A compensation myth debunked

October 02, 2009, 1:52 p.m. EDT 4 Min Read

The MP does not have to be the highest-paid partner in an accounting firm

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 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 percent to 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 believe that they should be the highest-paid partner for some or all of the following reasons:

* Often they are the biggest business producer.

* Often 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 their 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.

* 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. They probably don'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 their own, it is quite possible that the production partner will out-earn the MP.

2. Somewhat similar to No. 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 two to five 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 MP's 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. The accompanying table shows an analysis of client responsibilities for MPs versus all firm partners for three major size groupings of firms.

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? The accompanying chart ("Follow the Money," bottom) suggests four scenarios, depending on two variables: whether the MP functions as a true chief executive who drives the firm's excellence and makes all firm members more productive, or functions more as an administrative partner; and whether the MP has significant client production metrics.

It is not "automatic" that the MP would be the highest-paid partner simply because they have 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.

Marc Rosenberg, CPA, is a management consultant to CPA firms nationwide. His firm, The Rosenberg Associates, is based in Wilmette, Ill. Reach him at (847) 251-7100 or marc rosenbergassoc.com. This article is based on the statistics and data contained in the 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.

CLIENT DUTIES

Annual Fees

Over $20M $10-20M Under $10M

Avg. annual billable hours for all partners 1,055 1,115 1,189

Avg. annual billable hours for MPs 335 704 1,031

(% below all partners) 68% 37% 13%

% of MPs with client responsibility of over $500,000 47% 80% 86%

FOLLOW THE MONEY

MP has significant client production metrics:

* MP functions as a true CEO - MP is almost always highest-paid

* MP is more of an administrative partner - MP is highest-paid, especially if the MP posts strong production metrics vs. other partners

MP does not have significant client production metrics: