CPA Firm Partner Compensation Theory

QUESTION:  We are trying to restructure our compensation plan. I was wondering if you have any insight on “compensation theory” that might help us?

ROSENBERG’S  RESPONSE: 

1.     All compensation systems must start with strategic planning.  Without a clear, written vision, the firm doesn’t know what to compensate its partners for.   There should be a strong link between the compensation of partners and the extent to which each partner helped achieve the vision.  Key partners need to do what the firm needs them to do, not what they want to do.

2.    There are two main aspects on which a partner should be evaluated and compensated:

• Fulfilling his/her role in the firm.  It’s likely, and even preferable, for each key partner to have a different role in the firm. 
• Achieving his/her written goals. 

3.     An important factor in compensating partners must always be the extent to which   young staff  have developed and advanced under their tutelage.

4.      Formal, written performance evaluation for partners should never stop.  The purpose of performance evaluations is to improve performance, and no one’s performance is so extraordinary that it warrants a waiver on improving from year to year.  The results of this evaluation should be an important factor in determining a partner’s compensation.

5.      Performance criteria that will be used to evaluate the partners should be crystal clear. There are two types of performance criteria for most organizations:  production and intangibles.

• Examples of production criteria are business originated, client management responsibility, billable hours, client retention, expansion of services to existing clients, cross-selling and overall client satisfaction should be evaluated.
• The second type of performance criteria is intangibles, examples of which are leadership, people skills, communication skills, mentoring staff and living and breathing the firm’s core values.

6.      One’s total compensation should be balanced between two components:  (a) pay that recognizes the partner’s cumulative set of skills, ability and knowhow (this is not seniority or years as a partner; it’s what has been done with those years of experience to build the partner into a valuable “package),” (b) a reward for “what have you done lately,” what kind of a year did you have this year.  The former often is called base salary and the latter is frequently referred to as a bonus.  The bonus should be a meaningful percentage of the total compensation – at least 20%, preferably higher.

7.      Compensation is one way to motivate performance and behavior, but often is not the best motivator:

• Dangling a bonus in front of a partner and waiting for results doesn’t work in cases where the result is beyond the person’s capability.  A good example is a partner in a CPA firm who has never been a rainmaker.  No monetary incentive will change this.  
• Many firms have found that changes in behavior have a rather short life.

It’s much more effective, albeit more difficult, to motivate by other means such as goal-setting, training, coaching and mentoring. Some firms have found that partners are motivated more by the desire for acceptance and approval from their peers than by money.

8.       Communication between top management and partners throughout the year is critical:

• At the beginning of the year, goals and expectations must be crystal clear to the partners. 
• Progress on goals should be reviewed periodically during the year.  If a partner creates a goal on January 1 and top management never mentions a word to the partner throughout the entire year, it is unlikely that the goal will be accomplished because a message will have been sent to the partner that the goal is not very important.
• At the end of the year, top management should review the success the partner achieved in fulfilling his/her role and achieving goals.  The link between performance and compensation should be explained.  Judgments that are explained are more readily understood and accepted than those that are not.

 All of the above items need the leadership of strong management.  It’s the “glue” that holds everything together.