Setting partner compensation is an art and not a science. Show me your compensation plan and I’ll tell you your firm’s strategy.
As a consultant to small and midsized CPA firms, I frequently have the opportunity to provide guidance on partner compensation plans and it never ceases to amaze me to see how many plans fail to motivate partners and help perpetuate the firm.
Some partner compensation plans are purely formulaic. For example, you get X percent for how much you bill and collect, Y percent for your personal billable hours, and Z percent for new business originations.
Other firms can be socialistic. For example, every partner gets an equal piece of the firmwide partner distributable income, regardless of their individual contributions.
Yet other firms are a hybrid, with partner compensation bands that are narrow. For example, the highest paid partner can earn no more than three times the lowest paid partner. Many of these firms also have an “open” disclosure compensation system, with all partners knowing what each and every partner earns. More often than not, these open disclosure compensation systems further dilute the impact of these plans by creating disharmony among partners because of perceptions as opposed to the realities of partner performance.
The partner compensation plans described above reflect yesterday’s thinking. After the COVID-19 pandemic subsides, they won’t help grow firm revenues and profits or move the needle on overall partner performance.
While this pandemic has taken a huge toll on human life and the world’s economy, there are several silver linings out there. One of them is the opportunity to take a hard look at your partner compensation plan and start thinking about changes that would make your firm more competitive moving forward.
As examples, post-COVID-19, with many of the Top 100 firms anticipating a falloff in profitability (at least in the near term), managing partners are thinking about:
- How their partner compensation plan needs to change to better motivate the firm’s highest performers and improve overall partner performance.
- Where they should be placing greater emphasis in this new normal. Are what we measured and held partners accountable for in the past still the highest priorities for the firm?
In addressing questions such as these, the answers should not contain a predetermined formula for how partner contributions are weighted in arriving at an individual partner’s total compensation. On the other hand, a subjective, annual determination of an individual partner’s total compensation should be made with the premise that the responsibilities of each partner will be discussed one on one in arriving at a partner’s individual goals for the upcoming year.
I haven’t heard much about what partner compensation plan changes firms were being contemplated post-pandemic. So, as a no-fee service, my firm recently reached out to over 350 managing partners at leading small, midsized and larger CPA firms and asked, “Post-COVID-19, are you thinking about changing your partner compensation plan?" Twenty-nine managing partners of small, midsize and larger firms across the U.S. responded to our straw poll in June. Their input provides a glimpse into the current thinking regarding partner compensation plans post COVID-19 at leading firms across the United States.
The headline takeaway of the straw poll is that, post-COVID-19, with current profits likely to take a short-term hit, almost 90 percent of the managing partners who responded are either very likely or likely to implement tighter accountability over partner performance with a direct link to partner compensation.
Here are some other key takeaways of the straw poll (it is important to note that the results may differ with a larger number of respondents):
- Almost 45 percent of the respondents acknowledged their current compensation plan made it difficult for partners to clearly understand how their compensation was determined. Many are either very likely or likely to improve transparency and documentation as they hope to improve the motivation of their highest performers, address the general perception that their current compensation plan is unfair and inequitable, and need to accelerate overall partner performance.
- Almost 29 percent of the respondents indicated they currently don’t have annual goal setting, but many are either very likely or likely to implement it in the near future.
- In their desire to drive revenue and profit growth and to accelerate overall partner performance, more than 31 percent of the respondents are either very likely or likely to place greater emphasis on collaboration and team building when determining partner compensation.
About 79 percent of the 29 firms polled have annual revenues of less than $40 million, while 21 percent of the firms have annual revenues of $40 million or more. In addition, 69 percent of the firms have less than 15 full equity partners while 31 percent of the firms have more. Almost 52 percent of the firms had average full equity partner compensation over $500,000.
The messages communicated through a firm’s compensation plan are just as important as the amount of compensation partners receive for their contributions that perpetuate the firm. These messages affect the firm’s ability to grow revenues and profits and influence how partners choose to allocate their time and effort. COVID-19 has created lots of gloom and doom, and many anticipate that it will take several years before CPA firms get back to performance levels experienced before the pandemic. Positive changes to a firm’s partner compensation plan can help accelerate overall partner performance.
