Partner Compensation 101

BONUS CHECKLISTS: 26 intangible performance attributes and 9 teamwork rules.

By Marc Rosenberg

A performance-based system links partners’ compensation with their performance.

MORE ON PARTNER COMPENSATION: What Partners Earn and How They Earn It | Partner Compensation: An Art, Not a Science | How Partners View Compensation: It’s Not All about the Money | Why Most Partner Comp Systems Are Performance-Based

If partners have a “good year,” however “good” is measured, they will most likely earn more. Partners experiencing a “bad” year or an “off ” year should expect to earn less.

The logic is that if enough partners have “good” years” the firm will have a “good” year and as a result, the total income available to the partners will be higher, which hopefully trickles down to each partner’s individual compensation.

A non-performance-based system is one in which income is allocated based on factors other than performance. The most common examples of non-performance-based systems are:

  • Ownership percentage used to allocate income. Proponents of this system argue that ownership percentage is used to allocate the income or profits of many other businesses, why not CPA firms? The problem is that ownership percentage, in most cases, has little or no correlation with partner performance.
  • Allocate income equally or near equally to each partner. Partners attracted to this system feel that all partners work equally hard and contribute in different ways to the firm’s success. The problem is that there is no incentive for partners to excel and there is every reason to coast.

For a system to be considered performance-based it’s not necessary to allocate 100 percent of income on performance measures, but the vast majority of the income should be performance-based. There is no rule on this, but I would say if a firm allocates at least 70 percent of the income based on performance, it’s safe to call that system performance-based.

The Rosenberg MAP Survey shows that 90 percent of all CPA firms with three or more partners use performance-based systems.

Why most firms adopt performance-based compensation systems

Partners need motivation and rewards to produce. CPA firms commonly lose 10-20 percent of their revenues every year (the biggest part of this fall-off is clients that merge out of existence and major projects that don’t repeat). Firms have to originate 10-20 percent in new business annually just to stay even. Staff must be trained and supervised. Firm personnel must be productive. Partners are the catalysts to make this all happen. Performance-based systems motivate partners to perform well year in, year out.

The converse of the above is that firms need to avoid situations in which partners are not motivated to perform well. It stands to reason that if partners get paid the same whether they work hard or slack off, some partners will slack off because they think “Why bother? Other partners are slacking off and are well paid. I’ll do the same.”

Avoiding stagnation. There is a motto in CPA firm management that goes something like this: “If you stagnate, you die.”

Stagnation of firms is hard to see as it evolves and usually takes years to fully notice. But once it has settled in, stagnation becomes painfully apparent: to the partners, the staff, the clients and the referral sources. And stagnation is very difficult to reverse, often leading to the firm’s demise, usually in the form of an upward merger.

Accountability. Performance-based compensation is a great way to achieve partner accountability. Not the only way, and perhaps not the best way. But it does work.

The one-firm concept. Performance-based compensation is consistent with establishing the one-firm concept, which reasons that firms accomplish more if their personnel work as a team instead of separately. The one-firm concept is universally acknowledged to have a direct link to growth, success and profitability.

The converse of the one-firm concept is the “eat what you kill” philosophy, which encourages and rewards partners to do what is best for them, even if it is at the expense of the firm.

Production vs. intangible factors

At various times in their life cycle, most firms deal with the “production vs. intangibles” debate: Which is more important and to what degree?

  1. Production factors include:
    • Business origination
    • Client base managed (i.e., “book of business”)
    • Billable hours and total hours worked
    • Realization percentage
    • Age of WIP and A/R
  1. Intangible factors represent skills that are not production-based (see list below).

The vast majority of firms assign a greater weight to production factors than to intangibles. This is no different than in other organizations. For example, in baseball, hitting homers and driving in runs will always fetch more money for a player than being a good “clubhouse leader.”

Intangible performance attributes for partners

Not necessarily in order of importance.

  1. Management and leadership of the firm, department, etc.
  2. Leveraging and creating work for others; a good delegator.
  3. Staff development and mentoring – helping them learn and grow.
  4. Staff retention and motivation – keeping staff on board.
  5. Staff training, either on the job or in classes.
  6. Staff relations – take staff to lunch periodically; initiate ad hoc get-togethers with staff.
  7. Helps the firm recruit and identify staff that they come across in their daily life.
  8. Provides performance feedback to staff.
  9. Teamwork and loyalty to the firm – support the firm’s vision and policies as if they were their own. Think “we” instead of “I.”
  10. Is a good partner to his other partners; always shows respect and acts professionally; lets his partners know major things going on with clients, referral sources and even himself.
  11. Manage client engagements.
  12. Cross-selling.
  13. For all major clients and many middle-grade clients, strives to institutionalize clients as “firm” clients, not individual clients.
  14. Proactively participates in partner meetings of all types.
  15. Marketing efforts – activities (not results) to bring in business; active in the community to promote the firm.
  16. Developing new services, markets, niches, specialties.
  17. When other partners are on vacation or otherwise away, provides backup help to clients.
  18. Finds work for staff; helps the firm keep staff busy.
  19. Administration – formal, firm duties.
  20. If a partner happens to see something that doesn’t “look right,” the partner takes the initiative to share the observation with management.
  21. Good corporate citizen: adheres to the firm’s policies and procedures at all times. Lives and breathes the firm’s core values.
  22. Continuous learning; the partner is always reading up on the profession and relevant technical areas; NEVER feeling like they know everything.
  23. Never coasting; never satisfied with their current client base but instead, always trying to build it, regardless of the partner’s age.
  24. Good communication and interpersonal skills.
  25. Technical skills and expertise.
  26. Always willing to help other firm members.

Practice development must be a strong factor in partner compensation

It is widely agreed that the most important partner performance attribute partners are challenged by is bringing in business; if they are honest, partners readily admit to it being the duty they most dislike.

Therefore, bringing in business should be at or near the top of the list of partner performance attributes that are the most highly rewarded.

Two frequent retorts to this are:

  1. Sure, bringing in business is important, but not to the exclusion of other important aspects of performance such as helping staff learn and grow, providing great service to clients, firm management and a host of others.
  2. Not everyone is cut out to be a business-getter. Firms need a blend of partners with a variety of skills and expertise. Non-business-getters need to be fairly compensated as well.

These are valid responses.

Partners at most firms contribute to the firm’s overall success and profitability in many ways, each of which should be factored into the income determination. But even partners who are not skilled in practice development agree that those who bring in the most business are entitled to be among the highest earners.

Linking partner compensation with strategic planning

If a firm is serious about achieving its strategic plan, vision and goals, then its system for allocating partner income must take into account the extent that each partner helped achieve those strategic objectives. Effort and success at achieving strategic planning goals must be handsomely rewarded. You get what you reward. That’s common sense. 

The naysayers have two arguments against linking compensation with strategic planning:

  1. They cite the firm’s past failures at implementing a strategic plan or a goal-setting program. They argue that it would be folly to try to link compensation with strategic  planning.
  2. What can possibly be more important than partners bringing in lots of business, managing large client bases and keeping clients happy? Strategic planning is well and good, but it will always take a back seat to partner production.

The counters to this are:

  1. Firms that flourish as production-driven firms would perform even better with greater emphasis on strategic planning.
  2. Related to the above, witness the fact that only 20 percent of CPA firms make it to the second generation. Wouldn’t a stronger commitment to strategic planning be an effective way to get firms to the next generation?

Teamwork rules

To some, this statement may seem like blasphemy in the realm of partner compensation systems. Enlightened firms don’t want their partners constantly thinking about their numbers – production metrics and income. Instead, the partners should be focusing constantly on doing what’s best for the firm, never trying to “game” the system. 

Examples of partner teamwork that play an important role in allocating partner income:

  1. Partners adhere to a set of firm practices and core values, to be followed by all partners, even if each partner doesn’t believe in each area 100 percent.
  2. Partners frequently service clients as a team. Clients are viewed as clients of the firm, not the individual.
  3. Partners rarely go on sales calls alone.
  4. No Lone Rangers. Partners make sure that their clients have relationships with firm members other than themselves (multiple touch points). Partners never want to be MIA – missing in action. The firm should know where to reach partners 24/7.
  5. Clients are freely and willingly transferred to other partners because it’s best for the firm. No hoarding allowed.
  6. Ability and willingness to make referrals to others in the firm.
  7. Whenever one partner asks another partner for help and advice, the other partner responds proactively, without giving consideration to how personal earnings will be affected.
  8. Partners follow and support management and resist “nitpicking” of management’s decisions.
  9. Partners are accountable to each other and to the firm.
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