Why Most Firms’ Partner Comp Systems are Performance-Based

Any discussion of partner compensation must start with a fundamental concept: Should a partner group’s income allocation system be performance-based?

Compensation motivates performance.

To be successful year after year, CPA firms need to service their clients well on a continuous basis.

CPA firms typically lose 10-20% of their revenue sources every year because clients merge out of existence and major projects often don’t repeat. They have to originate 10-20% in new business annually just to stay even.  Staff must be trained and supervised. Firm personnel must be productive.  CPA firms do not run on automatic. As a result, to perform well firms need their partners to work hard every year.

Therefore, firms need to avoid situations in which partners have little financial incentive to work hard and perform well.

If partners get paid the same whether they work hard or slack off, some partners will ease off the throttle because they think “why bother? Other partners are coasting and are well paid. Why shouldn’t I?”

Three types of partners emerge in non-performance-based systems (where income is allocated on ownership percentage, or equally):

• “A” students. Higher performers in all walks of life are motivated by getting high “grades.” These “grades” take many forms: winning elections, getting promotions, acing an exam and yes, earning high levels of income. Without the opportunity to earn high grades, the enthusiasm of high performers eventually wanes.

• “B” students. Partners whose performance is below their more talented colleagues have little incentive to change or improve because in non performance-based systems, they get paid the same regardless. The presence of these partners is a de-motivator to the firm’s biggest producers.

• Coasters. These are partners who have been with their firms for 20+ years and may be in the 50-65 age range. They have built up a large book of business that provides them a sizable, annuity-like income. They have little reason to work harder or differently because they are perfectly content with their income and see no reason to step up.

Common CPA firm motto: “If you stagnate, you die.”  Stagnation occurs gradually, and is difficult to see as it evolves. But once stagnation settles in, it’s painfully apparent to the partners, staff, clients and referral sources. Difficult to reverse, it often leads to the firm’s demise, usually in the form of an upward merger.

Performance-based compensation systems motivate partners to reinvent and re-energize the firm to counteract stagnation.

Performance-based compensation is a great way to achieve partner accountability. It’s not the only way, and it may not be the best way. But it does work.

Performance-based compensation is consistent with the one-firm concept. The one-firm concept is universally acknowledged by CPA firms as having a direct link to growth, success and profitability. The converse of the one-firm concept, the “eat what you kill” philosophy, encourages and rewards partners to do what is best for them, even if it is at the expense of the firm.

No single partner compensation program applies to all firms. To be perceived as fair, and to satisfy the majority of partners, each system should be customized specifically to your needs.  Our new monograph CPA Firm Partner Compensation: The Art and Science details our proprietary process, the culmination of 20 years experience in the field.