Preparing Future-Ready Professionals
Key Factors to Consider in Designing Partner Compensation Models
Johnson Kong, Johnny Yong | June 14, 2021
With many models to choose from, firms must consider a wide range of possible factors when drawing up a partner compensation scheme. Regardless of which model fits best, success will depend on regularly assessing and refining the arrangement to meet the needs of the firm and its partners.
Choosing the Best Model for Your Firm
Every small- and medium-sized practice (SMP) needs a compensation model that is agreeable to all partners in the business. However, finding a suitable compensation model is a complicated task.
Many articles aim to demystify this part of practice management. As highlighted in a CPA Practice Advisor article on small firm challenges with partner compensation, regardless of the system being used to allocate income, at the end of the day, each partner has to look the others in the eyes and say “I’m OK with our final comp numbers. They are fair to all of us. Let’s move on”.
Within IFAC’s “Guide to Practice Management for Small- and Medium-Sized Practices”, Module 2 illustrates the benefits and drawbacks of different types of partnership, while Module 4 deals with general staff compensation models. However, further advice on how partner compensation can be managed may be helpful because of the challenges in forecasting future practice performance and hence, allocation of profit sharing and the major issue of goodwill when joining an existing partnership.
Others suggest a compensation structure covering base compensation, incentive pay and ownership distribution (using different ratios) to ensure a sustainable practice that can also incentivize the partners in an equitable manner. The incentive pay within such structure will also be able to encourage desirable behavior, which is essential when firms are formulating an effective quality management system internally.
While measurement of a partner’s assignment-specific productivity is important, the firm should not lose sight of the intangible contribution that a partner may bring to the firm. In fact, CPA Trendlines list 26 such attributes, not necessarily in the order of importance. The challenge is always in how these attributes are to be quantified and agreed upon by all partners.
CPA Australia has recently identified new trends, such as partnership models that do not require an incoming partner to purchase equity in the firm or where a new partner does not have to buy goodwill when joining an existing practice. These arrangements often combine with an outgoing partner not being able to cash in his/her share of the equity / goodwill when leaving or retiring from the practice – a “zero-in, zero-out” model.
Using Partner Compensation as a Hiring Strategy
During a recent session of the IFAC Small- and Medium-Practices Advisory Group (SMPAG), the issue of how partner compensation can be used as a strategy to attract talent at the partner level was discussed. These are some of the suggested factors to be considered when formulating an equitable partner compensation scheme:
- Avoid a one size fits all approach. Each service line is different. All partners will bring different skill sets and contributions to the firm. Individual services, from technical report drafting to credit control of receivables, two partners’ functions might be vastly different, but the contributions of both are required to enable the unit or firm to function well. To generate decision-useful information, all activities need to be graded, and all outputs will need to be quantified and assessed. The partners must be able to appreciate the equitability when grading the work and subsequent contribution of each partner and how the individual’s effort will eventually contribute to the firm’s overall goal or vision.
- Establish goal setting and a performance evaluation system. While equitable profit sharing when joining an existing partnership is a challenge, having an appropriate goal setting and performance evaluation system in place to motivate and reward production is also important. A performance-based compensation system, with the resulting adjustments, can avoid stagnation and complacency by rewarding (or not rewarding) partners fairly on an on-going basis. This also promotes the “One Firm” true partnership concept where partners are accountable to each other.
- Encourage innovation. Firms should consider ways to encourage innovative practices, as agreed-upon and defined by the firm (i.e., defining “what success looks like”). This will ensure that innovative suggestions and practices will not get “buried” under the “same as last time” (SALT) attitude. For a new partner moving into such firm environment, it will show that diverse views can be tolerated, and even encouraged, all in the name of innovation.
- Intangible contributions must not be ignored. Amongst others, this includes:
- Ability to delegate and actively encourage work-life balance;
- Active or good standing in the community to promote the firm and enhance its brand;
- Timely delivery of engagements while maintaining high quality standards;
- Positive feedback from staff and clients; and
- Clearly demonstrating respect for other colleagues, acting professionally and ethically – bringing the right “tone at the top”.
- Consider rotating partners’ roles. Firms may also want to consider rotating partners’ roles, especially when dealing with the administrative functions, where feasible. However, it is important to ensure that such a shift will not impair the overall operation of the firm (e.g., not everyone can be good with human resources). Rotating roles can help partners to familiarize themselves with the various operational aspects of the practice.
- Partners should help forge a vision. It is important for senior partners to forge a vision for the whole firm, but more critically, a shared destiny among the partners on how the firm can make a difference in the marketplace or the profession. The purpose of work can be bigger than just the take home pay—especially for millennials. The recently launched “IFAC Practice Transformation Action Plan – A Roadmap to the Future”, is a great place to start a conversation on embracing change and managing talent.
There is no magic solution. Many of the partner’s compensation formulas will need to be constantly refreshed and refined if the firm is serious about attracting and retaining the right partners into the leadership team. It is important for the firms to remain agile and able to adapt as the need for the firm changes with the development in the marketplace and the profession in general.
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