Who Decides How Partner Income Is Allocated?

Multi-partner CPA firms need to ensure the right person or people make comp allocation decisions.

In addition to the mechanism used to allocate income, such as a formula or the criteria used in partner evaluations, firm owners need to specify who will determine the allocation. Sometimes that means “who’s on the comp committee,” but it can also mean “who decides the formula” and “who decides what the new partner’s comp will be.” A formula never determines comp on its own; it has to be created by one or more people who feel the formula is correct.

At any partner-run professional service firm, partner income allocation is a sensitive topic. The best system — one that serves the firm and those who make the decisions — can propel growth and profits. A poor system — one that rewards complacency or self-centered choices over best-for-the-firm — will stifle prosperity.

Clarity about who determines partner income is an important first step.

Who typically makes comp allocation decisions?

Here’s what we often see in our work with small to mid-sized CPA firms across North America:

Founder-led firms: Often the founders. This approach tends to work well as long as the founders are fair and valued as leaders. Some large founder-led firms use a compensation committee.

Firms with two to four partners: Often all partners together. It’s not uncommon for firms of this size to share all profits equally. However, that approach inevitably causes concern if, or often when, partners don’t contribute equally.

Second-generation+ firms with six or more partners: Often a compensation committee. These firms are large enough to have a subset of partners make compensation decisions for the partner group. The compensation committee receives input from appropriate sources to evaluate performance which they can’t observe directly.

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Who makes the best decisions?

The decision-makers identified above are the most common, but not always the best. There’s no guaranteed win, but the following factors tend to set the firm up for success. Having decision-maker(s) with these traits is a better predictor of an acceptable allocation than relying on someone’s role or position. These traits include people who:

• Make decisions in the best interest of the firm, ahead of their personal financial gain
• Reward strong performance and are comfortable reducing allocation for low performance
• Specify the criteria that indicate strong or low performance, including everything from strategic goals to intangible expectations (e.g., team player, timely billing, etc.)
• Hold partners accountable throughout the year for meeting individual and typical partner expectations.
• Provide the support and resources to make partners successful
• Communicate progress and evaluation of performance with timeliness and tact
• Have earned the trust and respect of the partners of the firm.

Historically, compensation committees have consisted of CPA firm owners and practitioners, but it’s worth considering a COO or other individual who would add high value to the CC process, even if they are not an owner or senior partner. Some larger firms also include a newer partner for additional perspective.

If your decision-makers do not exhibit the traits above, consider changes that would allow the partner group to have more say in who makes comp decisions. That may mean creating a compensation committee, specifying criteria and expectations for who is on the CC, or assigning a task force to develop partner performance criteria.

We have good decision-makers. Why is comp still so hard?

One of the bigger challenges in allocating income is when the amount to allocate feels insufficient. Put another way, highly profitable firms can buy themselves out of difficult discussions because they can allocate enough to reduce complaints about earnings.

If it feels difficult to get partner comp right, you might benefit from first aligning on strategic priorities for raising your overall income (e.g., stronger pricing, more leverage, automation, AI, offshoring). Getting these in place may soften the concerns over who allocates income or how. At the very least, it will make the job and the resulting financial outcomes more rewarding. Dividing a little pie into little pieces isn’t a game firm owners love to play.

What has your firm found successful in determining who makes partner comp decisions?