By Marc Rosenberg
What do CPA firm partners actually earn?
MORE ON PARTNER COMPENSATION: How Partners View Compensation: It’s Not All about the Money | Why Most Partner Comp Systems Are Performance-Based
The statistics below usually vary by the size of the population market, though our experience working on numerous client projects with firms in small markets has shown that it is quite possible for firms in small markets to earn “large market” income.
Here are the income per partner averages, broken down by size of market, according to the latest Rosenberg MAP Survey:
- Less than 2 million population: $401,000
- 1-2 million: $353,000
- 250,00 to 1 million: $312,000
- Under 250,000: $302,000
How do partners produce high levels of income for their firms?
As the above data show, partners in CPA firms earn a very nice living. What do they DO to produce this level of income? What value do they provide to their firms that creates this impressive income?
1. Partners are shareholders. Although professional service firms like CPA firms require a lot less capital than many others, all businesses need capital to get started and to maintain their operations. This means that firms rely on their partner/owners to capitalize the firm.
This takes place in two primary ways:
- Initial capital contributions of founding and new partners.
- Owners keeping their capital in the firm to finance the investment in work in process and accounts receivable, which typically run 20-25 percent of annual revenue. Many partners don’t realize how much capital they have invested in the firm because they only think of their actual cash contribution. But each partner’s share of the firm’s accrual basis net capital is quite substantial, a reality continually evidenced every time a retired partner receives capital payments.
How does this relate to partner compensation? A large percentage of firms create a tier of income called interest on capital, recognizing that partners wear two hats: a shareholder hat and a producer hat. The return on capital (their investment) is what an investor in any business endeavor would expect.
2. Partners are producers. This is illustrated throughout the remainder of this post. The value partners provide to their firms generates the substantial income that is paid out. These values are summarized below. Just about everything partners do that makes the firm successful and profitable falls under one of these items.
Values provided by CPA firm partners: What partners do to create firm profitability
Not necessarily in any order.
1. Bring in business.
2. Retain clients and help them grow. This includes:
- Providing great service; meeting clients' needs.
- Managing client engagements, attending to issues such as realization, meeting deadlines, billing and collection.
3. Train and mentor staff, helping them learn and grow; be a positive factor in helping the firm retain its staff.
4. Provide leadership and management to the firm.
5. Work a certain amount of billable hours while delegating lower-level work to staff.
6. Develop special skills and technical knowhow that clients need.
7. Work with other firm members as a team.
8. Achieve formal, written goals.
9. Fulfill a role in the firm, if one has been identified (practice leader, office PIC, audit department head, etc.).
Leadership, management and administration: Each has a different value to the firm
When attending conferences, we love “aha” moments. Those are moments when a speaker says something so profound that it illuminates a major issue, often very succinctly. We can’t wait to get back to the office, share it with our partners and start implementing the idea.
I had an “aha” moment several years ago. The speaker was the legendary Bob Bunting, the longtime MP (since retired) of West Coast regional powerhouse Moss Adams. He delivered a very simple but powerful statement that described the value system at Moss Adams:
- Leadership is worth MORE than your billing rate.
- Management is worth your billing rate.
- Administration is worth LESS than your billing rate.
My take on this is:
- The most important thing a partner can do is lead. It’s worth more than management, bringing in business or managing clients.
- Hours spent managing the firm, an office or department are just as valuable as billable hours.
- Administration is important, but not as important as management because the former can be performed by a non-partner at a fraction of what a typical partner earns. Partners should not be doing administration.
Bunting’s philosophy should be deeply ingrained in your partner compensation system.
What is a partner?
This final section is a more comprehensive list of what firms should expect from each partner.
Not in ranked order except No.1, which is the most important definition of a partner:
- A driver of firm growth, profitability and success.
- Trustworthiness. This isn’t about stealing money. Instead, it’s about trusting your partners to exercise good judgment, never circumventing policies and procedures, resisting the temptation to ignore questionable client practices, and being ethical in all your dealings.
- Leadership. Partners earn credibility with fellow partners and the staff by being a good role model. Inspire others to follow your lead; set an example because the firm is evaluated by your conduct.
- Management of the firm. Performing jobs such as MP, EC and CC member, department head, etc.
- Manage client relationships and engagements effectively; be attentive to their needs; establish strong client loyalty to maximize retention. Move clients upscale and grow their fees. Bill and collect promptly.
- Train and mentor staff. Don’t just be a “nice” boss; help staff develop, grow and advance under your tutelage. Positively impact staff retention. Treat staff with at least as much respect as clients.
- Bring in business; contribute to practice development in some way; develop and cultivate referral sources.
- Team player; develop a strong team beneath you; ensure that your largest clients have multiple “touch points” within the firm; share work among business units; refer work to other firm members. Commit to the one-firm concept – clients are the firm’s clients. Put the firm first; be willing to assist others.
- Achieve your written goals, both production and intangible. Fulfill your role in the firm.
- Delegate work to staff wherever possible; only do “partner- level” work. Recognize that a partner should work ON the business, not IN it. Keep the staff busy; never assume others are doing so.
- Live and breathe the firm’s core values, every day. Respect the firm, its decisions and its partners.
- Protect the firm. Keep technical skills sharp; never do work that is beyond your capability. Never stop learning. Commit to the highest possible level of professional ethics.
- Be a good corporate citizen. Obey the firm’s policies and procedures, even if you don’t agree with them. Treat people respectfully. Respond timely to voice mails, emails, etc.
- Practice good communications at all levels. Let people know what’s going on with you.
- Empathy. Be sensitive to concerns and needs of all stakeholders. Genuinely care about people.
- Be accountable for your performance.
- Be healthy personally and fiscally responsible 24/7; you are never “off duty.”
- Be a full-time partner, with work hours expected of a full-time partner.