Should Partners Cut Their Comp to Pay Staff Better?

I had lunch with the MP of a $12M firm recently and, naturally, the conversation turned to what’s on the minds of all CPA firms: the challenges of retaining staff, making their jobs more desirable and getting them to covet being a partner. This firm’s income per equity partner is about $600K, with the MP making close to $1M.

The MP tossed out an outside-the-box idea for firms who are making great incomes. To incentivize staff to stay with the firm and, even better, want to become a partner, should the partners consider reducing their compensation by a relatively small percentage (say 5-10%) and passing this money on to the staff?

The more we talked, the more we agreed that this tactic would be done mostly for stars and not necessarily across the board. I ran a few numbers: the math might result in a $10–20K increase for the stars, depending on their tenure and title, and less for other staff.

To add to our own opinions on the matter, we asked a few top CPA firm consultants for their thoughts. Here’s what they had to say and my follow-on thoughts.

Art Kuesel: art@kueselconsulting.com

“If I may offer a contrarian position… If the firm doesn’t reward its high performers with above average compensation, they will leave for more money elsewhere. There is no optional partner deduction to fund it. It is a required partner cost. We have discussed this with quite a few firms and found that about one-third to half had already awarded special increases for high performers or had imminent plans to do so.”

“By the way, the partners shouldn’t be paying these increases; the clients should.”

Rosenberg adds: “If I had to list best practices that too few firms follow, a strong nominee would be lack of aggressive pricing. In the 20+ years I have been consulting to CPA firms, every year (with very few exceptions), I have seen robust CPA industry revenue growth with accompanying partner incomes that would be the envy of 99 percent of our nation’s population. Yet, firms are perplexingly reluctant to raise their rates and fees to reflect the premium position they enjoy in their market and with their client base.”

Gary Adamson: gadamson@adamsonllc.com

“I tell my clients: ‘Raise your rates; cut the junk.’ If raising rates means losing some clients, that’s okay. Firms never lose as much as they fear. Few firms ever truly deal with the bottom of the client list to address the demand side. If there ever was a time to raise rates, it is now.”

“Other tactics: Grow your own – double your entry-level campus hiring. You need to fill the pipeline because no matter what you do (and you should do a lot), you will turn people over more rapidly than in the past, and you won’t be able to go into the market to replace them quickly.”

“Pay your staff, especially the stars, well above market. And ‘market’ is not just other accounting firms; it’s also opportunities in other industries.”

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Kristen Rampe: kristen@rosenbergassoc.com

“It feels odd to think of this as ‘partners reducing their income.’ Aren’t all employee salaries a reduction of partner income if they’re thinking about it this way?”

“If compensation increases are warranted, either because of merit/performance or market rates, then these increases need to be made to avoid turnover, especially with your stars. And pricing increases need to support this tactic.”

Rosenberg thoughts: I think the MP I lunched with had this in mind: Partners at many CPA firms enjoy substantial income levels, averaging $600K, $800K and, at an increasing number of firms, well over $1M per partner. We’ve seen hundreds of firms’ higher-paid earners take home $1.5 to $3M. Those are pretty fantastic incomes. Far be it from me to suggest that partners earn too much or that they aren’t entitled to this money. They deserve every penny for their expertise, the invaluable service provided to clients, their hard work and the infinite amount of great advice they give to clients every day. The point is that given these lofty levels of income, would these partners be more successful at retaining staff and making them more desirous of becoming partners if they spread the wealth just a little bit?

The caveat to this line of thinking is that it applies mainly to partners whose earnings are way above industry norms. Few would advise partners earning under, say, $250,000, to share some of their income with the staff.

An overarching aspect to this whole issue is the debate that has raged in the field of compensation for decades: How much does compensation cause people to accept employment offers and – perhaps more importantly – stay with their employers? This is all part of the central question: How motivating is compensation? We could write a book on this subject, but a few summary comments are in order:

• Compensation is definitely an effective incentive. It ranks at or near the top of every survey I’ve seen regarding what CPA firm staff want.
• Over time, compensation may lose its luster. Yes, it may cause employment candidates to accept your offer vs. another. Yes, it may have some short-term impact in retaining existing talent. But in the long term, other factors such as job satisfaction, career advancement opportunities, one’s ability to learn and grow and staff’s relationship with their bosses will determine how long staff stay with your firm. If these factors are not present, then it’s likely your better staff will eventually leave, regardless of how much you pay them.

The moral: Yes, pay your people above market. But be sure to pursue the parallel path of focusing energy and attention on training, mentoring and career-pathing.