if the executive and compensation committees aren’t one and the same, they at least should have heavy overlap.
by marc rosenberg
the role of the managing partner
does compensation motivate partner performance?
i’ve done a lot of research on this over many years. the short answer: yes, money motivates performance, but it’s often not the best motivator.
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the managing partner can best impact partner performance by the following:
- clarifying partners’ goals and expectations and holding them accountable for achieving them.
- coaching and mentoring. actively helping the partners achieve their goals.
to motivate most effectively, managing partners use compensation in conjunction with, never instead of, the above. they are careful to link rewards to performance.
there is a crowd that believes that people cannot be motivated, that they must motivate themselves. i say hogwash. if it’s made crystal clear to a partner that certain specific aspects of performance and behavior are encouraged and rewarded and others not only are discouraged but have meaningful consequences for transgressions, a partner would have to be a fool not to be motivated by this. a few years ago, i polled managing partners across the country and they roundly agreed that partners can be motivated.
biggest obstacles to using compensation to motivate
- affluence. depending on the size, market and quality of a multipartner cpa firm, equity partners’ annual income averages between $350,000 and $800,000. this is higher than almost anyone else in the world earns. it’s almost always higher than partners’ parents earned. it will always be difficult – though not impossible – to motivate affluent people with more money.
note that while it may be difficult to motivate partners with a higher income to better their own lifestyle, it almost always works as a motivational tool when they compare their own income to others’.
- lack of accountability. if partners are handsomely rewarded despite subpar performance and routine transgressions of the firm’s core values, policies and expectations, then compensation will not be an effective motivator. this goes double when the firm’s managing partner is unwilling or unable to hold partners accountable.
these are formidable obstacles, but they can be overcome. and that is the job of the managing partner, albeit a difficult one. the job is to push partners to achieve that which they cannot or will not do by themselves.
overarching goals for partner compensation system
all of the managing partner’s overarching goals for the partner compensation system are interrelated.
- to reward and motivate partners for their overall impact on the firm’s growth, profits and overall success
- to get partners to do what the firm needs them to do
- to link partners’ performance with their compensation
- to devise and administer a system for allocating income that the partners perceive as fair and transparent
- to achieve partner accountability
highest-earning performance attributes
the managing partner must have a significant impact on partner income allocation. not only must this be true in practice, but partners should clearly see the managing partner’s hand in setting their compensation. otherwise, they will have little motivation to listen to what the managing partner says.
the managing partner must make the firm’s expectations clear for all partners, including unique goals that are customized to each partner.
here are the partner performance attributes that generally result in partners making more money:
- demonstrating leadership; getting others in the firm to follow
- achieving their goals
- making a significant impact on staff, helping them learn and grow
- contributing to the firm’s revenue growth and marketing; bringing in business; moving clients upscale; developing referral sources.
- growing one’s client responsibility, regardless if one’s client base was self-generated or inherited
- practicing teamwork; partners work together to service clients, as opposed to operating as lone rangers
- being proficient at basic production metrics, such as realization, wip and a/r management
- providing strong client service and loyalty; retaining clients; growing the clients
- being a good citizen; partners live and breathe the firm’s core values, follow the firm’s policies, communicate well and are accountable and trustworthy
- helping the firm achieve its vision and strategic plan goals. the cemetery of great cpa firm strategic plans is littered with organizations that failed to implement. the biggest reasons for this failure are that the plan was never linked to what the firm needed the partners to do and there was little or no accountability. it’s the managing partner’s job to ensure that the firm’s strategic plan and vision are never buried in this cemetery.
seven partner compensation systems
virtually all cpa firms use one of seven systems for allocating partner income. the chart below shows the use of these systems by size of firm. the data is taken from a recent edition of the rosenberg map survey.
| compensation system used | size of firm (number of partners) | all firms | ||||
| 2 | 3-4 | 5-7 | 8-12 | 13+ | ||
| comp committee | 6% | 12% | 24% | 59% | 71% | 30% |
| formula | 22% | 35% | 37% | 19% | 11% | 29% |
| paper & pencil | 3% | 3% | 5% | 0% | 3% | 3% |
| ownership percent | 3% | 4% | 9% | 6% | 5% | 6% |
| mp decides | 16% | 14% | 9% | 12% | 3% | 11% |
| pay equal | 22% | 7% | 1% | 5% | 3% | 6% |
| all partners decide | 28% | 25% | 15% | 0% | 3% | 15% |
if you are looking for comprehensive definitions of these systems, including the compensation committee, and everything you ever wanted to know about partner compensation, i recommend two books that i wrote on these subjects:
compensation committee: the system of choice
as the chart shows, the cadillac of all systems for multipartner firms is clearly the compensation committee:
- larger firms (those with eight or more partners) prefer the compensation committee to all other systems by a wide margin.
- smaller firms (those with four or fewer partners) don’t use the compensation committee very much, primarily because they aren’t large enough to have a committee.
why is the compensation committee the system of choice for larger firms? more than any other system:
- it gives the compensation committee the most freedom and flexibility to use good judgment and common sense in evaluating partner performance and linking it to income. smaller firms use formulas because they believe numbers never lie. larger firms know better. they understand that standard finding minding grinding metrics don’t tell the whole story and that sometimes numbers can be misleading.
- it aligns the firm’s strategic plan and vision with the partners’ contributions to implementing these goals. to be frank, smaller firms’ strategy is as simple as it gets: bring in business, do the work, bill and collect. that’s why formulas appeal to small firms.
larger firms subscribe to the “if you build it, they will come” strategy (borrowed from the movie “field of dreams”). first, build a strong firm with great management, strategy, staff development and marketing. then, the revenue and profits will come.
- it achieves a balance between tangible and intangible performance factors.
- it places the compensation and evaluation decisions in the hands of credible “jurors” who give the partners a degree of comfort that would not be possible if only one person, the managing partner, had the sole responsibility.
- it enables the firm to avoid using formulas to allocate income. formula systems are more individual-oriented and less firm-oriented. a compensation committee minimizes the partners’ ability to game the system, one of several huge flaws in compensation formulas.
the managing partner, as chair of the compensation committee, should make sure that all of these benefits are realized.
what should the managing partner do as compensation committee chair?
- make the compensation committee a year-round activity, not just a “jury” empaneled at year-end for a few hours of meetings. this is why it’s so important for the executive and compensation committees to be one and the same or at least have heavy overlap.
- at the beginning of the year, the managing partner, perhaps with one or more compensation committee members, should meet with every partner to create a short list of high-impact goals and expectations. partners should be crystal clear on which aspects of their performance will likely increase their income and which will reduce it.
- periodically during the year, the managing partner should meet with each partner to review their progress on meeting goals and see what can be done to help the partner be successful. this is critically important and is the most common area in which managing partners struggle.
- at the end of the year, each partner should have a performance appraisal session. results should be in writing.
- after the income is allocated, the managing partner should meet with each partner to discuss how their compensation number was determined, what increased it and what held it back.
open vs. closed system
every managing partner should try to move the system from open to closed because, quite simply, it enables the compensation committee to do the best job it can do. the reason for this was astutely given to us by andrew grove, former chair of intel:
“if people are concerned about their absolute level of compensation, then they can be satisfied. however, if their focus is on their standing versus others, then they can never be satisfied.”
in an open system, compensation committee members tend to allow their decisions to be influenced by the predicted reactions of certain partners when they see their income numbers in comparison to those of other partners.
randy nail, managing partner of $50 million hogan taylor, said, “when we merged in a large firm, we moved to a closed partner compensation system. we get greater unity when partners stop comparing their income to each other’s. if i can’t have a closed system, i won’t be mp.”
moving from an open to a closed system is never an easy sell. the firm may have operated with an open system for many years, and it’s hard to take this away from partners who view it as a basic right of being an owner of a business. the managing partner must be up to this task.
ideally, a firm with a true managing partner uses the compensation committee system for allocating partner income. one of the strengths of this system is that it gives the firm flexibility in recognizing the performance of all partners, the special and unique roles they play, and how well they achieve their goals. different partners have strengths in different areas, all of which serve the firm well.
the biggest factors in managing partner compensation should be the following:
- how well they managed the firm.
- achievement of their goals.
- accomplishments such as
- orchestrating a successful merger
- hiring a high-performing partner from another firm
- installing a new practice management system that results in fewer write-offs
- challenging partners on their wip write-offs, thereby increasing realization
- the firm’s revenue growth and profitability.
- to the extent that managing partners have client responsibilities, certainly how much business they bring in and the size of their billing responsibility must be factors. however, the compensation committee must understand that managing the firm is more important than posting strong production metrics. managing partners should never be penalized for lower production numbers. in fact, a strong case can be made for rewarding lower numbers because it means the managing partners have delegated clients to others in order to free up their time for managing the firm.
there is no hard and fast rule that says the managing partner should be the highest-paid member of the firm, though he or she often is, or close to it. it’s up to the other partners and the compensation committee to decide the value of the managing partner’s contributions to the firm.
a question that many firms ask is this: during the compensation committee’s deliberations, when the managing partner’s compensation is on the table, should the managing partner participate in the discussion or step out while the other compensation committee members make the decision? in my experience, most managing partners stay in the meeting, but there is no hard and fast rule on this either.
managing partners’ compensation when they leave the job
when a managing partner steps down or is forced out, the compensation problem is obvious, regardless of whether the firm uses the compensation committee or a formula to allocate income:
- prior to becoming managing partner, he or she probably had a substantial client billing responsibility accompanied by a decent number of billable hours. before assuming the managing partner job, this person likely delegated some clients and billable hours to other firm members to free up time to perform managing partner duties.
- while performing the managing partner job, it’s likely that the managing partner shed more clients and billable hours.
- after stepping down, a former managing partner may need to build up his or her client base and billable hours in order to maintain or increase income. this takes time and requires revving up relationships with contacts that haven’t been nurtured as actively as in the past.
many firms address this challenge by guaranteeing the former managing partner’s income in certain ways. the guarantee may last for as long as four or five years. the guarantee may be a fixed amount or a percentage of total income. the latter enables former managing partners to increase their income.