Partner's Report for CPA Firm Owners

Although there are a number of workable partner compensation approaches used by CPA firms, no one size fits all. Your firm’s size will be a factor in whatever approach you choose, and you will probably find your firm revisiting its approach periodically.

Now, when so many firms are working on upgraded strategic plans that include succession, restructuring into a "one-firm" approach, and other central changes, it is also a good time to consider how you and your fellow owners should be paid.

"Should" is the operative word, since it is a rare firm that has 100% of its owners who are 100% satisfied with the partner-compensation program 100% of the time. However, if you and your fellow owners can shoot for "happy most of the time," and achieve it, that is an outcome that will keep all of you moving forward personally and in realizing the firm’s goals.

Partner-compensation plans—and the processes and changes most firms go through in adjusting and readjusting them—were discussed during a recent conference call of The Advisory Board (www.theadvisoryboard.net) consulting group.

Types of partner-compensation plans. Gary Boomer of Boomer Consulting (www.boomer.com) outlined the options that CPA firms have now for their partner-compensation plans:

• Equal: This is an easy choice, but Boomer suggests that it "promotes mediocrity" in larger firms.

• Formula: It can work, but can also be complex.

• Spreadsheet: Boomer says this approach is based on the "paper and pencil method."

• Managing partner’s decision: The managing partner sets the compensation, in a firm that is CEO-run.

• Compensation committee: A structure that suits large firms best, Boomer noted, with certain provisos: Owners have to trust the committee members, and there must be good communication between the two. It also helps if the members of the committee are elected by the other partners, and the managing partner is a permanent member of the committee.

• Points/units: Used in very large firms, points or units are earned in ownership, and compensation is based on an owner’s total.

• Balanced scorecard: Relatively new to professional-services firms, this mode can work in a firm of any size where there is proper leadership and governance. Balanced scorecards (BSCs) rely upon the firm’s determining what elements it will reward and then ranking individual partners on their performance of these elements to come up with the compensation amount.

It is important to remember that no one plan is right for all firms. What matters most in any compensation program, advised Boomer, is that owners perceive it to be fair; that they trust the person administering it; that there are regular and honest reviews and communication; and that the firm has a vision that supports the plan.

The merit-based approach. Blum Shapiro (West Hartford, CT) uses a system that combines individual partner planning with rewards for achievements. It is a slow process to institute, but the rewards can be great, noted Carl Johnson, managing partner, who was a speaker at the Advisory Board audioconference. The firm has two offices, with 165 people, including 18 equity partners and six contract partners. It projects billings of $25 million for 2006.

Blum Shapiro’s strategic mantra: "Do everything to motivate partners and nonpartners to be profitable." Compensation is based upon merit, which is proving a powerful motivator. To make it work, however, the firm has spent much time and effort in honing its structure and governance.

"Long-term strategy is important, but you need short-term goals to get there," Johnson said. "You need a positive, strong culture to keep people in public accounting. You need work/life balance."

The firm’s current initiative was launched about eight years ago, when the owners decided it was time to establish evaluation and accountability for the partners. It set up a four-person compensation committee that includes the managing partner and three others who are elected. Two of those members are from the firm’s executive committee.

Partners are paid based on their achievement of both objective and subjective measures.

The strategic plan sets the firm’s mission, vision, values, and strategies, supported by partner actions. The firm’s goals include achievements in revenue per equity partner and per employee, net income per equity partner and per employee, chargeable hours, and realization. Its strategy is to achieve controlled profitable growth, recruit and retain strong talent, deliver quality client service, and maintain stable stewardship of the firm.

"It’s important to drive hard numbers, so that profits go back into the firm" Johnson said. "Hard numbers" include chargeable hours, realization by partner, managed billings, work done on accounts and not on partner’s run, and carrying of WIP and A/R, timesheets and monthly billings.

The hard numbers are used for 50% of the annual bonus pool. A quarter of the pool is based upon new business and cross selling, and the remainder is made up of diverse achievements, some intangible. These can include technical and industry knowledge, developing new contacts, recruiting and retention, CPE and speaking engagements, firm morale and activities, mentoring and evaluations, client transition, and firm management and leadership. Other intangibles that may be rated positively or negatively include starting a new niche, merger activity, steps to improve something, partner comments, negative behavior, upward evaluations, and client surveys.

The program is beneficial, even though it can never be 100% fair, Johnson explained. Having partners believe it to be "somewhat" fair is enough to ensure that they buy in. The realization that their pay is directly linked to achieving firm goals is also a great convincer, although it is a slow process to sell the program to all. "It’s a long, multi-year process. But if you actually hit the pocketbook, it can make a difference," said Johnson. In fact, the average partner compensation at Blum Shapiro has increased more than 100% in the past seven years. Also, staff like the fact that partners are accountable. The program attracts talent and everyone focuses on client service.

The team approach. The Bonadio Group (Pittsford, NY) has tried just about every owner-compensation approach as the firm has grown. Now with 200 people and 20 partners, the firm has settled on a structure of teams with goals and reviews for each, according to Thomas Bonadio, founder and managing partner, who also spoke at the Advisory Board audioconference. The firm has five team leaders, and goals are set for each team. Partners are reviewed for achieving preset goals and team leaders are polled for input.

This firm favors keeping partner compensation confidential from all except the partners involved with the compensation committee and the managing partner. With such a "closed" system, Bonadio pointed out, "the executive committee can make decisions that are good for the firm," without resentment among partners over compensation.

This holds true when partners are acquired in a merger, he continued. "We brought in two Arthur Andersen partners at a high level. This was a great boon to the firm, but there could have been animosity over it from other partners," said Bonadio, if everyone had known what the incoming partners were being paid.

The freedom to make the deal is critical for firms seeking to grow via merger, he emphasized, and it has helped in another recent merger for Bonadio’s firm. "If you don’t give them enough money, they won’t come. They’re giving up autonomy, so you need to give them a compensation commitment for two years."

Here are five lessons Bonadio says he has learned in almost three decades of trying out different compensation plans:

• There is no perfect system.

• Your firm’s size will dictate your system.

• Each approach has its weaknesses.

• At the end of the day, you must reward partners for doing the things that the firm wants to do.

• Maintain the basic elements of trust, fairness, communication, and "keeping it real."