Partner Compensation and Retirement Values

Source: Texas Society of CPAs

In this month’s article, Bill Reeb continues his series on partner compensation. He discusses how the “Eat What You Kill” method helps firms succeed in early years but chokes growth in later years.

Rainmaker partners who develop networks that generate new clients are able to passively reap the fruits of their efforts for years. These partners recruit young ones to help them manage these clients. The older partners continue to receive a major share of the earnings. The younger partners never develop their own networks of referral sources because they spend their time managing work for the older partners. The problem is aggravated by the weakening of networks as older partners near retirement.

Firms may also weaken because leaders favored short-term goals over long-term strategic objectives. To avoid this syndrome, firms should follow these guidelines.

• Partners and staff should have goals consistent with the long-term strategy the firm develops.
• Everyone in the firm must understand his/her role in helping realize the strategic vision.
• Those who don’t buy-in should be fired.
• The managing partner should have the ability to reward people who perform and punish people who fail.
• Although partners may constitute, in effect, a board of directors to which the managing partner reports, the partners report to the managing partner in non “board” matters.
• Clients belong to the firm, not to any partner.

These points should be bigger factors in partner compensation than book of business. But for this to work, the firm must award retirement value to the business generated by the partners. Partners shouldn’t be allowed to make individual decisions about when to turn over clients to younger partners. And the firm can’t require retiring partners to do so without giving value for clients in their retirement program (in effect purchasing them). By the same token, younger partners shouldn’t expect older partners to turn these over for nothing.

In future articles, Reeb will discuss the actual form of the compensation and retirement models.

Bill Reeb is a prominent speaker, author, and management consultant.

From Texas Society of CPAs, Public Practice. October 2007. For the complete article and access to previous articles in this series, click here.