As we consult with small and mid-sized CPA firms, one of the most common complaints we hear (from both line partners and senior management) involves compensation and annual adjustments. The line partners complain that they cannot clearly align their compensation and annual adjustments to their performance. Senior management complains that they have been less than successful in using compensation and annual adjustments as a means of driving firmwide strategy and partner accountability in a meaningful way. This is unfortunate as partner compensation and annual adjustments are leadership’s most powerful tools that affect firm culture, how partners choose to spend their time, and how the firm can drive implementation of its strategic plan.
In Our Opinion, a comprehensive, tightly linked annual partner goal setting, evaluation and partner compensation process becomes a bit of a carrot and a stick. Firm leadership must make sure that it is driving strategy and striking an appropriate balance between current performance and the creation of longer-term enterprise value. Leadership also must have a sharp focus on understanding the market value for: (a) the franchise players, (b) the next generation of leadership, (c) a partner who consistently generates or originates a large amount of new business most every year, (d) an excellent client relationship partner, and (e) a solid accounting, tax and advisory technical guru including those in Quality Control.
Presented below is a summary of the traps that should be avoided by the firm’s senior management and the Executive Committee when it comes to dividing net profits among partners:
Our strong preference in awarding annual compensation adjustments is a subjective methodology that considers a partner’s total body of work and how that partner has helped perpetuate the firm on a consistent basis. In many cases, this includes successful implementation of the tasks required to drive implementation of the firm’s strategic plan.
Finally, we believe that firms should avoid an “open” system of partner compensation disclosures. The larger the firm (particularly if the firm is doing about $15 million or more in annual revenues and/or has more than one office) is, the more important it is to have a “closed” compensation system because partners are often not able to evaluate other partners they do not work with throughout the year. Impressions and gossip often become the basis for reaching conclusions about performance and compensation of other partners. This is not healthy. In some firms, the only compensation disclosures that are open to all partners are the dollars awarded to the Executive Committee. This is healthy because many partners have the perception that the Executive Committee takes all the money and trickles down only small awards to the line partners. Experience has demonstrated that quite the opposite is true. Oftentimes, the senior partners on the Executive Committee redistribute their awarded dollars to the younger and/or very high performing partners who must be taken care of in a particular year. This is very common when the firm misses budget and there aren’t enough dollars to go around to appropriately reward performance for partners deserving of more. After all, it is a zero-sum game and the pie is only so large.
A performance management and compensation plan is the leverage that the firm’s leadership has to drive performance and create accountability. Use it wisely. Use it as a means of driving strategy and running the firm rather than merely a means of distributing the bottom line. You will know when you have a good goal setting, evaluation and compensation process when partners tell you that they believe they were treated fairly after considering all factors. And remember, we believe the larger the firm is, the more important it is for compensation not be disclosed internally to the partner group.
Dom Esposito, CPA, is the CEO of ESPOSITO CEO2CEO, LLC — a boutique advisory firm consulting to leading CPA and other professional services firms on strategy, succession planning and mergers, acquisitions and integration. Dom, voted as one of the most influential people in the profession for two consecutive years by Accounting Today, authored a book, published by www.CPATrendlines.com., entitled “8 Steps to Great” which is a primer for CEOs, managing partners and other senior partners. In Our Opinion, is a continuing series of perspectives for leading CPA firms where Dom shares insights, experiences and wisdom with firm leaders who want to “run with the big dogs” and develop their firms into sustainable brands. Dom welcomes questions and can be contacted at either firstname.lastname@example.org or 203.292.3277.