SPECIAL REPORT – Partner Compensation: Why Accountability Matters

By Kristen Rampe, CPA, and Dr. Christopher Harper, CPA, MBA, Assistant Professor of Accounting, Seidman College of Business at Grand Valley State University

Partner compensation has been a dilemma ever since professionals began joining forces to earn revenue. Although a few firms have mastered this process, compensation mechanisms are more likely to create disappointment and confusion as partners struggle to understand their share of the pie or how it was determined. Whether you are fine-tuning a time-tested system or overhauling an antiquated process, CPA firm leaders must have tools for assessing the effectiveness of a partner compensation model.

How do you know if partners feel they are fairly rewarded? What features could enhance satisfaction with your firm’s income allocation systems? How can a compensation system cultivate cultural change? Would any of your partners recommend your firm’s system to a peer at a firm of similar size?

To help answer these questions, Rosenberg Associates partnered with Grand Valley State University to survey CPA firm partners regarding their compensation systems. Respondents told us about the types of systems used at their firms. More importantly, they told us what they liked and did not like about the way their firm allocates income. A key result was accountability. Respondents highlighted how accountability not only resulted in comp system satisfaction but also connected to improved profitability.

Research and Respondents

Our survey was aimed at partners of firms with more than three equity owners. In late 2022 and early 2023, we collected 125 responses from United States CPA firm owners and obtained relevant data for most questions from over 80 individuals. To encourage candid responses, the survey did not capture identifying information, thereby encouraging partners to freely share their views without concern for peer or senior partner reactions.

A CPA firm “compensation system” is a combination of the decision-makers (one or more persons) and the tools or mechanisms used to determine owner compensation, including mid-year distributions and final annual allocations. We asked respondents to select from the following options used by their firm to allocate the majority of each partner’s compensation.

• Formula (e.g. pay calculated based on book of business, collections, business development or similar production metric, finder minder grinder, balanced scorecard, etc.)
• Compensation committee
• Managing partner decides
• Paper and pencil (each partner writes down on a sheet of paper what every partner should earn, and all ballots are averaged to arrive at each partner’s compensation)
• Pay equal (everyone is paid equally or nearly equally)
• All partners decide as a group
• Ownership percentage
• Not sure
• Other

Current Landscape

Over half of our respondents used either a formula or a compensation committee to allocate income. A wide range of partner incomes and annual revenues are represented. Over three-quarters of respondents had 10 or fewer partners.

Systems indicated above are the ones used to allocate over 70% of partner income at the respondent’s firm.

Additional demographics of our respondents:

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What’s Going Well?

We asked questions about individual and firm factors related to partner compensation systems by rating statements like these on a 7-point scale ranging from strongly disagree to strongly agree.

Most respondents felt positive about the following statements, as indicated by an “agree” rating (“somewhat agree,” “agree” or “strongly agree”).

• I understand how firm income is allocated to me. (93% agreed)
• I make enough money to live the lifestyle I want. (91% agreed)
• I receive respect and fair treatment from my partner group. (84% agreed)
• The income allocated to me over the last several years was fair. (83% agreed)
• I am able to bring up problems and tough issues with our partner group. (82% agreed)

This is good news. Partners seem to understand how income is allocated, they believe it’s done fairly, and they get to live their desired lifestyles. Perhaps there’s nothing left to want!

However, a few additional data points uncover work to be done.

Where Can We Improve?

We also asked respondents to respond to the question “How likely are you to recommend your compensation system to a firm with similar size and structure?” The question probed partners’ feelings about their compensation system’s ability to allocate income fairly and reasonably.

This question adapted a 10-point scale adapted from the Net Promoter Methodology. Results from this question were:

• 14% of respondents gave a 9 or 10 score (considered “promoters”)
• 28% gave a 7 or 8 response (“neutral”)
• 58% rated their systems a 6 or below (“detractors”)

In addition to less-than-glowing responses related to specific systems, we uncovered opportunities for improvement. Fewer than half (47%) of partners agreed that partners at their firm are held accountable for meeting goals and expectations. Only 59% of partners felt expectations are clearly defined and communicated to all partners. And even though 66% of respondents agreed “My individual performance is factored into my income allocation in a meaningful way,” this still leaves plenty of room for improvement.

In a question related to dissatisfaction, we asked partners to respond to the statement “I did not earn as much compensation from the firm as I deserved last year.” Only 38% agreed or felt neutral about not earning as much as they deserved.

Respondents reported their greatest concerns involved partner accountability. This led us to look further into the responses of firms with varying opinions on this aspect of CPA firm leadership.

Download the full report to see the impact of accountability on profitability.