Developing a Partner Compensation System—More to it than Meets the Eye
Source: Public Practice
Bill Reeb uses the following example to illustrate the interrelationships among ownership, compensation, and book of business:
| Partner | Ownership | Compensation | Book of Business |
| A | 1/3 | 40% | 45% |
| B | 1/3 | 33 | 35 |
| C | 1/3 | 27 | 20 |
In a three-partner firm, owners recognize that power comes from size of book of business regardless of equity percentage. However, as more partners are added, conflicts may arise where voting rights are not commensurate with size of book of business. Reeb believes ownership should be adjusted to more closely reflect the realities of the power distribution.
Most firms base compensation on book of business and retirement on compensation. Among other things, this inhibits partners from turning clients over to other partners. Partners should be compensated according to how well they achieve their goals.
But if you change the compensation system, the retirement system will automatically change in most firms. Partners with the biggest books of business (and the most power, since they can take their clients and leave), may object to this. Therefore, to protect these partners, the retirement system has to change. Reeb believes the retirement system should be based on equity. So in order to change the compensation system, you must first redistribute equity, and then change the retirement system.
In the above case, Reeb would redistribute equity somewhat like:
| A | 42.5% |
| B | 34.0% |
| C | 23.5% |
In Reeb’s next installment, he will discuss retirement benefit formulas.
For the complete article, click here.
From Texas Society of CPAs, Public Practice. December 2007.
Measuring CPA Leadership Effectiveness |
Full Service Real Estate Investment and Mortgage Finance. |