From Frustration to Growth: How to Shift to Performance-Based Pay

A firm I worked with this year said, “We have a pay-equal partner compensation system, and the cracks are starting to show! No one is taking advantage of it, but it is frustrating the high performers, and I have no leverage to improve my lower-performing partners. I want a comp system that rewards performance. How do we get there?”

Like my client, many firms find that their comp system works… until it doesn’t. A firm doubling in size, the diverging quality of partners’ contributions, and an increasingly competitive marketplace are just some of the factors that can compromise what was once a good-enough comp model.

How to Move to Performance-Based Compensation

Changing compensation systems isn’t always easy, but it is achievable. Here are some of the key steps you’ll need to take:

1. Decide WHAT is being valued

When we say “performance,” what exactly are we referring to? Private equity wants partners to focus on EBITDA to generate more enterprise value. While there is merit to this as a performance-based approach, it is also a lagging indicator that can be gamed in the short term (by cutting discretionary but helpful expenses, for example). For over 30 years, Rosenberg Associates has helped CPA firms develop partner comp systems that truly meet their needs. We encourage firms to look at hard performance metrics—business generation, book-of-business management, realization, total firm profitability—and to look holistically at leading indicators of long-term success. These include things like who provides key leadership for the firm (e.g., managing partner or department head), staff mentoring, training, retention, and adherence to the firm’s values as well as progress toward personal and strategic goals.

Performance indicators can also evolve from year to year based on the firm’s shifting priorities.

2. Decide HOW MUCH weight each performance element gets

We’ve heard from partners:

“Billable time is all that matters!”

“I am the best at business development in this firm, so I get to ignore everything else.”

“If we don’t retain our team, who will do the work?”

After selecting the performance elements to be measured, you have to choose a relative weighting for each. It can be tricky because partners don’t always see eye-to-eye on this. This leads into our third step…

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3. Identify WHO will decide the compensation allocation

A person —or a designated group—will need to be in charge of deciding the final compensation allocation. Best practice is often to designate the managing partner (for small firms) or a compensation committee. Formulas can’t capture all the nuance and context of a partner’s performance, so it is very helpful to have a person or group who can consider both the quantitative data and the qualitative performance of each partner.

That said, whoever is making these decisions must earn sufficient trust from the partner group to do the job well. This goes back to how much things get weighted. A good MP or comp committee must be able to align the partner group around fair performance factors and weightings. They must also be able to articulate how the system will benefit each individual partner as well as the firm as a whole.

4. EVOLVE with time

Performance-driven systems aren’t meant to be set in stone. To truly drive the kind of performance needed most, the systems must evolve with the firm and the abilities of the partner group. A common element of these systems is partner goals. These can be a shock to the system if partners have never been accountable to one another! It can take several years to grow a culture of accountability at the partner level. That’s okay. A benefit of talking about performance is it forces owners to envision the future they want and what each person will need to contribute to getting there.

Ultimately, shifting to performance-based compensation creates a cultural change. Partners must agree on the philosophical changes and build enough trust for the process to work over time. When firms approach this change intentionally, the transition enables long-term performance, accountability, and scalable success.

As for my client, after gathering further data, we found that their partner group was resistant to a drastic departure from their past compensation system; however, they were philosophically open to moving to a more performance-based comp system. We decided that a progressive move over several years would help phase in the change without shocking the system. To put an immediate focus on performance, we added management stipends for critical leadership roles that were already being performed, as well as a modest discretionary performance bonus tied to partner goals. This broke ties with the pay-equal entitlement mindset and gave the firm enough time to start building its high-performance muscles.

If your partner compensation system is showing cracks, consider the benefits of moving to a performance-based model—and what the path to getting there might look like for your firm.