CPA Firm Partner Pay: Is Base Comp at Risk & How Much is Base Pay?

The complexities involved in allocating income to a group of owners is not for the faint of heart. With numerous decisions to create a plan that fairly rewards individuals for their contributions to the firm’s profits, it’s easy to fall back on what you’ve heard others doing. In some cases, those plans might work out really well. In other cases, you might realize you would need to make a change for your firm to thrive. One of the many decisions is what to do about base pay.

Base Pay Philosophies

Regarding partner base pay, we’ve found varying practices at CPA firms. Some firms provide a base pay amount that’s similar to a salary (whether on a W-2 or otherwise), and philosophically it is not “at risk.” Providing the firm does even marginally well, partners can assume this money is theirs to keep and will fund their lifestyle throughout the year.

Other firms allow for a base draw but philosophically agree that all owner pay is at risk because it depends on the success of the business. Often at these firms, the base draw is still such that there won’t be a need to ask for it back, barring a really terrible performance year by the individual or firm.

In addition to the at-risk philosophy, we also wanted to discover how many firms had an equal-for-all approach to bases or if they varied them by anticipated overall earnings, and how much was being paid out.

To find out where firms stand on these topics, we conducted a poll asking if base pay was at risk, how much base pay was, and whether it was equal or varied by partner. We received over 100 responses and have analyzed the data below.

Note: All references to partner refer to equity owners, shareholders, partners or similar at a CPA firm.

Is base pay typically at risk?

Most firms indicated that, for them, base pay is not at risk. Partners can rely on this pay, and unless disaster strikes the firm’s economics, they’ve earned it. There are many firms, however, just over 30% of our respondents, that do consider all partner pay at risk. These partners still typically take cash out each month, but there’s a sense of having to perform in order to “earn” it once the financial performance for the year is known.

I find that firms keeping base pay at risk want partners to be aligned on driving performance and not resting on their laurels. Conversely, those firms that characterize base pay as guaranteed (more or less) want to take care of their partners who work hard and show up every day, knowing they will continue to perform as they have in the past.

I don’t believe there’s a right or wrong choice here; it’s more the cultural environment you wish to prioritize.

How much is CPA firm partner base pay?

According to our poll, base pay is most commonly between $100,000 and $250,000. Some smaller firms are still paying out less than $100,000, which seems like either a conservative cash strategy or trouble with profitability.

Base pay varies by firm size, as you would expect, though over 30% of firms under $20M in revenue are paying over $250,000.

CPA Partner Compensation: The Art and Science is your ultimate guide to understanding and optimizing the complex landscape of partner comp. Our book covers: Partner comp 101 • Explore and understand the 12 systems used by all firms • How to design your firm’s system • Open vs. closed systems: Understand the distinctions between them • The role of the book of business • Differences between large and small firms’ systems • MP’s compensation • Operating a compensation committee • Linking partner compensation with strategic planning • Explore the metrics and data used to evaluate partner performance • Compensation nuances • Trends and controversies • Case studies • Best practices

Demystify partner comp for your firm and purchase your copy today.

(Base) Pay Equal? Or Varied?

While the full allocation of shareholder compensation may vary from how firms pay out monthly bases, we found that the majority of firms do vary base pay depending on how much total anticipated earnings a partner is going to take home. In 64% of firms, those projected to earn higher, based on historical performance and potential for current year earnings, had higher base pay.

The 36% of firms who have equal bases often have a philosophy that partners get a certain amount for showing up every day, and that all partners are the same in that way. Firms that offer part-time partner options may still pay equal for others, with a reducing factor (e.g., 75%) for the part-time partner.

Here are some comments on whether a firm’s base pay is equal or varied:

• “Varied, based on perceived market value of the partner.”
• “The younger partners earn less but experience rapid growth, which brings them to a maximum base salary after a few years.”
• “Varied, based on additional partner roles.”
• “Varied, based on experience and skills.”

While some partner groups are comfortable with equal bases, I am a proponent of varying them to align with anticipated earnings. As much as many tolerate it, few partners are thrilled to take home the same as (or, in other situations, less than) their new partner colleagues on a monthly basis. If you can’t make the cash flow work for the full equity group, perhaps you may be able to make slow changes over time with the admission of new partners or at the time of retirements.

The dangers of varying pay for seniority

Some firms mentioned that their base is varied, based at least in part on seniority.

• “The pay varies, based on time served and past history of performance.”
• “Base pay rises every year. It is capped out, and once senior partners reach a certain point (around ten years or so), they hit the cap.”

In our work consulting on partner compensation plans for firms, we tend to find few that wish to move to a system with a “seniority” component based on years of service.

Most partners (especially rising talent and those concerned about staying competitive) prefer to reward current and long-term value creation. For example, if a partner has been at the firm for 25 years and created significant value through business and people development, they should earn much more (including the cash flow from their base pay) than another 25-year partner that does not bring in new business or has been a detriment to staff retention.

A cap can serve to alleviate some of this and accelerate new partners to get to “partner-level” compensation. However, having stated increases without regard for merit or performance can cause a challenge if you have two partners promoted at the same time, with notably different value contributions.

What does your firm do for partner base pay, and is it at risk? Is an equal amount paid for partners? We’re curious to hear your approach and whether it’s working for your firm.