Partner Compensation: Is it Time To Review Your Firm's Model?

We all know that compensation alone has been proven not to be the ultimate motivator, but it can be a demotivator and can also highlight other concerns that may exist in your firm. This is certainly less of an issue when business is coming in during a robust economy and everybody is making money. But, that’s a different story when things get tough, as they have been for the past couple of years and organic growth is much slower.

Here’s what you should consider:

The draw or base.

Most of the firms I work with pay out between 50% and 75% of projected annual fixed compensation before bonus and through quarterly or semi-annual payments bring the total draw to between 80 and 90% of an estimated annual amount. This is a fair formula in my view.

Year-end distributions and bonuses.

Are those paid out on a timely basis? Some firms pay everything out by 12/31 while generally holding back some funds for capital and/or contingencies.

Other firms pay out the year end bonuses three, six or even twelve months after the year end. That’s a very conservative approach. I think that firms should pay out as much as they conservatively can on a current basis.

An open or closed compensation system.

More and more firms have closed compensation systems, so partners not involved in the compensation setting process do not know what other partners earn. The reason more firms have closed systems is to reduce what can be what is viewed as unproductive discussions about why partner X made more than partner Y I find firms that have well defined compensation plans don’t have any real issue with the closed system. Firms that have a closed system generally have a process for reviewing the decision making process with individual partners.

The factors that are evaluated in setting compensation:

• Does your firm have a democratic or fair process?
• Is there a strategic plan? If so, is compensation aligned with that?
• Is there favoritism, politics or nepotism? Many firms I work with have explicit no nepotism policies.
• Are partners compensated on current versus past results?
• Is there an overemphasis on billed hours, realization or new business development in the compensation process?
• Is staff training, mentoring and other things that enhance retention valued?
• Is quality control valued?
• Is talent acquisition valued?
• Is a partnership spirit valued such as sharing work, setting a great example for staff?

How could you be more of a contributor in this process at your firm? One thing you could do is suggest consideration of alternative compensation models. (I do know this would be very difficult for a newer partner). One common method is the scorecard approach, where each partner has agreed upon goals based on their role in the firm and different weightings are assigned.

Here’s your action plan to help evaluate whether your firm has the right compensation plan:

• Is it consistent and transparent?
• Is there a process for questioning the results?
• Is it democratic i.e. not biased by overemphasis on certain factors?
• Is it generous enough in current period payouts?

If you’d like to discuss this or any other issues related to your practice or career, please don’t hesitate to contact me. My direct line is (212) 490-9700 or you can email me here. Absolute confidentiality always assured.

- Robert Fligel, CPA