Income Partner: Permanent Position or Stepping Stone to Equity?

Question from a CPA firm: Our firm has an annual revenue of $10M. We are considering someone for partnership who will likely always be an income partner. In the past, we have admitted new partners as income partners, knowing that eventually they would become equity partners. This is a first for us, and we need to figure out what the criteria are for becoming an income partner in our firm. One criterion for the equity promotion has been bringing in business. Some of our partners now feel that we should be open to considering people for income partner even when they aren’t a business-getter. What would you advise?A person walking on stones across a river.

Our thoughts: Management practices differ depending on the size of the firm. We would say that a significant dividing line on how firms are managed is $15–20M of revenue, but practices vary, sometimes considerably, both above or below this threshold. There are no rules; it’s simply our observation of how these two groups of firms tend to operate.

One example is how the income partner position is used. At around 30-60 percent of firms, many income partners never make equity partner. So, it’s okay to make someone a permanent income partner. The main reasons some income partners never make it to equity:

  1. They don’t bring in business.
  2. They lack leadership skills (they’re not awful at it; they’re simply so-so).
  3. The original promotion to income partner was more a staff retention tactic than recognition of the person’s ability to drive the firm.

Our book How to Bring in New Partners is written for firms fortunate enough to have staff with the right stuff to be a partner. This book addresses all of these areas and more, including: ►how do firms develop staff into partners and when are they ready  should we have non-equity partners what is the process for bringing in a new partner how do new partners get compensated what should the buy-in amount be.

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The promotion from income to equity partner generally occurs when:

  1. They start bringing in business. It’s a little puzzling, but when a person gets to their mid or late 30s and has the title of “partner,” their overall maturity, self-confidence and business acumen grows, and after 10 to 15 years of not bringing in business, they start to do so — not as a rainmaker, but contributing.
  2. The person has grown to the point that they are a driver. They manage and retain a sizeable client base and grow it; they mentor and develop staff; they begin to bring in some business; and they are a team player. They know how to participate in leadership, even if they’re not setting the direction of the firm.

Enough partners retire so that the firm needs high level people to replace the retirees and manage clients, grow revenues with existing clients, write retirement checks to older partners (succession planning), and bring sorely needed technical skills to the partner group (mainly audit and high-level tax).

Anecdotally, we have seen many firms under $15M that are willing to make people equity partner even when they lack business development or leadership skills. This isn’t necessarily right or wrong, and it seems that if the promotion satisfies some of the criteria above, then these firms are okay with it.

Ultimately, deciding whether the income partner position is a permanent position or a stepping stone to equity is a judgment call. If someone is really a glorified manager, then they are rarely promoted to equity partner. But if they are truly capable of functioning like a partner (mainly bring in business; being a leader; managing, retaining and growing a client base; training and mentoring staff), then it may be reasonable to make them equity partners.

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1 Comment

  1. R. Peter Fontaine on February 16, 2022 at 9:52 am

    As a firm decides whether to create an “income partner” postion, it must also determine what it means. What is the increase in compensation/benefits? Does the income partner particpate in firm goverance (non-voting)? Does the income partner make a “capital contribution” the firm (in the form of a loan to the firm)? What are the increased responsibilities and expectations? Becoming an income partner could be just a title change – but is it meaningful without some incremental benefit??

    As an alternative to the traditional income partner, smaller firms are creating “hybrid partner” positions. These are individuals that have no equity interest, but have most of the attributes of an equity partner – at a significantly reduced level. A share in the firm profits. Deferred compensation. A share of the proceeds of a sale. Voting rights in operational matters. A “capital contribution.” The rationale for these hybrid partners is the same as for income partners. The obvious difference is that the benefits of a “hybrid partners” are significantly greater than your garden variety of income partners.

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