Deciding How to Allocate Partner Income

Gavel resting on $100 bills8 aspects that might fall to your compensation committee.

By Marc Rosenberg

CPA firms have a habit of making frequent changes – some major and some minor – to their system and methodology of allocating partner income, just as a baseball team tweaks its roster of players during a long, grueling season.

MORE: Principals Who Aren’t CPAs | Non-Equity Partners: Why Have Them? | Why You Might Want an Executive Committee | Buyout When a Partner Dies | Why and How New Partners Buy In
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Because of this, firms are advised to keep the wording on partner compensation in their partner agreements as general as possible. This avoids the need to change the agreement every time the income allocation system is modified.
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The Struggles of Hitting Market Compensation … Fairly

Four empty metal bucketsAvoid the temptation to “sprinkle” among “buckets.”

By Domenick J. Esposito
8 Steps to Great

For the most part, managing partners at a large number of the best-run Top 100 firms below the Giant Four do an excellent job in splitting up their compensation pies.

MORE ON STRATEGIC PLANNING: Ineffective Partners and How to Address Them | Develop Home-Grown Future Leaders | How to Capitalize on the Trusted Business Advisor Opportunity | Leadership Must Be Persistent and Consistent | Using a High-Performance Business Framework | What a Client Service Plan Can Add | 36 Consulting Services You Might Be Overlooking | How to Drive Consistent Partner Behavior | CPA Firm Partner Performance: Different Activities, Different Metrics
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Their partner compensation system rewards performance and, at the same time, nurtures rising stars with lots of potential.
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Compensation: Money and Beyond

Chef garnishing a platePlus 6 types of bonuses and 12 extraordinary benefits.

By Marc Rosenberg
On Staffing

Every CPA industry survey I’ve seen for decades shows that compensation is #1 to staff.

MORE ON STAFFING: 6 Keys to Advancement Programs | Making Flex Time Work in the Real World | 10 Winning Traits of Accounting Firm Leaders | The Importance of Great Bosses | The 12 Reasons Your Staff Hates Your Firm | What Happened to the Relevancy of the CPA Profession?
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For example, the AICPA/PCPS 2011 Top Talent Survey showed:

  • Salary was #2 for what attracts staff; #1 was career growth opportunities.
  • Salary was #1 for what retains staff.

My feeling is that compensation is ante to enter or stay in the game.
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Partner Comp Pearls of Wisdom

Woman holding paper and standing next to seated man in officeDon’t forget how you got where you are.

By Marc Rosenberg
Partner Comp: Art & Science

During my 20-year consulting career, I have been privileged to meet many amazing managing partners, who were very generous in sharing their knowledge with me. I wanted to share them with you.

“The best way to make a lot of money is to build a great team beneath you.”

Rosenberg’s take: Eat-what-you-kill may work out fine for small firms, and may maximize short-term earnings for all firms. But CPA firms operate much more effectively and profitably with the one-firm concept, with all firm personnel working as a team.

MORE ON PARTNER COMPENSATION: Paying for Current vs. Historical Performance | Partner Pay in Retirement Transition Period | How to Pay Non-Equity Partners | How Large and Small Firms Allocate Income | Partner Pay: Recapping the Compensation Systems | 3 Tiers of Compensation | Partner Compensation: An Art, Not a Science
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“If you’re weak at client service and good citizenship, you flunk and you’re out.”

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5 Cautionary Tales in Partner Compensation

Older man reading newspaper by fireplaceDo you see your firm here?

By Marc Rosenberg
Partner Comp: Art & Science

Here are five case studies to illustrate potential problems in partner compensation.

MORE ON PARTNER COMPENSATION: Does Compensation Motivate Performance? | Why Compensation and Buyout Plans Must Be Synchronized | When Partner Vacation Becomes Excessive | Management Stipends: Who, How and Why | The 8 Basics for Data-Based Partner Performance Evaluations | Crash Course: Operating a Compensation Committee | 11 Points in Designing a Partner Comp System | What Partners Earn and How They Earn It
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The Stressed-out MP.  This seven-partner firm had recently changed from having the “MP decides” method of income allocation to usage of a compensation committee because the burden of allocating income was too stressful for the MP. The ensuing problems with the compensation committee, all solvable, were:

  1. Mandatory rotation of CC members resulted in people on the CC who were not credible and used their role to boost their own income.
  2. No communication between the CC and the individual partners about expectations and income allocation.
  3. Frequent, bitter arguments among CC members.

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Does Compensation Motivate Performance?

Businesswoman throwing money into air in office3 times it works well … and 2 times it doesn’t.

By Marc Rosenberg
Partner Comp: Art & Science

The Harvard Business Review published an intriguing article on compensation titled “Rethinking Rewards” written by Alfi Kohn, who describes himself as a leading critic of competition.

MORE ON PARTNER COMPENSATION: Why Compensation and Buyout Plans Must Be Synchronized | How Business Entity Type Affects Partner Income | Paying for Current vs. Historical Performance | Partner Pay in Retirement Transition Period | How to Pay Non-Equity Partners | 5 Types of Partner Evaluations | How Large and Small Firms Allocate Income | Partner Pay: Recapping the Compensation Systems | Partner Pay: The Declining Importance of Book of Business | 3 Non-Performance-Based Comp Systems | 3 Subjective Compensation Systems | Partner Compensation 101 | How Partners View Compensation: It’s Not All about the Money
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Says Kohn: “It is difficult to overstate the extent to which most managers of people believe in the redemptive power of rewards. Certainly, the vast majority  of  companies  try  to  motivate  employees by tying compensation to performance. But research suggests that, by and large, rewards succeed at securing one thing only: temporary compliance. They do not create an enduring commitment to any value or actions. A kick in the pants may produce movement but never motivation. Rewards do not alter the attitudes that underlie our behaviors.”
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Why Compensation and Buyout Plans Must Be Synchronized

Overhead view of people solving a large jigsaw puzzleTransitions can be affected, too, if you don’t handle this.

By Marc Rosenberg
Partner Comp: Art & Science

Coordinating how the partner compensation and partner retirement/buyout plans are structured is critical.

MORE ON PARTNER COMPENSATION: How Business Entity Type Affects Partner Income | When a Firm Tanks While a Partner Soars | How Profitability Affects Income Allocation | Paying New Partners and Lateral Hires | 3 Rules for Promotion to Partner | Should the MP Be the Highest Paid Partner? | Integrating Partner Comp with Strategic Planning
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One of the biggest complications for firms changing their partner compensation system is addressing the effect it will have on their partner retirement/buyout plan.
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How Business Entity Type Affects Partner Income

Hands tear money isolated on white backgroundNot as much as you might think.

By Marc Rosenberg
Partner Comp: Art & Science

Here’s the challenge: Firms are rarely able to complete their internal accounting in time to finalize their income and make final partner distributions prior to the end of their fiscal year, which for 90 percent of all firms is Dec. 31.

MORE ON PARTNER COMPENSATION: When a Firm Tanks While a Partner Soars | When Partner Vacation Becomes Excessive | Management Stipends: Who, How and Why | Paying Part-Time Partners | The 8 Basics for Data-Based Partner Performance Evaluations | Crash Course: Operating a Compensation Committee | Why Firms Use Partner Comp Formulas

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On Dec. 31 of each year, firms still have a sizeable bonus pool to allocate. By the time the entire compensation process is completed, it could be February or March.
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