can retired partners stay involved? only if it benefits the firm.
by marc rosenberg
the rosenberg practice management library
this post explains the rock-solid link between bringing in business and partner compensation.
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here are the major factors firms consider in compensating partners:
- bringing in business
- managing a large client base profitably
- providing great service to your client base
- holding management and leadership positions in the firm
- nurturing and mentoring staff; helping them learn and grow
- living and breathing the firm’s core values
bringing in business is the most highly compensated element because of the dynamic combination of two factors:
- revenue increases and strong revenue-to-partner ratios correlate highly with profitability. cpa firms generally do not have high levels of expenses, so revenue increases fall almost directly to the bottom line.
- bringing in business is the most difficult trait for cpas to master. most accountants don’t enjoy business development and aren’t skilled at it. they need to go outside their comfort zones to get results.
in short, bringing in business is the most critically important performance factor and the hardest to do. but it
- shouldn’t be so highly compensated as to render other factors (firm management, mentoring staff, providing great client service, etc.) insignificant by comparison.
- shouldn’t automatically be the highest-paid factor. great managing partners, for example, are often compensated higher than rainmakers because they drive the firm’s profitability and success, provide leadership, hold partners accountable for their performance and behavior, are visionary and do many other valuable things to make their firms successful.
you probably know the adage “every partner should be put to his or her highest and best use.” this can be interpreted in many ways, one of which is this:
great business-getters should manage a smaller client base and work a low number of billable hours to free up their time to do more business development and bring in more business. on the other hand, firms often have great technicians and client handlers who are not good at bringing in business. these people should focus more on client work and client retention than on bringing in business.
too many partners interpret the compensation aspect of “highest and best use” incorrectly. their reasoning is that if business-getters are freed up from client production and are successful at bringing in more business, and that if technicians and client handlers are freed from the pressure of bringing in business to focus on production, which they do spectacularly, then both types of partners should earn the same because each had a separate, critically important role in the firm and succeeded at it.
sorry, this doesn’t fly:
- bringing in business is more difficult than being a client handler and is worth more.
- most skilled business-getters are also good at handling clients and delivering great service, so they need to be compensated for that the same as technicians.
beware the entitled rainmaker
legions of firms suffer from this scenario. bringing in business is the most critically important partner performance factor and the one that most partners are weakest at. rainmakers are deified by their partners because the profits they generate increase all partners’ compensation, not just the rainmaker’s. this leads to an unfortunate attitude: “the rainmaker can do no wrong.” this is never overtly stated, but the partners resign themselves to it every day.
this often results in rainmakers assuming an attitude of entitlement. entitled rainmakers routinely violate the firm’s policies, procedures and core values because they know their partners won’t dare call them on it. some examples: late billing and collection, late timesheet submission, hoarding work, being late to partner meetings, and badmouthing the firm to staff.
over time, the other partners see the problem grow but are reluctant, almost paralyzed, to confront offending rainmakers because they fear a reduction in their own income if their complaints cause the rainmakers to bolt.
this issue is one of the biggest tests of partners’ commitment to the one-firm concept, which includes these tenets:
- no partner is exempt from living and breathing the firm’s core values.
- no partner receives a waiver from following the firm’s policies and procedures.
- all partners must earn the trust of the other partners every day. when that trust ends, offenders need to leave the firm.
readers who have entitled rainmakers need to ask themselves a difficult question:
- will we tolerate an entitled rainmaker at the cost of compromising our firm’s core values? or …
- will we uphold our firm’s core values, even if the cost is a short-term income reduction?
what will you do?
keeping retired partners involved in business development: realistic or a pipe dream?
first, an important point must be made. any work arrangement between a retired partner and the firm should meet these criteria:
- whatever activity a retired partner engages in, it should provide value to the firm. with rare exceptions, firms should not allow retired partners to continue working as a “favor” to the retiree. the reality is that it costs the firm to employ the retiree, either financially or operationally.
- the work arrangement should be a win-win for the retired partner and the firm.
as a practical matter, the best way a retired partner can provide value to the firm is by bringing in business (for which the retiree should be handsomely compensated). one would hope that in 30 or 40 years of being a partner, this person would have a solid reputation in the community and have numerous contacts with referral sources, organizations and others. ideally, they put their contacts and experience to great use by bringing in new business to the firm.
sounds great, right? but unfortunately, this rarely happens. why?
- if partners were not business-getters before they retired, this is unlikely to change after they retire.
- when retirees reach retirement age (say, 60-70), their contacts may be the same age or older and may have dried up.
- even though we are living longer and retaining our mental faculties longer, few people have the same energy at 67 as they did in their 30s or 40s. and it does take energy to market.
still, there is hope. one of the reasons (and there are many) why 80 percent of partners at local cpa firms are not active in bringing in business is that they are kept so busy doing client work, maintaining client relationships, mentoring staff and a myriad of other things. and many make good money without being business-getters. when partners retire, theoretically they should have a lot more time available to engage in business development and serve as ambassadors for the firm. so it is possible for non-business-getting retirees to make a change.
should people who don’t bring in business be promoted to partner?
this question has been hotly debated by cpa firms for decades. in a perfect world, bringing in business should be a perfectly reasonable criterion for making partner. our favorite definition of a partner is one who drives the firm’s success. there are many ways to drive a firm, but bringing in business should make anyone’s short list.
a related reason for requiring staff to be business-getters before being made equity partners is succession planning. over 20-plus years of working with hundreds of firms, we have seen many confront this unfortunate scenario: in generations past, the firm had several partners who were business-getters. over time, these business-getters retired and were replaced by personable, smart, hard-working partners who, unfortunately, were not business-getters. this scenario reaches the panic stage when the partners sit around the retreat table and brainstorm why their revenues have been flat for years. the classic line from pogo explains it perfectly: “we have met the enemy, and he is us.” none of the partners is even trying to bring in business. succession planning becomes almost impossible at this point.
yet for many firms under $15 million, bringing in business is not a hard criterion for making partner. why is this?
fear of having no partners. if firms had a rigid requirement for new partners to be business-getters, they might not have any partner candidates.
avoiding heartburn. many firms have longtime staff who are great in every aspect of their job … except bringing in business. the firm would have heartburn if the staff left, so they make them equity partners partially as a retention tactic.
promotion = time in grade. many firms embrace an old-school notion that when a staff person has been on board for a certain number of years (say, 15 or so) and is great at their job (except at bringing in business), the firm feels obligated to make the staffer an equity partner. so they do.
it’s all in the math. partners with sizable client bases retire and their firms need a new partner to take over the retiree’s clients.
a lot of the problems go away with the increasing usage of the non-equity partner concept, which makes it easier for firms to require bringing in business as a criterion for making equity partner.
how does technology enable firms to expand their markets nationally?
we’re getting close, but we’re not there yet. the more specialized a local firm is, the more likely it will be able to establish a national market. generalists will find it more difficult.
great examples of when local firms can develop a national practice:
- they do business valuations and litigation support, ideally in a specialized industry. i know a firm that has a very large national litigation support practice in lawsuits involving cpa firm audits.
- they have a technology consulting practice.
- several dozen local cpa firms have a specialty in fast food franchises; their client bases are national.
- partners relocate to retirement-minded areas to develop a client base and eventually retire there. for residents of northern states, florida comes to mind.