Solving the Partner Compensation Puzzle: Start with this 35-item checklist. By Marc Rosenberg Author of “CPA Firm Management & Governance“ If you ask the partners, they will tell you that the most critical and sensitive aspect of CPA firm practice management is the allocation of partner income. Because of the sensitivity of partner compensation, firms change various aspects of their allocation system quite often. For this reason, the smart firms include wording in their partnership agreements on partner compensation that is very short and quite general. This way, the firm doesn’t have to revise the partnership agreement every time a change is made. It’s a complicated task. There are seven different systems in use today; three basic tiers; a couple ways firms are calculating bonuses, and at least a dozen other items to ponder and work through. Here is a checklist of decisions that the best firms are making to determine the compensation of each partner: * What compensation system will be used? * Managing partner decides each partner’s pay. * Compensation committee – a small number of partners determines the compensation of all partners. * Formula – an algebraic formula is devised to compensate each partner for various aspects of performance, primarily business origination, billing responsibility and billable time. * Paper and Pencil – each partner allocates partner income as he/she sees fit, the ballots are averaged and the result is how income is allocated. * Ownership percentage – income is allocated based on each partner’s ownership percentage in the firm. * Pay equal – income is split equally among all partners or mostly split equally. * All partners decide – all partners meet to discuss allocating the income to each partner. * Number of compensation tiers, how large each tier should be and who decides this: * The most common tiers are: i. Return on capital. ii. Base salary or draw iii. Incentive bonus or year-end distribution. * Alternatives for deciding the tiers and the amount of the tiers are commonly decided by: i. Compensation committee. ii. Vote of all partners. iii. Managing partner. iv. Executive committee. * Performance criteria used to evaluate and compensate each partner. * Extent that performance criteria for partners include intangibles. * If interest on capital, will it be paid on capital only or capital plus goodwill? * Role of ownership percentage, if any. * Role of seniority, if any. * If there is a base and a bonus: * Will the base be a draw on a final amount for each partner, with the “bonus” being a final distribution to arrive at each partner’s income number? * Will the base and bonus be independent of each other so that the bonus is a true incentive bonus? * If there is a compensation committee, how many members, how will they be selected, terms, limit of consecutive terms, etc? * Appeal procedures of compensation committee decisions, if any. * Approval of compensation committee decisions required by the full partner group, if any. * Link of compensation to strategic planning. * Formal written goals and extent that they will be linked to compensation. * Formal, written partner evaluations and extent they will be used to determine compensation. * Special impact of the MP on compensation, if any. * Mechanisms in place to prevent hoarding of clients and billable hours by partners to maximize their income. * Communications to partners regarding criteria used to determine their compensation. * For multi-office firms, what has the biggest impact on individual partner income: firmwide profits or local office profits? * Interoffice pricing. * Closed or open system? cpaclick/19dToCY
Posted on: Tue, 08 Oct 2013 13:09:14 +0000
Trending Topics
Recently Viewed Topics
© 2015