How Much Should the MP Earn?

Question from a Reader:

What should our Managing Partner earn?  Our 3.4M revenue firm is comprised of 4 equity partners with income averaging $231,000. Ownership percentage is the sole determinant of income.

The MP spends a substantial amount of time managing the firm and maintains a $775-800K book of business. The MP’s ownership percentage is 26%, resulting in an income of $240,000.

SHORT ANSWER:
The 2015 Rosenberg Survey reports the following:
– Annual revenue of firms $3-4M: the MPs earned 17% more than the average partner in the firm.
– Annual revenue of $20+M: MPs earned 63% higher than an average partner.
– Annual revenue of $10-20M: MPs earned 27% higher than the average partner.
– Annual revenues of $2-10M: MPs earned 19% higher than the average partner.

Based on the reader’s data, the MP earned almost the same as the other partners in the firm. It seems the MP’s comp does not provide any compensation for serving as MP. If the MP didn’t have these duties, there would be more time available to build up production numbers.If we assume that the MP duties are worth $25-50K, then this MP has a case for being compensated at $265-290K.

LONGER ANSWER:
Basing the MP’s compensation on MAP survey data is a perilous practice. One cannot simply refer to a chart to make this determination. Many factors need to be taken into account, and every firm is different.A lot depends on the MP’s role.

Some MP’s truly manage the firm, which includes managing partners’ performance and behavior, holding partners accountable and having overall P&L responsibility for the firm.

Other MPs serve more as admin partners. Partner performance and overall P&L responsibility are not expected of the admin partner. Instead, the MP runs partner meetings, oversees internal accounting, prepares the firm’s financials, and coordinates systems, recruiting, landlord duties and the like.

The first kind of MP is worth a lot more money than the second..

Main issues that should impact a MP’s comp:

• Effectiveness of the MP at truly managing an organization. This may be partially impacted by the amount of time devoted to the job.
• Client base and billable hours. Most MP’s of firms under $15M still have substantial client duties. They could probably do a better job of managing the firm if they were not burdened with as many client duties, but this is the reality of how smaller firms operate.
• Other intangible performance attributes, which could include leading the firm’s marketing strategy, developing staff, loyalty, teamwork, etc.

Your present comp system based on ownership percentage:
The reader’s firm bases income allocation on one factor – ownership percentage. The vast majority of firms with 5 or more partners use performance-based comp systems. Ownership-percentage based compensation is an archaic system that rarely correlates to performance and is therefore, NOT a best practice.

Common performance-based systems include (1) MP decides, (2) Compensation Committee, (3) Compensation Formula and (4) Paper and Pencil.

Although comp formulas are frequently considered performance-based, most fail to measure anything beyond production metrics, and largely ignore performance intangibles such as firm management, mentoring staff, teamwork and loyalty.

For a thorough examination of partner comp systems, industry best practices and guidance in addressing your firm’s unique circumstances, consult our monograph CPA Firm Partner Compensation: The Art and Science.