Let’s take a deep dive into both a firm’s partner mix and its compensation model.

In a "Good to Great" research study on high-performing organizations performed by Jim Collins, he concluded that the method of compensation, as a causal factor for high and sustained performance, is largely irrelevant. The study found that whatever system is in use, it simply must be rational and equitably managed and that high sustained performance is largely the result of doing many things well. Jim emphasizes that the key to high performance is having the right people on the bus.

With that said, we ask that you visualize your partner group fitting into a bell curve:

In Quartile 1, you have your stallions — the very high performers who produce outstanding contributions year after year. These partners want to and know how to win. Their contributions probably are a combination of excellent client relationships, consistent new business development in excess of $250,000 a year, mentoring younger staff or firm administration. Your stallions usually get large year-end bonuses and generally are the firm’s highest earners.
In Quartile 2, you have your solid performers — reliable team players who do their best and are sincere in furthering the success of the firm. These partners probably are a combination of seasoned equity partners and a number of up and coming nonequity partners. They are worth every penny in compensation.
In Quartile 3, you have journey men — every firm has them. These partners give you a solid performance and do what they can to further the firm but generally act, look and feel like employees — not owners. These partners usually aren't lead partners on client relationships because they are ineffective and only occasionally bring in some new business.
In Quartile 4, you have poor performers. Some of these partners no longer have gas in their tank; some never had gas in their tank and should not have been promoted to partners in the first place. Some have been with your firm for a very long time. As a result, it is difficult to deliver the message that they are probably better off seeking employment elsewhere. Waiting to deliver tough love later rather than sooner usually isn’t a good thing and more than likely makes a bad situation even worse.

Does your firm have the right partners on the bus? Every CPA firm needs more than 50 percent of its partners in Quartiles 1 and 2. If your firm doesn’t, there is work that needs to be done before you can achieve satisfactory growth on the top and bottom lines. This is particularly true if your firm has more than 50 percent of your partners in Quartiles 3 and 4 who probably don’t care what your compensation model is as more compensation usually isn’t much of a driver for them. If your firm doesn’t have the right mix of partners, it is incumbent upon you to change the partner mix sooner rather than later. Easier said than done, but if you don’t, it is costing you today and will continue to cost you in the future — no matter what your compensation model looks like!

Let’s assume your firm does have the right mix of partners but, nevertheless, isn’t clicking on all cylinders as the market becomes tighter, competition gets more intense, and billing rate pressures continue to increase. If this is the case at your firm, this year is probably the time for you to take a hard look at your compensation model to see if there is a better way to motivate your partners by getting your compensation philosophy right. This, in turn, will enable you to get partner compensation right to ensure continued financial prosperity and perpetuity.

Your 2018 compensation model needs to:
Support a firm’s core values and strategic decisions;
Promote a “firm first” culture that rewards collaboration;
Drive industry specialization (the key to a value proposition that differentiates your firm) into the firm’s DNA;
Emphasize growth on the top and bottom lines at satisfactory rates (say 6 to 8 percent per annum) through both cross-sells (low-hanging fruit) as well as new originations; and
Contain enough transparency.

There are essentially three forms of partner compensation disclosure. Each can be effective under the proper circumstances. They are:
An “open” system with great transparency and accountability: The negative is that it focuses on peer to peer comparisons and creates a lock step type of environment that is not healthy.
A “closed” system that more readily rewards partners who are exceeding expectations without concerns that others might feel slighted: The “closed” system also offers more flexibility when pursuing lateral hires who often join firms from the outside with a “premium” compensation amount that needs to be amortized and hopefully pays dividends to all over time. This system works best when there is a high level of trust in leadership.
A “modified closed” system that does not disclose every partner’s compensation but instead discloses average partner compensation, median partner compensation, and highest and lowest partner compensation amounts: The “modified closed” system also permits compensation disclosure for each member of the executive committee and senior management. Some firms indicate that partners may review leadership’s compensation only in the managing partner’s office and may not copy or remove the disclosure.

Your 2018 compensation model also needs to contain the right mix of qualitative and quantifiable measures. Ideally, the compensation model needs to be holistic by evaluating a partner’s overall “body of work” or contribution to the firm, including:
Mentoring younger staff, firm management, and community involvement, and
Client originations, cross-sells, hours managed and hours billed.

The compensation model also needs to have the perception of fairness and a lack of cronyism. These provide the bases for a model’s reputation as a solid system, one that partners understand and respect. Perception is the foundation for a quality partnership that is built upon trust in the firm’s leadership. When your firm says certain things matter and they actually do matter when you evaluate and weigh both qualitative and quantifiable measures in arriving at partner compensation, it goes a long way in establishing the integrity of the compensation model and those who administer it.

If you think that the year 2018 might be the year for you to take a hard look at your partners, I encourage you to do so with compassion and conviction. One of the hardest responsibilities for a managing partner is to deliver tough love to a partner who isn’t living up to expectations and something must be done about it.

I also encourage you to:

  • Have a large number of partners provide input regarding the existing model and what the firm needs in the future. To build buy-in that creates an environment that is open to real change, have those partners take a shot at drafting the new compensation model.
  • Keep it simple. Many firms have formulas to slice and dice data in arriving at partner compensation, but at the end of the day, no one truly understands how to win.
  • Correlate the level of contribution with the level of pay to give credibility to “merit” and “pay for performance.”

Remember, there isn’t a perfect compensation plan. The world of public accounting is changing rapidly and the areas of compensation emphasis in the past probably aren’t the same areas of emphasis today and tomorrow. I have always believed that if you showed me your compensation model, I could tell you what your firm’s strategy is. If you did that simple analysis at your firm, would you conclude that your firm strategy and partner compensation philosophy are aligned? If not, this is the year to tackle the challenge.

Dom Esposito

Dom Esposito

Dom Esposito, CPA, is the CEO of Esposito CEO2CEO LLC, a boutique advisory firm consulting with small and midsized CPA firms on strategy, practice management, mergers and acquisitions.