Years ago, a senior partner at a 12-partner firm retreat I was facilitating gave us all an ‘aha’ moment: “A partner compensation system is just a way of allocating income among the partners. It’s not meant to be the primary way to manage a firm.”
There are two messages here: one obvious and one that is deeper. First, many firms, especially those below $15M in revenue, use partner comp as the primary way to communicate to partners whether they have performed well and met expectations. Believing partners’ performance and behavior can be modified simply with money, management essentially says: “If you do good, you’ll get a big check. Keep doing what you’ve been doing! If your performance is below expectations, then your income allocation may disappoint you.” In the latter case, the firm hopes that the dissatisfied partner takes this “message” to heart and works hard to do better.
The deeper message this partner conveyed was that the best, most effective way to improve anyone’s performance – not just partners – is with communication and coaching, not by the size of the paycheck. Successful firms establish a strong link between partners’ compensation and the extent to which they succeed at helping the firm achieve its goals.
Here are 8 ways this is accomplished:
- Clearly define what the firm needs from its partners. Many call this strategic planning or creating a vision. Partners obviously can’t do what the firm needs until someone articulates what those needs are. A firm can have an innovative and inspiring strategic plan, but it will mean nothing if it’s not executed by the partners.
- All partners should have written roles, expectations and very specific goals. This applies to their role in achieving the strategic plan as well as their operational goals (bringing in clients, mentoring staff, billing, collection, delivering quality service etc.).
CPA Partner Compensation:The Art and Science covers►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 ►overall best practices
- Intangibles must play an important role in allocating partner income. We all know the tangibles – finding, minding and grinding. But the intangibles are important too – managing the firm or a team, delegating clients to other firm members, mentoring and nurturing staff while helping them learn and grow; living and breathing the firm’s core values.
- Bring down “book of business” from its pedestal. Book of business is probably the ugliest term ever invented by CPA firms. It connotes “I vs. we,” clients owned by the partner instead of the firm and the firm merely acting as a group of solos instead of one firm. Firms must reduce the potentially huge impact that book of business has on compensation and partner buyout. Managing a large client base should always be important but delegating clients to others and working as a team is also important when this is best for the firm. Also…
- Differentiate origination (finding) from billing responsibility (minding). Suppose a firm has two partners, equal if every way shape and form (age, experience, personality, etc.). They also have the same $1M client responsibility. Further suppose that one partner originated 100% of her client base and the other originated $50,000, with the remainder delegated to him. Both partners are valuable to the firm but clearly, the first partner should be paid more than the second. The point here is that in allocating partner income, the firm must look beyond client base managed and also factor in client origination.
- The MP should impact income allocation more than other partners. There are two types of MP’s: Those who are expected to manage the performance and behavior of the other partners, growth and profitability and those who are not. The latter is more of an admin partner than a true MP. True MPs should have a much more significant role in allocating income than all the other partners. This is often done with the MP being the chair of the firm’s compensation committee and/or the MP having near total discretion in allocating a bonus pool. Although money isn’t the best way to motivate a partner, it does help MPs to have partner compensation as a weapon in their arsenal.
- Communication. Communication. Communication. Show me a subjective performance-based partner compensation system (comp committee or MP-decides) where there is little or no communication between individual partners and management regarding performance, and I’ll show you a system that is doomed to fail.
- Adopt a compensation committee to allocate partner income. This is the best way to incorporate all of the items above in your income allocation system. The Comp Committee is the system of choice for the vast majority of firms eight partners and above. Why? Because it’s the best for (a) balancing production with intangible performance factors, (b) allowing the committee to use its best judgment to assess each partner’s performance without being restricted by formulas, (c) making great use of goal setting and (d) allowing the firm to link partner income with what the firm needs from its partners.