May 26, 2020

PERSPECTIVE #110 — IN OUR OPINION, May 26, 2020

(A Continuing Series for Leading CPA Firms)

INSIGHTS INTO THE ACCOUNTING PROFESSION

MANAGING PARTNER SURVEY RESULTS

“ARE YOU THINKING ABOUT CHANGING YOUR

PARTNER RETIREMENT BENEFITS POST CORVID-19?”

“There is nothing wrong with change…if it is in

the right direction.”   — Winston Churchill

Upon retirement, a full equity partner in a small (less than $12 million in annual revenues), midsized (between $12 million and $39 million in annual revenues), and larger (between $40 million and $1+ billion in annual revenues) CPA firms across the United States typically earns a deferred compensation/retirement benefit together with a return of cash capital contributions. In many firms, an equity partner also earns a share of a firm’s accrued capital. When added to the retirement benefit, an additional distribution of a firm’s accrual capital can be crippling to firms. When offering this additional pay-out, firms should do so with caution.

In Our Opinion, following employee compensation and rent, partner deferred compensation/retirement benefit plans usually are the third largest expense on a firm’s income statement. It is no secret that COVID-19 will probably hurt revenues and bottom lines at many firms. It is very common for us to hear that firms of all sizes are working hard to reconfigure their staff loads and to renegotiate their space requirements. We haven’t heard much, however, about what firms are doing regarding their obligations for deferred compensation/retirement plans. So, as a no-fee service, we recently reached out to over 350 Managing Partners at leading small, midsized and larger CPA firms and asked, “Are you thinking about changing your partner retirement benefits post COVID-19?” 30 Managing Partners at leading firms across the United States responded to our survey. Their input provides a glimpse into the current thinking regarding partner retirement benefits post COVID-19

The headline takeway is that, with current profits likely to take a short-term hit, several respondents are contemplating changes to annual net profit caps, early retirement provisions, and mandatory retirement ages. In addition, and of particular interest, the survey found that 10% of respondents at leading small and midsized firms with annual revenues less than $40 million indicate that they have deferred at least 25% of their most recent pay-out of retired partner benefits. None of the respondents at the larger firms, however, have taken this action.

Presented below are other key takeaways of the survey. It is important to note that all key takeaways may differ with a larger number of respondents.

Other Key Takeaways

• Over 73% of respondents indicated that a partner’s retirement benefits are at least 2 ½ times his/her highest average compensation. With a likelihood that short-term current partner compensation is going to be less than that before CORVID-19, only 3% of respondents are contemplating reducing that multiple by 10%.
• Almost 43% of all respondents have an annual net profit cap of more than 10% on aggregate retirement benefits. While only 5% of all respondents are thinking about increasing their cap by at least 10%, 20% of the firms with more than $40 million in annual revenues are thinking about increasing their cap by at least 10%.
• More than 96% of all respondents indicate that their firms have a mandatory retirement age of 65 or more.
• Almost 7% of small and midsized firms are thinking about reducing mandatory retirement to 62 or 63.
• About 69% of all respondents indicate that partners can retire ten years before the mandatory retirement age.
  • 11% are thinking about changing early retirement from ten years to 13 years.
• Almost 54% of all respondents indicate that their retirement plan had cliff vesting but only 40% of the larger firms contain cliff vesting.
• 73% of all respondents indicated that they have a minimum number of partner years to qualify for a retirement benefit.
• Just over 91% of all respondents were not thinking about extending the service period by at least one or two years while almost 97% are not going to extend the pro-rate period by at least two or three years.
• About 13% of all respondents indicate that there is a retirement benefit cap for individual partners. Only 5% indicate that they are thinking about reducing the cap.
• Accrued capital, in addition to a partner deferred compensation/retirement benefit, is paid-out by about 77% of all respondents.

IN CONCLUSION

Over the last ten or 15 years, partner retirement plans slowly became more and more attractive to full equity partners at many of the leading firms across the United States. This was occurring as partner profits were slowly improving for the active partners. While none of us knows where the accounting profession will land two or three years from now, it is very probable that improved profits will be hard to come by. We believe that all leading firms need to take a hard look at their partner retirement plan post-COVID-19 and, if necessary, change it reflects the current environment we are now operating in — our new normal.

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About ESPOSITO CEO2CEO, LLC

After 47 years in the accounting profession (with responsibilities that included CEO of Grant Thornton and COO of CohnReznick), Dom Esposito, CPA, launched ESPOSITO CEO2CEO, LLC — a boutique advisory firm that consults to leading CPA and other professional services firms on strategy, succession planning, 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 and his colleagues share insights, experiences, and wisdom with firm leaders who want to “run with the big dogs” and develop their firms into sustainable brands. Insights into the Accounting Profession Managing Partner surveys are laser-focused on practice management issues impacting the business of public accounting.

This has been prepared for information purposes and general guidance only and does not constitute professional advice. You should not act upon the information contained in this publication without obtaining specific professional advice. No representation or warranty (express or implied) is made as to the accuracy or completeness of the information contained in this publication, and ESPOSITO CEO2CEO, LLC, its employees, and its independent contractors accept no liability, and disclaim all responsibility, for the consequences of you or anyone else acting, or refraining to act, in reliance on the information contained in this publication or for any decision based on it.