This is the 2nd of a two part series on our recent partner compensation survey.
As part of CPA firms’ never-ending quest for the perfect partner compensation system, our company recently conducted a survey of firms’ compensation techniques and methodologies in conjunction with our colleagues at CPA Leadership Institute.
But before we begin, a clarification. Let’s not confuse Best practices with Common practices. Best practices, based on experience and research, reliably lead firms to the most effective results. Common practices are simply those practices followed by a large percentage of firms, whether they are best practices or not. I will point out these differences as I proceed.
33% of the firms were under $5M in annual revenue; 46% were $5-15M and 21% were over $15M.
- Does your firm track origination separate from client base managed?
Fundamental to this question are two key definitions: Origination refers to who brought in the client. The originator may or may not manage the client. Client base managed refers to who manages the client relationship and engagement. The client manager may or may not be the originator.
- 55% track origination separately from client base managed.
- 45% do not.
Best practice or common practice? Common – yes but certainly not a best practice. Assume a firm has two partners, exactly the same in every way. Both manage a million dollar client base. One of them originated 100% of the client base and the other originated zero. For compensation purposes, it’s clear that the originator should out-earn the other partner. That’s’ why origination should be tracked separately from client base managed.
Another key issue is teamwork. I hope my readers agree that teamwork among partners is better than operating as a group of solos. In a team environment, clients may be transferred between partners, from time to time, for the good of the firm and the clients. But this will rarely happen if originators lose all compensation credit when they transfer clients. Hence, a good reason for tracking origination vs. clients managed.
Firms that do not track origination separately from clients managed are usually smaller firms at which the originator and the client manager are almost always the same person. Since the originator and the manager are usually the same person and originators rarely delegate clients to others, smaller firms have little need to differentiate between these two roles in the partner compensation system.
CPA Firm Partner Compensation: The Art & 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
- What factors carry the greatest weight in allocating income?
Factors are listed below in order from highest ranked to lowest:
- Client base managed.
- Technical expertise. (much lower ranking than #1 and #2)
- Firm management.
- Billable hours of the partner individually.
- Ownership percentage.
- Mentoring and development of staff.
- Intangibles such as teamwork, loyalty, work ethic, developing staff, etc.
Best practice or common practice? Common – yes but certainly not a best practice.
Firm management should rank higher than 4th because if done effectively, it makes all the other things happen. Mentoring and management of staff should be ranked no lower than 4th because of its importance in the firm’s profitability and overall success. One of the biggest hypocrisies in CPA firm management is when firms “say” their staff are just as important as clients but yet, virtually ignore mentoring of staff in the partner compensation system. Technical expertise should not be ranked anywhere near as high as third because, in allocating partner income, this skill should be considered a “given” for all partners.
- Are compensation committee members elected or appointed?
50-50 split. I’m not sure there is a best or most common practice here. Firms that lack obvious, credible choices for the comp committee and/or are big advocates of democracy as a way to manage a firm, will opt for elections. Firms that have confidence in the managing partner to select the most effective people to serve on the committee will be comfortable with the MP appointing CC members. Also, firms with several departments, industry teams and office PICs find it more effective to have these key positions serve on the committee.
- Are the comp committee members the same as the executive committee?
At 54% of firms, the two committees are the same. 41% of firms’ committees are comprised of executive committee members and partners not on the EC. At 5% of the firms, the CC and the EC are totally separate.
Best practice or common practice? The best practice is for the two committees to be the same people. If the EC is doing its job well, it works closely with the MP for 52 weeks in monitoring the performance of each partner. The EC members are keenly aware of the contributions – both positive and negative – of each partner and thus, are in a much better position to link performance with compensation of the partners. To the extent that non-EC partners serve on the CC, there is a risk that the CC will become a “jury” that meets for a couple of days, comprised of uninformed people who lack the deep knowledge required to make the best decisions.
A common practice is to have some degree of separation. Firms preferring the separation are fearful that the EC will become too powerful if it has the authority to allocate partner income.
- Terms for comp committee members
62% of firms have no fixed term length. 86% of firms have no limits on the number of consecutive terms a CC member may serve.
Best practice or common practice? Both! Some firms mistakenly limit the terms because they want every partner to have a turn to serve on the CC. One of the keys to the success of a CC is that the partners must trust the judges (the CC members). All CC members need to be highly credible in the eyes of the other partners. I guarantee you that at all firms large enough to operate a CC, there will be at least one partner who is not credible in the eyes of the partners. It would be a disaster if someone lacking credibility served on the CC.