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adding new partners: 19 reasons to choose between equity and non-equity

the ways they differ.

by marc rosenberg

it’s worth exploring the reasons for equity partners in great detail.

here are the key points:

  1. new partners deserve the promotion to such a great extent that the firm can’t afford not to admit them to the ownership ranks.
  2. the firm needs to expand its partner ranks.
  3. the firm needs to replace a departed partner.
  4. it rewards longtime managers who have solid client service skills.

more: what firms should address in partner agreements | six systems used to determine partners’ goodwill payments | fifteen steps to new partner buy-in | four philosophies for managing a cpa firm | public accounting as a business, 101 | 16 steps to creating a partnership path | six ways new partners differ from managers | the four essentials for every new partner
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  1. it’s part of a succession planning strategy.
  2. partner promotions send a strong message to the staff.
  3. it energizes the partner group.
  4. it’s part of a merger strategy.


reasons for adding new non-equity partners

  1. non-equity partner is often a partner-in-training position. the firm recognizes that a manager has the talent and skills to function as a partner. it provides the non-equity position so that both the firm and the partner candidate have an opportunity to work with each other to determine if the individual is a good fit in the firm’s equity partner group. at many firms, it’s perfectly acceptable to be a permanent non-equity partner.
  2. it enables a firm to recognize the stature and contributions of a valuable, longtime staffer who does not meet all the criteria for being a partner (usually bringing in business is lacking).
  3. it’s a staff retention tactic. certain longtime staff who are now managers reach the point in their career when they feel that if they don’t make partner, or if they can’t call themselves “partner” to the outside world, including friends and family, then it’s time to move on. years ago, firms made the mistake of promoting these valuable people directly to equity partner. but firms have been finding that the non-equity position is a good position so that these valuable people can now be called partners.
  4. some firms, usually with just a few partners, have built up their compensation and the firm’s value to such a high extent that they simply don’t want to share it with others who don’t produce at their high level. so people are made non-equity partners and compensated very well, perhaps better than other firms’ equity partners.
  5. for lateral hires, it provides both sides an opportunity to test each other out before fully committing to an ownership arrangement. the same applies to merged-in partners.

equity vs. non-equity partners

characteristic non-equity partner equity partner
1.is the person a driver in the firm? to some degree often
2. expected to bring in business? to some degree; encouraged but often not required often
3. manage a certain size of client base? usually several hundred thousand dollars in billings, some of it delegated to non-equity partner often $1 million or more
4. work on clients of other equity partners? some; varies from firm to firm very little
5. technical skills? high level; new non-equity partners still may need help high enough that a second review is seldom needed
6. is staff-level work delegated? more than as manager but delegation not always possible almost always
7. client relationships? good relationships but sometimes secondary to equity partner relationship strong relationship; always the primary partner
8. buy-in? no yes
9. liability? no yes
10. held out as a “partner”? yes yes
11. attends partner meetings? yes, but excused when confidential issues discussed yes
12. a vote? not legally, but fully allowed to influence others’ decisions yes
13. determination of comp? set subjectively by management, just as for staff fits in with the firm’s equity partner comp system
14. participate in the firm’s profits? not directly, but usually eligible for bonus based on non-equity partner’s impact on the firm’s overall success, including profitability always
15. receive w-2? almost always, paid as a salary no, unless firm is a corporation
16. participate in the firm’s retirement benefits? rare, but a growing number of firms are beginning to award buyouts to non-equity partners, albeit at lower amount than equity partners always
17. access to partner comp data? usually not yes, but if a closed comp system, access is limited
18. access to confidential data: financials, operating stats, etc. usually, but not partner compensation data yes, except certain partner comp data if a closed system
19. sign client reports? some do, some don’t; aicpa ethics says the guideline must be included in the firm’s quality control policy yes

 

 

 

 

 

 

 

 

 

 

 

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