Partner Comp Earnings Gap: What’s the Right Spread?

There are many reasons for a sizeable spread in partner income at a CPA firm. For example, at a firm that has both a founder nearing retirement and a first-year partner, the spread would be wide. Some firms are the opposite, with two to four founding partners agreeing to share all profits equally. No spread there.

For most multi-partner and multi-generation accounting firms, the situation gets more complicated. You’ll have some high performers and some who are on cruise control. You’ll have ones contributing notably more dollars to the bottom line, and ones contributing more to the development of future leaders.

But what about two partners who contribute relatively the same? Should their income allocation be similar? How similar?

Earnings Gap Philosophy Check

In our work with firms on partner compensation, we often ask this question:

Assume you have two line partners in the same department, who both manage a similar amount of billings and realization, and whose skills in business and people development are similar. Both have a history of similar performance over their tenure as partners. The difference is that one has been a partner for five years; the other, 20 years. Should they be awarded the same compensation? Different? How different?

Does this exact scenario exist? No. Do you have questions about what else they do for the firm? Of course. But for the sake of exploring the comp gap philosophy at your firm, assume these two people are “the same,” except for the number of years of service as a partner.

This is a difficult question for many CPA firm owners. Current-year performance is essentially the same. But there has been historical value creation over time. What’s that worth? What, if anything, should the partner be paid in the current year for that value? How would the firm determine that value?

Like all things partner-comp, there is no one right answer. What matters is what aligns with your firm’s values, and what’s competitive in the market (assuming you wish to attract and retain partner-level talent with longer career runways). Given current changes in the industry with PE and fair value models, and less loyalty-at-all-costs mentality demonstrated by newer partners, optimizing your compensation plan may be more important than in the past.

Industry Data

Considering partners at all performance and seniority levels, earnings gaps vary widely. Below is data for equity partner compensation, excluding firms that pay all partners equally.

2023 Rosenberg Survey (2022 data), ratios of highest to lowest partner compensation:

Firms $5M–$10M

• Range 1.1 to 6.9
• Median 1.9
• Average 2.3

Firms > $20M

• Range 1.3 to 13.7
• Median 2.9
• Average 3.5

Example dollar ranges might look like this:

• For a wide-gap firm: $4M (highest paid) to $400,000 (lowest paid)
• For a narrow-gap firm: $700,000 (highest paid) to $440,000 (lowest paid)

Average income per partner (IPP) in the 2023 Rosenberg Survey was $653,000. It’s important to note that although firms with larger gaps tend to have higher IPP, there are plenty of well-above-average-IPP firms with a gap below the median.

2024 IPA Survey (2023 data), ratios of highest to lowest partner compensation:

Firms $30M – $75M

• Range 1.2 – 33.9
• Median 3.1
• Average 4.0

Firms > $75M

• Range 2.4 -52.8
• Median 4.9
• Average 8.4

The IPA Survey encompasses much larger firms, though does not include the Big 4. There are some clear high-end outliers in this data set, as evidenced by both the ranges and the increase in average above median compared to the other groups of data. Nonetheless, larger firms, which are typically more profitable and have more focused leadership roles (CEOs running large professional organizations), have higher spreads overall.

CPA Partner Compensation: The Art and Science is your ultimate guide to understanding and optimizing the complex landscape of partner comp. Our book covers: Partner comp 101 • Explore and understand the 12 systems used by all firms • How to design your firm’s system • Open vs. closed systems: Understand the distinctions between them • The role of the book of business • Differences between large and small firms’ systems • MP’s compensation • Operating a compensation committee • Linking partner compensation with strategic planning • Explore the metrics and data used to evaluate partner performance • Compensation nuances • Trends and controversies • Case studies • Best practices

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How to get the gap right at your firm

So, back to our initial question: what’s the right spread? Overall ratios in the industry are shown above, but even the ratios vary widely. A gap of 2-3 times is popular among small to mid-sized firms with a ratio of 4-5 common at larger firms.

Ultimately, those making comp decisions at your firm should, as a part of their income allocation process, review the pay gaps for partners and ensure they feel appropriate based on individual partner performance and value. For some, the gap should be narrow or working in that direction. For others, the gap may need to widen to properly recognize contributions to the firm’s value and bottom line.

If your gap is zero, is that still effectively serving your firm? If your gap is 15:1, is that still effectively serving your firm?

Other questions to consider

If you had a quick answer to our opening question about the 5th year and 20th year line partners who contributed equally, here are some advanced scenarios to consider:

1. What about a 10th year partner and a 25th year partner? What does the gap look like in that scenario, all else being equal?
2. Compare the 5th year home-grown partner and a lateral hire who was a partner for 20 years at their prior firm but didn’t bring over a significant book of business (instead replacing a retired partner’s work). How much is “market value” for those extra years of experience vs creation of long-term value at your firm? Remember, they are both line partners, with similar production levels and similar contributions to people and business development.
3. How do you handle partners who are stepping back mid-career? Still serving a reasonable client base, but no longer achieving as much as they did in the past in terms of business development or strategic goals?

How does your firm approach partner income allocation when you have partners with similar performance? Do you feel the spread in comp at your firm is fair? Can you articulate why to incoming partners? Thinking through questions like this can add clarity to your income allocation system, which is something everyone appreciates. We’d love to hear your approach, thoughts or comments below.