Best Practices for Partner Compensation

This article is based on a webinar presented by CPA practice management consultant, Gary Adamson and hosted by CPA Leadership Institute.

When it comes to partner compensation, what are the two most common success criteria for partners? 

• Personal production (charge hours)
• Book of business (amount of revenue you manage)

And what are the traits of a great accounting firm?

• Accountability
• Leadership development
• Intangibles
• Growth
• Skilled motivated staff
• Right people on the bus
• Production
• Leadership and management
• Quality work
• Delivering great service

Most partners are paid for “minding and grinding,” a compensation strategy that treats partners like production workers, rather than rewarding them for their part in making the firm great in terms of accountability, leadership development, intangibles, and all the other items we just listed.

Evolution of Compensation in a CPA Firm

Firms usually start out with equal pay for all the partners. As the firm grows, new partners are rarely admitted at a compensation level equal to that of the founding partners. Many choose a compensation formula, and as the firm gets larger most  will trade the formula for a compensation committee.

Compensation Considerations

Partners should be assessed on a combination of factors such as return on capital, finder, minder, grinder, leadership/management contributions, and intangibles such as goal achievement, staff growth and development, client service satisfaction, and a willingness to help the team.

Even with these benchmarks in place, determining compensation requires careful judgement to assess the combination of tangibles and intangibles. Whether your firm uses a compensation system, a formula, or a committee, it’s critical to remember that no two partners are the same and all partners should be rewarded for their unique contributions.

Additionally, any compensation plan should be integrated with firm goals, planning, and core values, as well as partner evaluations and performance. A holistic approach to compensation is best.

Best Practices and Trends

Let’s look at some of the best practices and trends in compensation.

• Firms are moving from formulas to committees, and from tangible criteria to intangible.
• The managing partner is key to any compensation process.
• The compensation program is performance-based, and not the place to address a problem with a partner.
• Preferably use a base and  a bonus so the entire income is not at risk.
• Flexibility is key.
• New business generation is very valuable and should receive a premium.
• A heavy dose of discernment.
• Larger firms are closing the compensation process.
• More: “What does the firm need you to do?
• Less: Book of business and chargeable hours.
• Accountability: Partners doing what they’ve said they will do, on time, to the best of their ability without being nagged.

Formulas have inherent flaws, such as promoting empire building and silos and making it difficult to reward leadership and intangibles. However, if your firm does use a formula, the following are two examples to consider.

• Finder, Minder, Grinder
  • Finder  – Finding the sale. Usually rewarded for three or four years.
  • Minder – Having the relationship and running the engagement.
  • Grinder  – Doing the work/chargeable time.
• Six Factors
  • $2,500 for each year as partner (up to 15 year maximum)
  • 25% of production and management time (budgeted)
  • 6% of billings in book
  • 20% of new business billings for 48 months
  • Less 50% of write-offs (AR & WIP) over 12%
  • Bonus fund of 10% of pre-partner profit for achieving goals and intangibles
  • The remaining balance is allocated equally.

 When using any formula including the above, make sure you reward leadership and management, return on capital, and intangibles.

 A Few Compensation Committee Best Practices

• Communication and understanding of the process is critical.
• There must be a clear link between firm goals, partner goals, and compensation.
• The managing partner is the quarterback for the process and liaison with the partners.
• Partners must know how they contribute and what behavior and results will be rewarded.
• Partners must respect and trust committee members.

 Compensation Committee Structure and Process Considerations

• Committees should have three to five members.
• Members are voted in and serve staggered terms.
• It is common for the compensation committee to also be the executive committee or board.
• The managing partner is a permanent committee member.
• The committee meets once a year.
• The committee is responsible for determining the year-end bonus and next year’s salary/draw.
• The managing partner prepares the package for each partner for consideration by the committee.
• Communication of the committee results is critical.

 Compensation Committee Criteria

(These are examples of partner performance that may be evaluated. No firm would include all of these and the criteria may also vary from year to year.)

• Achieving goals
• New business development
• Charge hours
• Book of business
• Profitability of the book of business
• Working capital utilization
• Staff utilization
• Staff mentoring and development
• Firm leadership activities
• “Good of the firm” activities
• Teamwork
• Movement of clients to other partners
• Client service/satisfaction
• Upward evaluations
• Partner cross evaluations
• Extenuating circumstances
• Managing partner discretionary pot
• Weighting of criteria
• Compensation of  partners in a transition process and nearing retirement

No matter which type of compensation system your firm chooses, remember to apply a heavy dose of discernment and to account for leadership and management, return on capital, and intangibles.