Non-Equity Partnerships: Advantages and Pitfalls
Source: AICPA CPA Insider
In this article, Jennifer Wilson explores the benefits and drawbacks of non-equity (or “income”) partner programs in several important practice management areas. Wilson summarizes her observations in a table, excerpts of which are reproduced below.
| Management Attribute | Advantages | Pitfalls |
| Firm Career Pathing and Promotability | • Firms can promote bright up-and-comers when their top-line revenue is not yet significant enough to sustain their admission as equity partners. • Firms can promote managers to income, or non-equity, partners without being committed to progress them further. This is a tactic we call “parking.” • The firm and the income partner can “test drive” their partner relationship before the income partner is admitted as an equity partner. This makes the promotion easier to “undo.” |
• Confusion can arise in the firm as to whether one has to be a non-equity partner before becoming an equity partner. • Most firms do not create enough of a distinction between income and equity partners in terms of competencies or responsibilities, creating confusion about roles and career paths. • Most firms do not document what it takes for an income partner to “earn” equity status, leaving income partners in the dark. |
| Compensation | • Income partners often have a guaranteed base salary, providing them with less earnings risk than equity partners have. • Because most compensation programs offer non-equity partners a share of net income, their focus on profit performance is heightened. • Most firms do not dramatically accelerate the income partners' overall earnings when promoted, so this promotion is usually not costly. |
• Many firms do not spell out the income partner compensation program, creating confusion. • Firms often don't share the compensation differential between income partner and equity partner, so there is a lack of clarity about this. • Sometimes, non-equity partners think they are being paid close to what equity partners make, but without the hassle of the buy-in or other partner-specific tasks and risks. This can cause non-equity partners to shy away from committing to full equity partnership. |
The table also outlines advantages and pitfalls in the following management areas: Recruiting, retention, marketing, governance, and buy/sell.
For the complete article, read “The pros and cons of non-equity partnerships.”
From AICPA CPA Insider, January 7, 2013, http://www.CPA2biz.com.