I call it the PCO - the Partner Comp Ordeal. It happens at most CPA firms in December.
All partners received adequate salaries during the year (which need to be set using logic and historical information; not every partner gets the same amount). Then in December, the remaining profit needs to be allocated to the owner group (with some extra usually going to nonowner owners – an oxymoron, to me anyway).
There is no exact one way to do CPA firm partner compensation – it has to align with the desires and needs of the actual owners and the size of the firm and number of partners. As for my opinion, which is the same as my opinion on a lot of things inside a CPA firm – keep it simple! It should be relative to your size firm, and always remember to pay for performance.
I have several good friends and colleagues in the CPA firm consulting world who offer lots of good advice on this topic.
- Communicate. If the partners don't understand how the compensation committee works, and don't understand how their income was determined, it will fail.
- Align compensation with what the firm needs from each partner.
- Resist the temptation to equalize final distributions. Only through a quirk of fate will all partners be equal contributors to the firm's performance.
- Make sure that the managing partner's input on overall partner performance has more impact on income allocation than any other single partner, including compensation committee members.
- Reward for more than production (management, mentoring staff, teamwork, loyalty).
- Resist the temptation to adjust the final income allocation to avoid a war with a problem partner who will go ballistic if he/she sees an income number that fails to meet expectations.
I strongly urge you to reread 6. Don't, annually, avoid the obvious. Partners who aren't role models, who are childish, and who go ballistic should be gone. Make a plan for that in 2014.
Gary Adamson of Adamson Advisory offers The Partner Compensation Checklist. I think you will find it very helpful. I agree with his point that partner goal setting and results are very important items on the checklist.
Many firms still rely on formulas. I once knew a firm administrator who spent the majority of her time tracking the partner compensation formula stats throughout the year.
I like to quote Allan Koltin on partner compensation formulas: "Numbers ARE deceiving! Show me a formula and I'll show you how to beat it. Trust leadership to make the call."
On the topic of trust, I want to share a comment from David Maister in an interview about partner compensation: "Recently, I was advising a firm on its compensation system. They didn't like my recommendations. Finally, one of the partners said, 'David, all your recommendations are based on the assumption that we trust each other and trust our executive and compensation committees. We don't. Give us a system that doesn't require us to trust each other!'"
Final thought: What do your people think? It's not extremely important that you're one of the firm founders. It's more about how you rated on the partner upward evaluation survey, the partner peer survey, and the client satisfaction survey.
About the author:
Rita Keller is a nationally known CPA firm management consultant, speaker, author, mentor, and blogger. She has over thirty years of hands-on experience in CPA firm management, marketing, technology, and administrative operations.