06/14/2021 | News release | Distributed by Public on 06/14/2021 11:21
With many models to choose from, firms must consider a wide range of possible factors when drawing up a partner compensation scheme. Regardless of which model fits best, success will depend on regularly assessing and refining the arrangement to meet the needs of the firm and its partners.
Every small- and medium-sized practice (SMP) needs a compensation model that is agreeable to all partners in the business. However, finding a suitable compensation model is a complicated task.
Many articles aim to demystify this part of practice management. As highlighted in a CPA Practice Advisor article on small firm challenges with partner compensation, regardless of the system being used to allocate income, at the end of the day, each partner has to look the others in the eyes and say 'I'm OK with our final comp numbers. They are fair to all of us. Let's move on'.
Within IFAC's 'Guide to Practice Management for Small- and Medium-Sized Practices', Module 2 illustrates the benefits and drawbacks of different types of partnership, while Module 4 deals with general staff compensation models. However, further advice on how partner compensation can be managed may be helpful because of the challenges in forecasting future practice performance and hence, allocation of profit sharing and the major issue of goodwill when joining an existing partnership.
Others suggest a compensation structure covering base compensation, incentive pay and ownership distribution (using different ratios) to ensure a sustainable practice that can also incentivize the partners in an equitable manner. The incentive pay within such structure will also be able to encourage desirable behavior, which is essential when firms are formulating an effective quality management system internally.
While measurement of a partner's assignment-specific productivity is important, the firm should not lose sight of the intangible contribution that a partner may bring to the firm. In fact, CPA Trendlines list 26 such attributes, not necessarily in the order of importance. The challenge is always in how these attributes are to be quantified and agreed upon by all partners.
CPA Australia has recently identified new trends, such as partnership models that do not require an incoming partner to purchase equity in the firm or where a new partner does not have to buy goodwill when joining an existing practice. These arrangements often combine with an outgoing partner not being able to cash in his/her share of the equity / goodwill when leaving or retiring from the practice - a 'zero-in, zero-out' model.
During a recent session of the IFAC Small- and Medium-Practices Advisory Group (SMPAG), the issue of how partner compensation can be used as a strategy to attract talent at the partner level was discussed. These are some of the suggested factors to be considered when formulating an equitable partner compensation scheme:
There is no magic solution. Many of the partner's compensation formulas will need to be constantly refreshed and refined if the firm is serious about attracting and retaining the right partners into the leadership team. It is important for the firms to remain agile and able to adapt as the need for the firm changes with the development in the marketplace and the profession in general.