Partner Compensation Therapy Session: Part 2
Marc Rosenberg, CPA / May 15, 2020
This blog series is patterned after a terrific TV show from 2010, “In Treatment.” The show brought us inside a psychologist’s office as he conducted weekly sessions with various patients. Gabriel Byrne was masterful as the psychologist.
In this two-part series, the patient is 56-year-old Pat, the oldest of 8 partners in a $10M CPA firm, located in a major city. Pat’s firm is 30 years old and has seen better days. Several partners have retired in recent years. Income per partner is $280,000; Pat earned $310,000 last year.
In the dialogue below, MR is the therapist treating Pat for anguish over proposed changes to the firm’s partner compensation system. [Read Part 1 of the series here.]
MR: Last week we talked about the need to manage your firm differently, but yet the current partner comp system of using a formula still seems to work well enough for you and some of the other older partners.
Pat: Yeah, my view is that if it ain’t broke, don’t fix it. Are you saying that we need to break the system to fix it?
MR: I’ll leave it to you to decide that. It might be helpful to take a closer look at some of the issues. Let’s start with teamwork. Do you think operating as a team is important to a CPA firm’s success?
Pat: You clearly want me to say “yes” and who would disagree. All of our partners, including me, consider ourselves to be team players. But to be honest, I’m not convinced that teamwork provides enough tangible value to the firm to warrant recognition in our partner comp system.
MR: Let me suggest how teamwork makes a firm stronger:
- Partners work ON the firm instead of IN the firm. Partners delegate clients and billable work to staff to train them as leaders and enhance the challenge of their work, all keys to retaining and developing personnel. And partners do this without fearing it will reduce their comp.
- Partners delegate staff-level work to staff, freeing them up to do partner-level work.
- Partners agree on a common vision so that everyone pulls in the same direction.
- Partners take staff on sales pitches to mentor them in business development.
- No partner is as smart and experienced as the partner group as a whole. Partners freely tap into the expertise of other partners to expand the firm’s ability to satisfy clients’ needs.
One final thought on teamwork. You’re telling me that 7 of your 8 partners want to change the present formula-based comp system, with you being the lone holdout. If you can convince the other 7 to agree with you, ala 12 Angry Men, more power to you. But it doesn’t sound like this is going to happen. An important aspect of teamwork is the ability of dissenters to agree to disagree and support an overwhelming majority.
Pat, I’m not suggesting that teamwork be weighted higher than business origination, but would you agree now that good teamwork makes the firm stronger?
Pat: I guess when you put it that way, yes. You’ve certainly got a way with words.
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.
MR: Let’s talk about another issue. Would you agree that one of the biggest problems facing all CPA firms is the shortage of talented, experienced staff?
Pat: You got that right!
MR: Firms have told me that there isn’t much they can do to increase the supply of available staff, but there is a lot they can do to retain and develop their existing staff. Studies have shown that the #1 factor that causes employees to stay with their company is their relationship with the boss. And of course, the most important bosses at a CPA firm are the partners. That being the case, can you see why it’s important for partners to make substantial efforts to make a positive impact on the retention and development of staff?
Pat: I can’t disagree with you on that.
MR: Good. So if we agree that it’s critically important for partners to help staff learn and grow, shouldn’t this be a factor in partner compensation? Wouldn’t this be a good example of how the partner comp system could be used to motivate the right behaviors?
Pat: Maybe. But I’ve got another problem. I feel it’s the job of all partners to effectively supervise staff. Therefore, it doesn’t need to be separately compensated.
MR: Pat, take a look at your 8 partners, including yourself. Do you feel that each of the 8 are equally skilled at mentoring staff, causing them to stay and helping them learn and grow? If you answer yes, you will be the first firm I have ever known to have this trait. Can you see how managing staff needs to be a factor in partner comp?
Another point: There is an adage: “You get what you measure.” It stands to reason that if all partners are rewarded the same regardless of their effort and achievement in mentoring staff, then no one will be incentivized to excel in this area.
Pat: Of course. I see your point. But here’s another thing that bothers me. Today, when I go to conferences and read articles, all I hear is mentoring, mentoring, mentoring. How partners should reduce their billable hours to spend more time with the staff, coaching them and helping them learn and grow.
But when I was their age, no one mentored me. It was sink or swim. We pulled ourselves up by our own bootstraps. Now my partners want us to hand-deliver success to our staff on a silver platter? It’s too much coddling of the staff, if you ask me.
MR: What’s the alternative? Years ago, when you and I were young staff, times were different. Staff were a dime a dozen. When the boss said jump, we said “how high.” But things have changed. Staff are smarter and in shorter supply today. If firms aren’t proactive about providing a great place for staff to work with advancement opportunities abound, they will leave and find another firm that does. So, as I see it, you’ve got two choices: Keep your head in the sand, cloaked in old school ways of treating staff and pray that future leaders will emerge. Or recognize that if the partners don’t work their butts off trying to retain and develop staff, your firm will continuously suffer for lack of trying. Which choice do you want to make, Pat?
Pat: OK. OK. I see your point.
MR: We’re almost out of time today, but there are several other factors besides partner production that need to be considered in allocating partner income. I’ll name just a few:
- Partners should not have high billable hours because much of their work can be performed by staff.
- The firm’s MP should manage a smaller client base to free up time to manage the firm.
- Partners should not be highly compensated for coasting.
At our next session, we’ll begin exploring them, one by one. But I want you to walk away from this session and future sessions with these overarching thoughts:
- Bringing in business, managing a large client base and to a lesser extent, billable hours (often termed Finding, Minding and Grinding or FMG), will always be important factors in allocating income, perhaps more important than any other factors.
- There are many things that make CPA firms successful besides FMG and they need to be important factors in allocating partner income as well. Your partner comp system needs to motivate solid performance in all areas, production as well as intangibles.
- The only way, and the best way, to consider objective, production factors plus performance in intangible areas is with a subjective system such as a compensation committee.
Pat: I’m beginning to see why our partner comp system needs to change. I’ll see you next week.
No one partner compensation system applies to all firms. Both subjective judgment and quantifiable methods and tactics must be employed to result in an outcome that satisfies the partners and is perceived as fair. Tailor your partner comp system specifically for your firm: here's how.Learn More