Operating-Model Flaws Guaranteed to Complicate Partner Compensation: Flaw 2 of 3

Marc Rosenberg, CPA / Oct 12, 2020

Understanding how common CPA firm operating model flaws affect partner compensation helps firms review and modify their comp systems to better achieve the firm’s goals.

In our second blog on this topic, we discuss complacency which can creep into a firm without much fanfare, and causes havoc when partners realize how hard it is to get rid of.

Operating Model Flaw #2: Rewarding the status quo. According to The Rosenberg MAP Survey, 85% of the revenue of firms under $20M are compliance services, leaving only 15% for consulting, most of which is client handholding – general advice and assistance. Since compliance services and hand-holding are largely annuity-based (clients keep coming back almost automatically) and equity partners earn $300,000-$600,000 per year (making partners content and sometimes complacent), most CPA firms are doing very little to develop specific consulting services such cybersecurity, business valuations, wealth management, risk management, due diligence, SALT and so much more.

Recently, there is no better example of the potential of consulting than all the work generated by government stimulus programs related to the COVID crisis.  This lack of focus on developing consulting is in spite of virtually every expert in the CPA industry – from elite managing partners to veteran CPA firm consultants- warning of the significant erosion of compliance services that will occur due primarily to the sea-change of new technologies on the near horizon.

Not only is the status quo of today’s operating model cheerfully rewarding the continuance of compliance services, but firms persist in embracing their generalist practices instead of developing specialty services and industry niches.

If you look over the history of any organization, from governments to sports teams to consumer products, there is one consistent phenomenon – change. Those who changed with the times survived and those who stayed the same eventually were buried on boot hill.

CPA Partner Compensation:  The Art and the Science explains ►Partner comp 101 ► the 12 systems used by all firms ►how to design your firm’s system ►open vs. closed systems ►the role of “book of business” ►differences between large and small firms’ systems ► the MP’s compensation ► trends and controversies and ►overall best practices.

How flaw #2 impacts partner compensation.  Partners who maintain or even increase their annuity-laden, compliance practice are handsomely remunerated, year after year.   This results in virtually no incentive or requirement to change, to innovate, to build, to create shiny new stuff.  Antiquated partner compensation systems perpetuate the status quo.  To address this, partner compensation systems need to encourage partners to innovate, discouraging them from doing the same old-same old ever year. Partners need to develop new services, specialize, delegate long-time compliance clients to other firm personnel, all while helping their firms achieve their vision.  And these activities need to be important factors in firms’ partner comp systems.

A well-designed partner compensation system does not ignore the volume of compliance work brought in and/or serviced by a partner, but includes an allocation for achieving new and innovative service contributions to the firm. This allocation piece is significant enough to drive the behavior desired by the firm’s vision and strategic plan.

In our next post on this topic, we’ll discuss CPA Firm Operating Model Flaw #3 related to partners trying to manage the firm and clients at the same time. Read about Flaw #1 here.

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