As I speak with members, partner compensation systems keep coming up in conversation. CPA firms that have shifted more services away from traditional audit and tax have found it challenging to transition to a partner compensation system that’s fair to everyone in the firm. But what is fair?
We’ve already discussed changing business models, and I think the traditional approach to partner compensation holds firms back from transforming their business model for the future. This is especially true for legacy firms who were born out of a few partners getting together and growing into an organization with a hundred or more employees, several partners, and multiple business lines. The earlier in the life cycle that a firm figures this out, the easier the change is to implement.
The Private Equity Model
Though the conversation has been a long time coming, one of the newest trends is getting private equity firms interested in CPA firms, which has helped with paying partners or owners very differently.
In this model the focus becomes stock price, not salary accumulation with a deferred comp promise to pay based on salary levels. Instead, partners are rewarded on a continual basis. The PE fund grows in stock price and gets turned over every so many years, hence partners see their value more regularly. For the younger partners and rising stars of a firm, this is becoming much more lucrative than the old model. Plus, as firms continue to expand to nontraditional services and owners, a new model for ownership and compensation is absolutely necessary to compete with nonaccounting firms.
Striking a Balance
I titled this “the art and science” for a reason—because the right partner compensation system is really both. The art is in how we motivate our partners to focus on the behaviors that will most benefit the firm as a whole and not just their specific book or department. The science is what tends to get in the way. Because we weren’t sure what to measure up front, chargeable hours and managed revenue seemed to be the easiest items to measure and compensate. Then that becomes all partners tend to focus on or want to talk about.
So how do we mesh the art and the science? It’s not easy, but there are a few things you can do to make this happen.
- Create a governance structure that allows for strategic decisions. Pulling the decision making out of the hands of ALL partners and putting it into the hands of a strategic few can help move this process along.
- Create a compensation committee. The committee can then be charged with the creation and management of the program.
- Identify performance measures that matter. Separate a higher portion of compensation to address key performance measures (i.e., reduce the base comp and increase the bonus pool). If measures aren’t hit, the firm keeps the money to invest in other things.
- Determine common goals by which all partners are accountable. A few items to consider are meeting the firm’s strategic goals, client satisfaction results, overall firm growth, etc.
- Truthfully evaluate partner strengths. Then you can build a system around their strengths and ensure that you have all aspects of partner-related competencies covered, from business development to technical acumen, people skills, administrative skills, etc.
- Create a “one fits one” model of compensation based on individual partner skills. This is where you cross the chasm from science to art. Create a bonus plan for each partner based on their strengths and what the firm can expect from them.
- Eliminate measures that do not help the firm. Chargeable hours at a partner level is NOT the ultimate measure of success. It’s busy work. Time to move away from that. And if we start here, we can move on to eliminating this toxic measure in the rest of the firm.
We also have to consider how compensation differs between departments for partners. How we compensate an audit partner is quite different from a CAS, SOC, or technology partner. Many of the advisory service lines that partners are adding to their firms come with professionals who will not understand our old ways of compensation. It’s time to change.
Where Do I Go for Help?
Years ago I was involved in getting a book on this topic published for AICPA. Written by August Aquilla and Coral Rice in 2007, the book is titled Compensation as a Strategic Asset: The New Paradigm. While it hasn’t been updated recently, its insights are still fully applicable today.
I can also think of a few consultants who can help with partner compensation. Allan Koltin, Jen Wilson, Terry Putney, Bill Reeb, or Carl George come to mind. And of course, there are your peers within Allinial Global. Our upcoming Executive Team Conference includes a member-led Q&A session that will touch on this topic and variety of other firm governance issues as well. I hope to see you there.
