Most firms are faced with the dilemma of keeping long-term managers who are major contributors to the firm but, for whatever reason, are not ready to be equity partners (or who perhaps will never have what it takes to be equity partners).

In the past, most of us would not make the decision to outplace the long-term managers, since -- from many perspectives, including client service, engagement and staff management, profitability, etc. -- they did a great job. But there were missing pieces to making them an equity partner. We just weren't willing to make an up-or-out decision, though we were also not willing to bring them into the partnership. So, we procrastinated until, in many cases, they left the firm.

We have also seen the opportunity to make partner in many firms limited in the last few years due to the economy and slowing growth. We risk losing some of our stars because we can't bring them in as quickly as we would like.

Both of these issues have the same result: the loss of high-level, talented people. A relatively new approach to dealing with the problem is gaining popularity in small and midsized firms. It is the no-equity partner position. Some firms call it a principal spot. For other firms, there is a small piece of equity and the title is low-equity partner. Regardless, the mission is to create an intermediate level between senior manager and partner. This type of partner position has been a common level on the ladder for the Top 100 Firms for several years.

 

IN-BETWEENERS

Here is an outline of what the position looks like, how it differs from the normal equity partner spot, and some considerations for implementing it in your firm.

First, the difference between no-equity and equity should be internal only. From the perspective of the public and clients, this is a partner position. Making a new no-equity partner is a big deal and you should celebrate it inside, and especially outside, the firm, just as you would a new equity partner. These individuals wear the partner title.

In most firms, the no-equity partners function just like the equity partners in terms of serving clients. They probably already have been in their role as senior managers. The differences are typically in how you pay them and whether they receive other partner benefits like buy-out and retirement.

Most firms utilize a different compensation plan for the no-equity partners. They may participate in firm profits to some extent, but they are typically not in the equity partner compensation plan or year-end pool. It is common to see a base salary that is between a senior manager and an equity partner, with a bonus potential based on some percentage of that salary or a profit pool separate from the equity partners.

The no-equities make either a very small equity contribution or none at all, and they do not participate in the firm's equity partner goodwill buy-out or deferred comp plan. They do participate in the firm's qualified pension plan and, in most cases, their other fringe benefits are the same as the benefits provided to equity partners.

From the perspective of firm governance, the no-equity partners should participate in partner meetings and firm retreats. Normally, they will not be eligible for service on the firm's executive board or management committee. They will be able to vote their shares if they hold any.

 

THE WAITING ROOM

Many firms use the no-equity partner position as a preliminary step to admitting someone as an equity partner. In other words, you will spend some time at the no-equity level while developing your book of business or fulfilling whatever additional requirements are necessary to move up. Most of the time, firms will permit someone to remain indefinitely at the no-equity level. I encourage you to establish and communicate the criteria for moving to the equity level as a part of your firm's career development program. The expectations should be clear.

You may also be witnessing the phenomena in your firm where at least one or two generations of your people don't want the same things that we (the older folks) wanted. Their motivations may be different and they just might be happy (or happier) with something less than the full equity role that most of us chased. Maybe the new title and some recognition/differentiation, along with minor financial changes, are the perfect combination.

Consider the no-equity partner position in your firm. It may be the answer to keeping talented people, while helping the firm maintain the right leverage and number of equity owners.

Gary Adamson, CPA, is the president of Adamson Advisory, specializing in practice management consulting for CPA firms. Reach him at (765) 488-0691 or gadamson@adamsonadvisory.com.

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