Operating a Compensation Committee: The devil is in the Details

Increasingly, CPA firms are adopting the Compensation Committee system for allocating partner income.  Firms are finding that systems such as formulas, pay based on ownership percentage or pay-equal no longer work.  When we compare the usage of the compensation committee today to 5 years ago, the increase in usage ranges from 16% to 26%. 

If there is one overarching cause for this significant trend, it’s that firms are understanding that their partners need to be something more than production machines.  In addition to bringing in business, managing a client base and working billable hours (all of which continue to be important values in a compensation committee), partners need to excel in intangible areas such as helping staff grow and develop, developing specialized expertise and teamwork.  The compensation committee is one of the best systems available to CPA firms to allocate income based on this diverse array of performance criteria.

When we help firms begin operating their new compensation committees, there is a lot of initial confusion and bewilderment about how to get started.  For example:

• What data should the committee review?
• In theory, the partners liked the idea of getting away from past formulas, but how do they determine each partner’s compensation without using some sort of formula?
• How should the compensation of the committee members be decided?
• What communication should take place between the committee and the partners?
• When is the best time for the committee to convene?

There are actually 20 major decisions that need to be made by a compensation committee.  Click on the highlighted area to receive a free list of these decisions.  This schedule is contained in our monograph How To Operate A Compensation Committee.  You can order a copy of the monograph by clicking on the red button in the right margin of this Blog.