solve the partner comp problem

now is the time to take a hard look at your partners and your compensation model.

by domenick j. esposito
8 steps to great

let’s take a deep dive into both a firm’s partner mix and its compensation model.

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in a “good to great” research study on high-performing organizations performed by jim collins, it was concluded that the method of compensation, as a causal factor for high and sustained performance, is largely irrelevant. the study concluded that whatever system is in use, it simply must be rational and equitably managed and that high sustained performance is largely the result of doing many things well.

collins emphasizes that the key to high performance is having the right people on the bus.

“the purpose of a compensation system should not be to get the right behaviors from the wrong people, but to get the right people on the bus in the first place, and to keep them there.”

– jim collins

with that said, i ask that you visualize your partner group fitting into a bell curve and:

in quartile #1, you have your stallions – the very high performers who produce outstanding contributions year after year. these partners want to and know how to win. their contributions probably are a combination of excellent client relationships, consistent new business development in excess of $250,000 a year, mentoring younger staff or firm administration. your stallions usually get large year-end bonuses and generally are the firm’s highest earners.
in quartile #2, you have your solid performers – reliable team players who do their best and are sincere in furthering the success of the firm. these partners probably are a combination of seasoned equity partners and a number of up-and-coming nonequity partners. they are worth every penny in compensation.
in quartile #3, you have journeymen – every firm has them. these partners give you a solid performance and do what they can to further the firm but generally act, look and feel like employees – not owners. these partners usually aren’t lead partners on client relationships because they are ineffective and only occasionally bring in some new business.
in quartile #4, you have poor performers. some of these partners no longer have gas in their tank; some never had gas in the tank and should not have been promoted to partners in the first place. some have been with your firm for a very long time. as a result, it is difficult to deliver the message that they are probably better off seeking employment elsewhere. waiting to deliver tough love later rather than sooner usually isn’t a good thing and more than likely makes a bad situation even worse.

does your firm have the right partners on the bus? every cpa firm needs more than 50 percent of its partners in quartiles #1 and #2. if your firm doesn’t, there is work that needs to be done before you can achieve satisfactory growth on the top and bottom lines. this is particularly true if your firm has more than 50 percent of your partners in quartiles #3 and #4 who probably don’t care what your compensation model is as more compensation usually isn’t much of a driver for them.

if your firm doesn’t have the right mix of partners, it is incumbent upon you to change the partner mix sooner rather than later. easier said than done but if you don’t, it is costing you today and will continue to cost you in the future – no matter what your compensation model looks like!

for purposes of this perspective, let’s assume that your firm does have the right mix of partners but, nevertheless, isn’t clicking on all cylinders as the market becomes tighter, competition gets more intense and billing rate pressures continue to increase. if this is the case at your firm, the year 2018 is probably the time for you to take a hard look at your compensation model to see if there is a better way to motivate your partners by getting your compensation philosophy right. this, in turn, will enable you to get partner compensation right to ensure continued financial prosperity and perpetuity.

i suggest that your 2018 compensation model needs to:

support a firm’s core values and strategic decisions
promote a “firm first” culture that rewards collaboration
drive industry specialization (the key to a value proposition that differentiates your firm) into the firm’s dna
emphasize growth on the top and bottom lines at satisfactory rates (say 6 percent to 8 percent per annum) through both cross-sells (low-hanging fruit) as well as new originations
contain enough transparency. there are essentially three forms of partner compensation disclosure. each can be effective under the proper circumstances. they are:
- an “open” system with great transparency and accountability. the negative is that it focuses on peer-to-peer comparisons and creates a lockstep type of environment that is not healthy.
- a “closed” system that more readily rewards partners who are exceeding expectations without concerns that others might feel slighted. the closed system also offers more flexibility when pursuing lateral hires who often join firms from the outside with a premium compensation amount that needs to be amortized and hopefully pays dividends to all over time. this system works best when there is a high level of trust in leadership.
- a “modified closed” system that does not disclose every partner’s compensation but, instead, discloses average partner compensation, median partner compensation, and highest and lowest partner compensation amounts. the “modified closed” system also permits compensation disclosure for each member of the executive committee and senior management. some firms indicate that partners may review leadership’s compensation only in the managing partner’s office and may not copy or remove the disclosure.
contain the right mix of qualitative and quantifiable measures. ideally, the compensation model needs to be holistic by evaluating a partner’s overall body of work or contribution to the firm including:
- mentoring younger staff, firm management and community involvement
- client originations, cross-sells, hours managed and hours billed
have the perception of fairness and a lack of cronyism. these provide the bases for a model’s reputation as a solid system, one that partners understand and respect. perception is the foundation for a quality partnership that is built upon trust in the firm’s leadership. when your firm says certain things matter and they actually do matter when you evaluate and weigh both qualitative and quantifiable measures in arriving at partner compensation, it goes a long way in establishing the integrity of the compensation model and those who administer it.

if you think that the year 2018 might be the year for you to take a hard look at your partners, i encourage you to do so with compassion and conviction. one of the hardest responsibilities for a managing partner is to deliver tough love to a partner who isn’t living up to expectations and something must be done about it.

if you think that the year 2018 might be the year for you to take a hard look at your compensation model, i encourage you to:

have a large number of partners provide input regarding the existing model and what the firm needs in the future. to build buy-in that creates an environment that is open to real change, have those partners take a shot at drafting the new compensation model.
keep it simple (“kiss”). many firms have formulas to slice and dice data in arriving at partner compensation but at the end of the day, no one truly understands how to win.
correlate the level of contribution with the level of pay to give credibility to “merit” and “pay for performance.”

remember, there isn’t a perfect compensation plan. the world of public accounting is changing rapidly and the areas of compensation emphasis in the past probably aren’t the same areas of emphasis today and tomorrow.

i have always believed that if you showed me your compensation model, i could tell you what your firm’s strategy was. if you did that simple analysis at your firm, would you conclude that your firm strategy and partner compensation philosophy are aligned? if not, 2018 is your year to tackle this challenge.

posted on december 30, 2017

dom esposito

about the author

domenick j. esposito was the ceo of grant thornton, vice-chair of bdo, and national growth director at cohnreznick.

he is the author of "8 steps to great: the eight essential strategies driving success at the world's largest cpa firms. and how to apply the lessons at firms of all sizes," published by 卡塔尔世界杯常规比赛时间.

a life in public accounting

in 2016, esposito, then a former ceo of bdo, moved from a 46-year career in public accounting into the next phase of his professional life – consulting to cpa firms, launching a boutique advisory firm, esposito ceo2ceo, that provides advice to ceos, managing partners and other senior partners of cpa firms focused on the mid-market throughout the u.s.

with the launch, esposito authored “8 steps to great," a guide for ceos, managing partners, and other senior partners on how to move their firm to the next level.

cohnreznick national growth director

esposito was one of the most qualified individuals in the country to advise cpa firms on growth and profitability. through 2015, he was national practice & growth director and an executive board member of cohnreznick, llp, a mid-market sustainable brand and the tenth-largest cpa firm in the united states. he oversaw cohnreznick’s go-to-market industry specialization and consulting and advisory service lines. he was also intimately involved in the firm’s mergers and acquisitions and strategic and tactical activities for its public company and capital markets initiatives. dom joined the predecessor firm of j.h. cohn in 2002 as the chief operating officer and executive board member.

dom was also an independent director of ethan allen interiors inc. for several years (through 2014), dom was a member of the nasdaq listing and qualifications committee to the organization’s board of directors. he formerly served as the leader of the new york state society of cpas committee for large and medium-sized firms practice management. he also was an adjunct accounting professor at c.w. post/long island university.

bdo and grant thornton

through october 2002, dom was vice chairman at bdo, a mid-market sustainable brand and the seventh-largest international accounting and consulting firm in the u.s., with almost 50 offices and 3,400 employees. during his brief time with bdo, he was responsible for the alliance distribution network (at the time consisting of over 80 cpa firms, 10 law firms, and 25 consulting firms). he was also responsible for attracting and servicing a number of clients.

from 1979 through 2001, dom was with grant thornton, another mid-market sustainable brand and the sixth-largest international accounting and consulting firm in the u.s., with over 50 offices and 4,500 employees. he joined grant as an audit manager, became a partner in 1981, led the long island office from 1984 to 1986, became assistant managing partner of the new york office in 1986, and from 1988 to 1999, led the new york office. in 1999, esposito became a regional managing partner and for two years, through 2001, was the firm’s chief executive officer.

cpa, partner, mba, leader, influencer, media celebrity

between 1996 and 1998, and while he was ceo, esposito was on the partner board and was also on the board of grant thornton international – the worldwide umbrella organization. in these capacities, he developed strong experience in strategic thinking and execution, international relationships, corporate governance, partnership matters, branding, expense control, client relationships, and new business development.

as ceo, he took grant thornton to record earnings, consummated the largest line-of-business sale in the firm’s history, developed a major joint venture with axa financial, and made the largest practice acquisition in the firm’s history. from 1969 to 1979, esposito was with price waterhouse (now pwc), servicing ibm when he was promoted to manager in 1976.

dom was a cpa, has been quoted in national and local media, and has appeared on radio and cable tv.

esposito also testified before the securities and exchange commission.

he received his m.b.a. from st. john’s university and his b.s. from ferris state university. accountingtoday, one of the leading trade journals for the accounting profession, named esposito one of the most influential people in the profession for two consecutive years.

he passed away in 2021 at the age of 74.

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