Rosenberg & Rampe Reveal Magic Formula for Partner Compensation

 

A satirical blog post in celebration of April Fool’s Day.

Partner compensation is a challenge for many accounting firm leadership teams. The desire to balance rewarding performance, book of business, billable hours, and plain old seniority leads to conflict. Feelings of confusion arise when partners who are total jerks continue to out-earn their peers who have 20% higher realization and manage staff as if they’d been personally mentored by Adam Grant.

I’ve been fortunate enough to work closely with Marc Rosenberg for the past several years on partner compensation projects. Combining our experience and talents, including Marc’s 25 years consulting with CPA firms across North America, today we are releasing his penultimate work: The Magic Formula® for Partner Compensation.

To give you more background on this groundbreaking system, we are sharing with you comments from an interview with Marc as well as an explanation of how the system works.

“Many firms contact us looking for help with how to make sure their partners are fairly compensated,” Rosenberg says. “All these years we’ve been telling them that while formula systems are the most popular, they’re not the best … until now.”

“It’s a sensitive topic,” continues Rosenberg. “We’ve been working with leaders in the industry and evaluating the compensation practices of firms that demonstrate flawless partner harmony and have 100% of partners thrilled with their income allocation. The result is The Magic Formula, which requires only a few simple inputs.”

How it works

The Magic Formula uses objective and subjective data, along with a proprietary scoring system to add or subtract points for desirable and undesirable partner behaviors.

One unique part of the system is that some partners may end up owing the firm money based on their annual performance. While some CPA firm partners may argue that this makes no sense, others have said, “It’s about time.”

Here’s an overview of the formula.

Step 1:

Calculate net income available for partner compensation by taking net receipts and subtracting operating expenses (but not partner pay).

Step 2 (a):

Calculate your Partner Scores. Evaluate each partner by inputting objective and subjective data on a proprietary Magic Formula worksheet. Categories include

• Number of team members who would say you are their favorite partner (+150 points each)

• Number of partner-level goals you wrote in advance and achieved during the year (+100 points each)

• Number of firm initiatives you undermined by not supporting or actively participating (-100 points each)

• Annual number of hours you spent working on client or administrative work that could have been done by someone else (-2 points per hour)

• Hours you spent ruminating, alone or with others, on difficult problems you haven’t created an action plan to resolve (-10 points per hour)

Step 2 (b):

For progressive firms that like to add an element of gamification to the workplace, The Magic Formula provides the option to have each partner roll the dice to add a multiple to their Partner Score! Are you feeling lucky today?

Step 3:

Calculate each partner’s contribution to, or detraction from, firm progress by dividing each person’s Partner Score by the average of all Partner Scores. This is where the magic begins. You will find that any partners with negative scores are in debt to the firm for their actions. Ultimate fairness demands that partners who cost the firm money must pay up. Enjoy that discussion with our compliments.

The in-depth research behind the Magic Formula will be explained in more detail in our forthcoming book Partner Compensation: Witchcraft and Wizardry.

This post was originally featured on The Rosenberg Associates blog.