how much should partners make?

do they deliver or develop?

by rob nixon

how much should a partner of a multipartner accounting firm be paid? should it be equal pay because you have equal shareholding?

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if it is going to be equal pay then each person must pass the checklist of the ideal partner. it’s my opinion that most should not be paid equally.

i have a view that a lot of partners in this industry are overpaid senior accountants. they are doing the work of a senior accountant but getting paid substantially more.

there are many partners who are partners because of retention reasons rather than good business reasons. in today’s money you can employ a senior accountant for $150,000 (or thereabouts) to do the work of most partners.

if i am paying someone $300,000 – $500,000 (with dividend) then i would expect them to operate differently from a senior accountant who does the “delivery” side of the work. at a minimum i would be expecting partners to bring in new business from existing and future clients.

high-contribution partners should be doing just three things:

1. high-end work for a low percentage of time – advisory work at “value-based fees” and high margins.
2. nurturing existing clients – increasing the average fee per client with additional services sold – priced on value, not time.
3. leadership – driving performance of the firm and making sales to new clients.

so how much should you pay them?

to start the discussion you need to separate employee vs. owner. there is no right or wrong answer (to how much). however, i think a rule of thumb needs to be, “what would it cost me to replace this person with another employee?”

by nature of the answer it means that there need to be differing salary levels among partners.

i am talking about rewarding people with a package based on their contribution to the business. it is farcical to think that all employees of a business (partner group) should be paid the same amount if they are contributing in different ways.

as an example, if one partner is bringing in $300,000 worth of new clients per year and doing $200,000 of personal chargeable work, then he/she is far more valuable than someone doing $500,000 of personal chargeable work and not bringing in any new business.

to get it close to right (and the number will never be right) there are three considerations to the total salary package of an employee/partner:

1. salary earnings – an amount that it would cost to replace you as an employee
2. bonus earnings – an amount based on “above salary” contribution – it must promote overachievement
3. equity earnings – an amount based on your equity percentage and your dividend policy

excluding equity, as an overall employee package, you should be thinking about “on-target earnings” – ote.

here are some examples of differing pay scales based on differing contribution.

*nb. before i get crucified the salary levels here are a guideline only. you’ll need to check the various salary surveys to get accurate numbers for your location, type of work performed and the various skill levels of people.

partner no. 1. if you have a partner who wants to be the business manager of the firm and have zero clients, then he should be paid accordingly. maybe his ote is $100,000 – $150,000.

partner no. 2. if you have a partner who wants to be a workflow, delivery person (say 65 percent productive or $350,000 personal chargeable time) and manage $1 million of team revenue, and do zero client nurturing, then she should be rewarded accordingly – like a senior accountant. maybe her ote is $125,000 – $200,000.

partner no. 3. if you have a partner who does 50 percent chargeable time (say $300,000 of personal revenue), and manages $1 million of team revenue and allocates 10 percent of his time to client nurturing (and he actually does it) then that would be approximately 100 sales meetings @ an average of 50 percent conversion @ an average $5,000 extra work for each sale – or an additional $250,000 of work that has been brought into the firm. maybe his ote is $150,000 – $250,000.

partner no. 4. if you have a partner who does 30 percent chargeable time (say $200,000 of personal revenue), and manages $1 million of team revenue and allocates 30 percent of her time to nurturing existing clients then that would be approximately 300 client sales meetings @ 50 percent @ $5,000 = $750,000 of new business. maybe her ote is $200,000 – $300,000.

partner no. 5. if you have a partner who does 20 percent chargeable time ($150,000 of personal revenue), manages $500,000 of team revenue and allocates 50 percent of his time to nurturing existing clients (approximately 500 sales meetings @ 50 percent @ $5,000 = $1.25 million of new business), maybe his ote is $250,000 – $350,000.

partner no. 6. the most valuable partner in the firm is the one who has zero chargeable time and she spends say 20 percent of her time with potential new clients (say 100 leads generated by the marketing team) and say 50 percent of her time nurturing existing clients, then the numbers are vastly different. 100 prospect meetings x 75 percent conversion x $10,000 each = $750,000 (recurring) business + 500 meetings @ 50 percent @ $5,000 = $1.25 million of new business from existing clients. total new revenue of $2 million. maybe her ote is $300,000 – $500,000.

this is part art and part science. which partner are you? which partners are your partners?

are your partners best at the “delivery” role or the “developer” role?

this is going to hurt, but delivery people are a dime a dozen. people who can generate revenue from existing clients or convert a prospective client with full services are not.

posted on september 18, 2017