Myth debunked: It's not automatic for the MP to be the highest paid

By: Marc Rosenberg, CPA

This article is based on the statistics and data contained in the 36 page narrative analysis in the 2009 Rosenberg MAP Survey. 353 firms participated in the recently published 11th annual survey of CPA firm metrics and operating practices.
 
It’s logical to assume that the CEOs of Fortune 500 and other large companies would be the highest paid of all people working at the company. After all, they are charged with managing the entire organization and meeting expected profit targets. It seems reasonable that a lifetime spent acquiring the necessary talents, skills, and experience to qualify for the CEO job would warrant being the highest paid. 
 
Similar logic would seem to apply to the managing partners of CPA firms. But the results of this year’s Rosenberg MAP Survey show that the MP is not the highest paid partner at 20-25 percent of CPA firms. 
 
This year, for the first time, we asked participating firms to submit the MP’s compensation. Our interest in capturing this data was triggered by a call from the long time MP of a $15 million firm. Over the years, I have been asked this question more times than I can count. So, rather than guess at the answer, I decided to start surveying the data. I was expecting the results to show that 90 percent or more of MPs were the highest paid, but the responses surprised me. 
 
Managing partners reason that they should be the highest paid partner for some or all of the following reasons:
 
·         Often times, they are the biggest business producer.
·         Often times, they founded their firm and continue to be the primary driver.
·         To carve out the time needed to perform the MP job, they spend less time on traditional client activities. Firms understand the need to preserve the MP’s compensation in the face of his or her declining production metrics (for purposes of this article, let's define "production metrics" as primarily business originated, size of client base managed, billable hours and realization).
·         CEOs of industrial companies are almost always the highest paid person.
·         Their ego demands it.
 


 

So, given the above, what are the reasons why the MP might not be the highest paid partner? Here are the most common reasons:
 
1.      A partner may have the MP title but function more as the administrative partner. He/she probably doesn't drive the firm’s growth and profitability, and may not be expected to by the other partners.  It’s likely that holding partners accountable for their performance is also not a job expectation for these MPs.  If this type of MP has a partner whose client production metrics greatly exceed his/her own, it is quite possible that the production partner will out-earn the MP.
 
2.      Somewhat similar to #1 above, some firms have line client partners that perform in a spectacular fashion. Their production metrics are in excess of the other partners to the point of trumping everything else, including managing the firm.
 
3.      A new MP has recently been installed. The previous MP was a major driver of the firm’s growth and profits. As part of the firm’s succession plan, however, the older MP has stepped down 2-5 years prior to retirement and turned the reigns over to the new MP.  In these situations, it is common and advisable for the firm to skip over “older” partners and appoint as the new MP a “younger” partner. It's also likely that the new, young MPs production metrics will not be as strong as other partners in the firm. 
 
Most MPs have two major roles: First, they are the MP. Second, the vast majority of MPs also have client responsibilities. Here is an analysis of client responsibilities for MPs vs. all firm partners for three major size groupings of firms:
 
 

 
Annual Fees
Over $20M
$10-20M
Under $10M
Annual billable hours for all partners
 
1,055
1,115
1,189
Annual billable hours for MPs
-          % below all partners
 
335
 
68%
 
704
 
37%
 
1,031
 
13%
 
Pct. of MPs with client responsibility of over $500,000
 
47%
 
80%
 
86%
 
 
As you can see, a lot of MPs have significant client responsibilities in addition to their MP duties. The larger the firm, the less likely it is that the MP continues to carry significant client responsibilities.
So, the key question that must be asked is: When does an MP's contribution to overall firm management and leadership trump a line client service partner's production metrics? Let me suggest four scenarios:
 

MP functions as a true CEO, driving the firm's excellence, making all firm members more productive.
 
 
MP has significant client production metrics.
 
Will the MP be the highest paid partner?
Yes
Yes
Almost always
Yes
No
Mostly, but if another partner has spectacular production metrics, the MP often is not be the highest paid.
No; functions more as an admin partner
Yes
Yes, especially if the MP posts strong production metrics vs. other partners.
No; functions more as an admin partner
No
Rarely.
 
 
So it is not “automatic” that the MP would be the highest paid partner simply because he/she has the title. It depends upon the blend of management and client duties of the MP compared to the other partners in the firm. There is no magical formula that dictates how these factors are weighted. 
 
About the author:
 
Marc Rosenberg, CPA, is a management consultant to CPA firms nationwide. Accounting Today magazine has singled him out as one of the nation’s 100 most influential people in the accounting industry for five consecutive years. Rosenberg works with firms in the areas of partner compensation, retirement and succession planning, mergers, facilitating retreats, strategic planning, profitability improvement, practice management reviews, and partner conflict resolution. His firm, The Rosenberg Associates, is based in Wilmette, IL. You can reach him at (847) 251-7100 and at marc@rosenbergassoc.com.
 
Marc will highlight the results of the 2009 Rosenberg MAP Survey, emphasizing which benchmarks to focus on, at the Management Summit October 29-30, 2009 at the Venetian Las Vegas Hotel & Resort. Learn more at www.ManagementSummit.com.
 

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