CPA Partner Base Salary Guidelines

I RECENTLY RECEIVED THIS QUESTION:  In developing a new partner compensation system, you have spoken about how most firms break down total partner income into three tiers:  Interest on capital, base salary and bonus.  We seem to be stuck on how to determine what the base salaries should be for each of us.  What are other accounting firms using as a base salary?

ROSENBERG RESPONSE.  First, let’s be crystal clear about the terms.

Base salary represents a partner’s street value to the firm, what he/she would be paid to join another firm.  It represents their cumulative or historical worth to the firm; what they bring to the firm every day.  In setting the base, firms look at each partner’s origination and client billing responsibility, relationships with clients, leadership and role in the firm and their expertise.  For most firms, the base is 60-90% of total partner compensation.

The bonus is reserved for “what have you done for us lately?”  What kind of a year did each partner have?  To what extent did they achieve their goals and otherwise meet expectations?  Did anyone hit any “home runs?”  For most firms, bonus is 10-30% of total partner compensation.

What do other firms use as a base salary?  Unfortunately, for the person posing the question, there is no definitive answer because it is totally dependent upon how much money a firm earns.  Let me illustrate:  There were 400 firms in the most recent Rosenberg Survey.   Their average income per equity partner (IPP) was $333,000, but there was a wide variation from high to low:  17 firms had IPP of $700K or more; 53 firms’ IPP exceeded $500K; 60 firms experienced IPP of less than $200K.

Firms with IPP in excess of $500K tend to have relatively high bonus pools – ranging from 20% to 40% of total partner income.  Their partners can “afford” the high bonuses because this still leaves their base salaries higher than the total comp of partners at most firms.   On the other hand, firms with IPP under the national average tend to have lower bonus pools – ranging from 10-20%, because they need more money to live on during the year.

How firms set the base salaries.  First, here’s what they DON’T do.  They don’t set the bases equally.  They don’t keep the ratio of each partner’s base to the others the same, year after year.  They don’t guarantee that every partner’s base goes up if the total base pool increases.

The most common approach is very similar to the same method used to change the base salaries of staff.    First, determine what the total size of the base salary pool is for the coming year and compare it to the size of the base salary pool for the recently completed year.  If the overall increase is 5%, those partners whose performance is evaluated as being relatively average compared to the other partners can expect a raise in their base of close to 5%.  Those with above average years can anticipate a raise of better than 5% and conversely, those who had “off years” might expect a small increase or perhaps none at all.

Here are a few exceptions to the above: (1) The firm needs to “bump up” the salary of new partners, observing the time-honored tactic employed by many firms of erring on the side of being generous to new partners, (2) One or more partners hits a “home run, and after acknowledging this in the form of a higher base, there isn’t much left over to give base increases to the other partners, (3) The firm has an overpaid partner and wishes to avoid giving this person any increases until he/she is no longer considered overpaid, (4) A partner intentionally slows down or wishes to cut back, which leaves more money to be divided up by the other partners, and (5) The firm wishes to move more money to the bonus pool and the method of doing so is to essentially freeze or greatly limit the size of the base pool.