As this unusual year comes to an end, many firms will be divvying up profits and assigning new partner salary or draw amounts for 2021. Where there are compensation agreements, this is primarily handled contractually, but there is usually some wiggle room for discretionary or merit adjustments. In larger firms this is usually done by a committee and in less larger firms by the partners together or by the majority owner for smaller firms.
Whatever the process, there is usually someone who is not happy. The trick then becomes to do it in a way that maintains the partner group and firm continuity without upsetting anyone more than just a little and not for more than just a little while.
This came up recently in three calls I received from partners who felt they were not or would not be treated fairly, and they wanted some suggestions. In particular, a partner of a two-partner practice, a five-partner practice and a 10-partner firm were pretty upset. There likely are as many ways of determining compensation as there are partners. However, my role, as I saw it, was to calm them down and inject some reason and perspective, and that is what I want to share here. Hopefully some of my “reasonableness” will rub off on you if you find yourself in a similar situation, i.e., fighting over compensation.
- The first thing that needs to be realized is that each partner is part of a business with every role necessary for the fulfillment of the firm’s mission. Obviously, some partners are more important and more essential than others, but they all fit together, creating revenue, pleasant client experiences and career opportunities for staff.
- I do not see leaving as an option, although that is always something that can be done and is occasionally thought about. I believe we are all aware there are widespread instances of musical chairs at law firms, but not as much at accounting firms. There are many reasons for the disparity in these two professions, but I think the main reason is that accounting firms regardless of their size are run more like businesses and use staff and technology leverage to a much greater advantage. Yeah, I know many lawyers will argue I don’t know what I am talking about with technology, but who cares — I am addressing accounting firms. You can’t beat accounting firms with technology, even the very small firms are heavily laden with technology, whether they recognize it or not.
- Getting back to the previous bullet point, when partners leave, they are leaving a business and they will not be able to recreate the leverage with a smaller firm they might consider starting. There is some partner movement, but most is not tied to compensation as much as it is to culture, serious personality clashes with other partners, a desire to grow a niche area that is not supported, or a lifestyle change. Money is an issue, but not the primary driver, and in many situations the move is a financially lateral one.
- Accounting firms also have pretty tight buy-sell agreements and, while a partner could leave, they would have to pay for the clients they leave with. Client control is equity, and that equity is usually greatest in the present environment, not in a new one.
- Now, let’s discuss money. I find that many of the money controversies are not over the absolute amounts, but the relative amounts. We are part of a great profession and the pay is excellent. If partners lived in a vacuum, they would all be happy with their compensation. However, many live in Macy’s window atmospheres and that leads to comparisons in compensation. That is where the problems start to fester. Because the compensation amounts are excellent, starting a fight over not getting as much as someone else is usually never worth it from a financial point of view. Ego gets in the way, sometimes jealousy and sometimes a feeling of being taken advantage of. Well, so what. This is business, and nothing is ever perfect, or can ever be perfect, but it is business.
- Try quantifying the difference. A $50,000 inequity is about $2,500 a month after taxes. Compare that to your “equity” in the firm, which would be a minimum of $700,000 or $800,000, and likely much more. Is it worth upsetting the applecart, so to speak? If you were advising a client, you would probably spend your time calming them down, which is what I did.
- Sometimes the differences are short term or can be made right in other ways. This would mitigate the loss or hurt, but that opportunity might not happen soon enough to provide salve, so get over it.
- There are ways to approach this. Prepare a presentation of your thoughts, the unfairness to you and what you want. Also present a solution that considers the other partners. Then meet with the appropriate partner or partners to discuss this. Do not handle this in an emotional way — it is business and a money issue. Unless there are other major issues (besides the money), you should not position yourself to go to the mattresses. (I picked this expression up from "The Godfather.")
- By the way, I have found that writing out grievances and solutions is a good way to put your issues in perspective, reflect on them, consider matters previously overlooked, and inject a big-picture viewpoint into what might just be a relatively small matter. This is also an organized way to count to 10 before acting.
My discussions involved a few phone calls with each of the callers. My first reaction was to go through a process of discussing the various criteria that can be used to determine partners’ compensation. It turned out, in these three cases, that what I was called about was not as much about the money but other issues which I tried to suggest above.
Nothing in an accounting practice is perfect, but almost everything is pretty good. Do not act precipitously or out of anger to cause confrontations that could create irrevocable harm to the business, partners and/or yourself.
Do not hesitate to contact me at
Edward Mendlowitz, CPA, is partner at
