Is your firm’s partner compensation structure holding you back?

Compensation, particularly partner compensation, is a topic that leads to considerable debate in most firms, and the discussion has only become more complex with the addition of non-equity and non-CPA owners.

In most firms, the compensation model started when the firm was small, the profession was less commoditized and labor was abundant with less reliance on technology. In that environment, compensation is traditionally based on stock ownership and book of business (financial results).

The problem is, these compensation models ignore things like upskilling, staff learning and development, client filtering, culture and other leadership behaviors.

Changing the partner compensation model

Change is never easy, and most partners aren’t interested in changing unless forced to by a crisis or threat of loss. Today, that crisis is here due to the too-narrow focus on financial results: talent shortages, technical debt, lack of a succession plan, and highly skilled managers who have no interest in becoming a partner.

Why would they when making partner essentially means being left with a lot of work and no money that will flow back to them?

Unfortunately, outdated compensation plans impede innovation and transformation. They protect firms from the adverse effects of poor client filtering processes, lack of investment in technology, and failing to develop new services or upskill team members.

Partners in these firms believe that simply delivering good client work is a recipe for financial success, which creates a significant obstacle to fostering a collaborative, continuous improvement, and growth-oriented firm culture.

It’s time to fix that.

7 characteristics of a successful partner compensation structure

In looking at successful firms, there are seven distinguishing characteristics of the partner compensation structure. They are:

1.     The foundation

Every firm needs a vision, a strategic plan, and alignment. Without these, you will have a weak foundation.

To change your partner compensation model, you need to get buy-in from your partner group. This is never an easy task as partners tend to resist change, but alignment and consensus are big factors in determining success.

2.     Time to think and plan

Firm partners need to spend time working on the firm rather than in the firm. Most partners tend to over-focus on financial measures because it’s easier to measure financial results than develop staff, improve internal processes, and operations and improve client satisfaction by developing new services and becoming a trusted advisor.

In addition, at least 25% of profits should be reinvested back into the firm – into technology, processes, people, training and development, etc. The truth is, financial results will come if partners work on these other areas.

3.     Objectivity

Creating a vision and strategic plan and reaching alignment is easier with an outside perspective. You may need help from a third-party coach or facilitator.

4.     Clear and communicated

What gets measured gets done. Partners and employees are motivated to achieve written goals. The best compensation structures look at several KPIs – not just charge hours. You may quickly become aware that you don’t have a reliable method for measuring performance outside of financial results.

We recommend the Balanced Scorecard approach, which typically sets goals in four categories:

• Learning and growth. Examples of objectives include developing an upskilling curriculum for each employee, hiring a learning coordinator.
• Internal operations and processes. Objectives can include things like implementing a content management system, outsourcing “easy” tax returns, and undergoing a process improvement project over billing.
• Client development and satisfaction. Sample objectives include implementing a client filtering system or completing a number of sales calls or proposals.
• Financial. Objectives may include increasing revenue per FTE to a certain number or increasing revenue by a certain percentage.

An in-depth explanation of the balanced scorecard approach is beyond the scope of this article, but if you think it could benefit your firm, there are numerous resources available.

5.     Fairness

Communicate the plan upfront. Use progress reports and 90-day game plans. Schedule your quarterly meetings in advance, as meetings scheduled in advance have greater priority.

6.     Performance and job satisfaction

The most successful firms today have a one-firm vision. They work as a team and consider each partner’s unique abilities when setting goals and measuring performance. This results in greater job satisfaction for everyone involved.

7.     Accountability and coaching

Accountability is missing in many firms today.

Historically, partners have been evaluated on charge hours, book of business and realization. Newer systems still focus on financial results but also on staff development, client development and satisfaction, and adherence to firm standards, policies and procedures. Frequent feedback and communication – at least quarterly – will improve accountability and lead to better results.

If your current owner compensation system isn’t producing the results you want, it’s time to change it to one that aligns compensation to the firm’s overall goals and strategic plan. This will hold owners accountable while focusing on priority objectives and increase confidence as the firm grows and improves.

Some good resources for further reading on partner compensation include CPA Firm Partner Compensation: The Art & Science by Marc Rosenberg, CPA, and Performance is Everything: The Why, What and How of Designing Compensation Plans by August Aquila and Coral Rice.

You may not get it exactly right the first year you implement a new compensation model, but evaluate your progress each year and make adjustments. As with any firm initiative, changing partner compensation is about progress, not perfection.