Can there be any more emotional topic than partner compensation?It seems that no matter what a firm partner is paid, there is always the issue of relative pay. In other words, how much did I get paid in comparison to you? If I received more than you, I feel good, and if I received less, I don't. It makes no difference that the disparity may be minimal.
How, then, do you overcome this ongoing comparison and annual emotional disruption? Many of the compensation systems used by firms today are out of date. For example, equal pay, the lockstep approach or the managing partner deciding do not address the issues of job families, individual performance and skills required. Employees and partners are never equal in skill or value to the firm, and being at the firm the longest (lockstep or seniority) doesn't necessarily make one the most highly paid.
Other compensation systems such as eat what you kill, overhead sharing or pure formula do not permit the practice to grow beyond a certain size. A couple of things about these systems should jump out at you. First, they put most of the emphasis on the individual partner's effort. This tends to create an environment of scarcity, rather than one of abundance. In other words, each partner thinks that she has to hoard work, rather than bring others into the client situation.
Second, in real companies there are different compensation programs for those in management positions - the managing partner, department heads, etc. In most firms, management does not have a lot to lose if the firm does not perform. Third, these systems do not encourage collaboration and teamwork.
Finally, since they are totally oriented toward the individual, they usually create a low level of trust in firm management.
Hence, it behooves us to take a new look at partner compensation within the traditional CPA firm.
New focus
Most traditional CPA compensation plans have focused on the individual employee or partner, the job to which the individual was assigned, and what the individual needed to do to get promoted.
The basic fault with this traditional thinking is that it causes the individuals to become concerned only about themselves. They often don't see the connection between what they do and the goals of the firm.
The new focus is that everyone understands how their position and their activities help the firm achieve its goals. It moves people from the concept of scarcity to the concept of abundance.
Base compensation
The concept of base compensation is prevalent in the corporate world and is used to reflect the relative importance of different jobs. This is nothing new in accounting firms. Most, if not all, have a base pay for staff accountants, seniors, supervisors and managers.
How do we determine the base for partners? The traditional finders, minders and grinders make a great start at developing job families for partners. The successful firm today needs one more type - the leader. While many partners will have skills in more than one of the above types, they will probably have a predominant type. The first step then is to identify each type, - management (leader), rainmaker (finder), client relations (minder) and technical (grinder).
Accounting firms need all four types of partners and employees to be successful. Think for a moment of a firm that has all finders. Yes, these rainmakers can find and bring in all the work that they can get their hands on. But what good would it be if there were no one to service the clients? This firm is nothing more than a "revolving door." It is not creating any long-term value.
And without finders, the minders and the grinders would have nothing to do. Firms without leadership are destined to fail sooner rather than later.
Each of these types should have a base compensation and a range. Each firm needs to determine what that has to be given its market, competition, etc. Where traditionally most of a partner's compensation was paid throughout the year, in the new environment, base pay is limited to perhaps 75 percent or less of total compensation.
By changing the nature of base pay to a lower percentage of total compensation, you will attract and keep people who are performers and motivated by the opportunity to earn more. Partners in this system will have to keep performing in order to earn more. The entitlement or legacy belief goes away. Each type of partner - leader, finder, minder or grinder - will know what they need to do to earn or keep their base.
Variable pay
Performance should be recognized by variable pay and not included in base compensation. This is significant if the firm wants to keep compensation expense under control, since variable pay does not become an annuity to the employee or partner.
Variable pay should be used to measure specific individual, team, department and even office performance in multi-office firms. This in turn helps align the individual's goals with those of the firm.
Finally, the key to variable pay is that the individual and the firm only win when both of them win. In short, they form a true partnership. If the financial results are not there, then the firm either pays less than anticipated or pays nothing at all. Superior compensation should be the result of superior performance.
Your compensation system can attract poor, average or good performers. The more you move to variable pay, the more you will attract the good performers. The mediocre employees will certainly seek the firm where performance is less important. The choice is yours.
August J. Aquila is a nationally known consultant to the accounting profession, and the co-author of Client at the Core: Marketing and Managing Today's Professional Services Firm. Reach him at (952) 930-1295 or aaquila@thegrowthpartnership.com.
