a key member of the firm.  Firms are legendary for handsomely rewarding partners for posting strong production statistics while tolerating egregious weaknesses such as being a poor team player, abusing staff, refusal to be held accountable and failure to follow the firm’s policies and procedures.  While few would argue the significance of partner production, firms make a big mistake when they fail to give meaningful recognition to intangible aspects of performance.

So there you have it.  In a few paragraphs, I’ve summarized several critical partner compensation issues that could easily take an entire book to properly address.

If you have questions about the art of partner compensation, please join me in my upcoming “Ask the Expert” session for iShade.com.  Login to iShade on Tuesday, May 15, from 2:00-4:00pm Eastern, go to the Practitioner to Practitioner Group and look for the Discussion Topic “Ask the Expert: Marc Rosenberg – Partner Compensation.”  I will be online, answering questions and sharing experiences.