Updating CPA Firms’ Partner Compensation Systems

By Marc Rosenberg

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Change is the law of life. And those who look only to the past or present are certain to miss the future.

—John F. Kennedy

JULY 2008 - One changing area of the CPA profession is the allocation of income among partners. A severe shortage of staff and the specter of succession planning have led to a major new focus on staff development and mentoring. CPA firms also continue to see the benefits from effective management and leadership. Partners are seeing that living and breathing their strategic plan and core values, instead of giving them lip service, really pay off.

The Huge Disconnect

The three overlapping circles in the Exhibit illustrate management practices that, historically, have been largely disconnected. For years, many firms have diligently prepared their strategic plans and outlined their core values, all encased in a lovely booklet. Not only didn’t the partners live and breathe the goals and core values, but the goals and values had almost nothing to do with how the partners were paid or evaluated. Today, firms see that strategic planning can make a difference, but only if there is accountability for achieving goals, in the form of partner compensation.

At small and mid-sized CPA firms, only a very small percentage of partners are formally evaluated on their performance. And at firms that do evaluate partners, very little if any of the firm’s income is allocated based on the results of those evaluations. Today, however, firms increasingly link performance assessment with partner income allocation.

Allocating Income Based on Factors Other than Production

Partner production will always be an important factor in allocating income. But firms need their partners to perform in a number of other areas as well:

• Leadership skills;
• Staff and younger partners advancing under a partner’s tutelage;
• Moving clients to other firm members better able to serve the clients;
• Providing world-class service to clients;
• Ensuring that the firm’s larger clients have multiple relationships within the firm; and
• Being a good partner—treating people respectfully, representing the firm’s core values, and complying with firm policies.

What Is Changing?

• Intangible performance attributes are impacting income allocation, instead of being ignored.
• For seven-partner firms and up, formula methods are being abandoned in favor of compensation committees, which are better able to reward intangible performance attributes.
• There is less emphasis on a “book of business,” more emphasis on working as a team to service clients.
• Linking of strategic planning, partner evaluation, and partner compensation occurs, instead of the three being disconnected.

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