how do you get it right at your firm?
by kristen rampe
partner comp: art & science
there are many reasons for a sizeable spread in partner income at a cpa firm. for example, at a firm with both a founder nearing retirement and a first-year partner, the spread would be wide. some firms are the opposite, with two to four founding partners agreeing to share all profits equally. there is no spread there.
more on partners: thirteen traits of partners you’ll want to keep | six rules for keeping partners happy and productive | five keys in compensating new managing partners | top 20 tough choices for the partner comp committee | voting on ownership basis? three better methods | what partners do and don’t deserve | tell potentials what partnership takes | five steps to transition to partnership
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for most multipartner and multigeneration accounting firms, the situation gets more complicated. you’ll have some high performers and some who are on cruise control. you’ll have ones contributing notably more dollars to the bottom line and more to future leaders’ development.
but what about two partners who contribute relatively the same? should their income allocation be similar? how similar?
earnings gap philosophy check
in our work with firms on partner compensation, we often ask this question:
assume you have two line partners in the same department who manage a similar amount of billings and realization and have skills in business and people development. both have a history of similar performance over their tenure as partners. the difference is that one has been a partner for five years; the other, 20 years. should they be awarded the same compensation? different? how different?
does this exact scenario exist? no. do you have questions about what else they do for the firm? of course. but to explore the comp gap philosophy at your firm, assume these two people are “the same,” except for the number of years of service as a partner.
this is a difficult question for many cpa firm owners. current-year performance is essentially the same. but there has been historical value creation over time. what’s that worth? what, if anything, should the partner be paid in the current year for that value? how would the firm determine that value?
like all things partner-comp, there is no one right answer. what matters is what aligns with your firm’s values, and what’s competitive in the market (assuming you wish to attract and retain partner-level talent with longer career runways). given current changes in the industry with private equity and fair value models, and less loyalty-at-all-costs mentality demonstrated by newer partners, optimizing your compensation plan may be more important than in the past.
industry data
considering partners at all performance and seniority levels, earnings gaps vary widely.
below is data for equity partner compensation, excluding firms that pay all partners equally.
the rosenberg survey (available here), ratios of highest to lowest partner compensation:
firms $5 million to $10 million
-
- range 1.1 to 6.9
- median 1.9
- average 2.3
firms > $20 million
-
- range 1.3 to 13.7
- median 2.9
- average 3.5
example dollar ranges might look like this:
-
- for a wide-gap firm: $4 million (highest paid) to $400,000 (lowest paid)
- for a narrow-gap firm: $700,000 (highest paid) to $440,000 (lowest paid)
average income per partner (ipp) in the 2023 rosenberg survey was $653,000. it’s important to note that although firms with larger gaps tend to have higher ipp, plenty of well-above-average ipp firms have a gap below the median.
2024 inside public accounting survey (2023 data), ratios of highest to lowest partner compensation:
firms $30 million to $75 million
-
- range 1.2 – 33.9
- median 3.1
- average 4.0
firms > $75 million
-
- range 2.4 -52.8
- median 4.9
- average 8.4
the ipa survey encompasses much larger firms, though it does not include the big 4. there are some clear high-end outliers in this data set, as evidenced by both the ranges and the increase in average above median compared to the other data groups. nonetheless, larger firms, which are typically more profitable and have more focused leadership roles (ceos running large professional organizations), have higher spreads overall.
how to get the gap right at your firm
so, back to our initial question: what’s the right spread? overall ratios in the industry are shown above, but even the ratios vary widely. a gap of 2-3 times is popular among small to midsized firms, with a ratio of 4-5 common at larger firms.
ultimately, those making comp decisions at your firm should, as a part of their income allocation process, review the pay gaps for partners and ensure they feel appropriate based on individual partner performance and value. for some, the gap should be narrow or working in that direction. for others, the gap may need to widen to properly recognize contributions to the firm’s value and bottom line.
if your gap is zero, is that still effectively serving your firm? if your gap is 15:1, is that still effectively serving your firm?
other questions to consider
if you had a quick answer to our opening question about the 5th-year and 20th-year line partners who contributed equally, here are some advanced scenarios to consider:
- what about a 10th-year partner and a 25th-year partner? what does the gap look like in that scenario, all else being equal?
- compare the 5th-year home-grown partner and a lateral hire who was a partner for 20 years at their prior firm but didn’t bring over a significant book of business (instead replacing a retired partner’s work). how much is “market value” for those extra years of experience vs. creating long-term value at your firm? remember, they are both line partners with similar production levels and similar contributions to people and business development.
- how do you handle partners who are stepping back mid-career? are they still serving a reasonable client base but no longer achieving as much as they did in the past in terms of business development or strategic goals?
how does your firm approach income allocation when you have partners with similar performance? do you feel the spread in comp at your firm is fair? can you articulate why to incoming partners? thinking through questions like this can clarify your income allocation system, which everyone appreciates.