The Job of the Managing Partner – Part 4

In our first three columns focused on the managing partner, we covered:

• Managing Partner (MP) definition, considerations and Roles and Responsibilities
• Roles and Responsibilities of the Board of Partners versus that of the Managing Partner
• Generic Partner Group Roles and Responsibilities (or Partner Board)
• Why the MP is the One Charged with Implementation and Accountability
• The role the compensation committee might play in accountability
• Electing, the term and dismissing the managing partner
• Notice required when the managing partner is the partner getting ready to retire

In this final column, we will pick up our discussion by covering how to compensate the management partner and a few other related issues.  Here is the general definition:

The managing partner should have a compensation plan unique to that position
focused on carrying out the strategic and tactical objectives of the Firm. While
there can be some individual performance goals assessed, the bulk of the
managing partner’s incentive package and focus should be on overall firm
performance.  The key here is that you don’t want an incentive system for the
managing partner that over-focuses on individual goals because the real value of
this position is driving firm-wide change.

The most common question we get when we start into this topic pertains to “How much of a book should the managing partner maintain” while serving in that role?  The question is common because most partners think, “we can’t pay this person if their own personal production doesn’t product whatever they are making.”  Well, this mentality flies in the face of successful businesses everywhere.  If you are in a sales organization, that attitude would say that you shouldn’t have a sales manager unless he or she was earning their own keep through their personal sales quota.  Or if you are running a manufacturing line, the theory would imply that unless you were working on the line, you wouldn’t be earning your keep.  The reality of what we find is simple.  As you grow larger, there is more money to be found or made by getting your resources to work together to achieve the common goals of the firm.  In a CPA firm, that job falls to the managing partner.  And its most critical and scarce resources start with the partner group, which surprise, surprise, is a primary focus on the managing partner.

So, to come full circle to the most common question asked, a generalized answer as to what is the appropriate client service load for a managing partner varies by firm size.  Before we get into some ranges, it is important to start with this concept.  If you firm is $30 million or less in revenues, managing partners need to service clients.  The reason is very basic, “Partners in CPA firms don’t have the same level of trust for MP’s to no longer service clients.”  Once a managing partner becomes totally administrative in his or her work, partners deem them out of touch with what it takes to fill the “client service partner role” in the firm and therefore are not in a good position to provide guidance or evaluate a line partner’s performance.  Given this position, here are some broad and generalized guidelines to answer this question.  If your firm is:

• From zero to less than 2 million in revenues, the managing partner will probably carry the biggest or second largest books in the firm
• From 2 million less than 4 million in revenues, the managing partner should have between 1 million and 800,000 in book being managed
• From 4 million to less than 7 million in revenues, the managing partner should have between 800,000 and 500,000 in book being managed
• From 7 million to less than 10 million, the managing partner should have been 500,000 and 300,000 in book being managed, and
• From 10 million and larger, the managing partner should have between 150,000 to 300,000 in book being managed

As I mentioned, the brackets above are generalized.  But the message is very specific.  As the firm grows larger, the managing partner’s main priority needs to shift from personal billings and managing clients to managing the firm.  To do this, the MP needs to be seen as still being in touch with the job of servicing clients, which is why we suggest that managing partners keep some client service responsibility.  But before we go on, I want to digress for a second because of another common misconception.  Given that we want to limit the number of clients the managing partner is still responsible for, it is important to note that those few clients shouldn’t be the smaller clients of the firm; small clients are for managers and principals and maybe even young partners, but certainly not the managing partner.  It is the complexity of working with the firm’s larger clients that helps the managing partner keep abreast of what the marketplace is expecting from a service, quality and competence perspective that helps him/her better lead and advise and counsel the firm and its individual partners.

One of the biggest problems we run into with firms is their lack of implementation ability.  That problem rests squarely on the shoulders of the managing partner.  But to be fair, the reason for this is because most managing partners we encounter carry way too big of a book for the job they are tasked to do, which is why we provided some general guidelines above for consideration.  If the client load responsibility of the MP is too burdensome, then the firm will not only get access to a limited number of hours from the MP to implement strategic changes, but it will get the worst hours he or she has because they will consist of nights and weekends.  As we introduced in Part 1 of this series, many firms in the critical growth range from about 3 million to 7 million don’t believe a managing partner is necessary, so the role is more about a prestigious title bestowed on one of the partners with the largest books who typically is less excited about running the firm and more excited about servicing clients.  As we have said so many times in our columns, as you grow larger, what helped make you successful in the past, will likely actually undermine your success in the future.  And as you grow, the job of the managing partner needs to not only become a real job, but the person filling that role’s most important job.  And if you don’t make the necessary book managed adjustments, you will be setting your managing partner up to fail, and more important, setting your firm up to stagnate.

Now before you start transitioning the MP’s clients to others, an important question is ask is whether you have the right person in that role.  If the person currently filling the managing partner role doesn’t want to wake up every morning focusing on the firm first, like developing employee competency, holding staff and partners accountable to the firm strategy, implementing changes approved by the partner group, etc., then that person should step down from the managing partner role.  Many times the person filling the role of managing partner is really that firms best rainmaker or one of the best marketing partners in the firm.  So, if this is the case and you have a current managing partner that loves to be viewed externally as the visible leader of the firm, but really prefers find new business and taking care of clients, we often suggest moving this person to a position like “Chair of the Board or Partner Group.”  This is actually a better role because it is a visible leadership role with very limited implementation expectation and allows them to do what they love, but get them out of the way of someone who actually wants to focus on making the firm better, faster and stronger.

Assuming you have the right person in the role and you are reducing book managed in line with the size of the firm and therefore the time required to manage it, the next question is “How do you motivate someone who has historically focused on personal achievement to focus on achieve the firm’s objectives?”  The best answer is for you to put your money where your mouth is; make the majority of the MP’s incentive compensation based on meeting the firm’s strategic objectives.  This means that the managing partner would have a special compensation plan created to motivate that outcome.  And while the MP might have some small amount paid for his or her personal performance as a client service partner, the vast majority of the compensation would be tied to firm objectives like:

• meeting firm profitability targets
• earning a specified average net income per partner goal
• meeting firm growth targets
• building capacity appropriate to service expected future client demand levels
• ensuring developmental, training and/or competency objectives are being reached for employees
• overseeing certain operational priorities (E.g., retiring partners transitioning clients properly, implementation of major technology changes, successful merger of a new office, etc.)

As you can see from the examples above, the emphasis is all about firm performance, not on individual performance.  So it is pretty simple … if you want a managing partner to do the job of managing partner, make the objectives you are paying him or her to do be about the firm.  There is a general rule CPAs need to understand.  CPAs will default to individual goals almost every time if they have a choice because they are easier for us to accomplish.  Firm goals or team goals usually take a back seat to individual goals because they require others to perform and we, as a group of professionals, are much better at just putting our own head down and getting it done.  So, generally speaking, if you set up goals such that a CPA can earn performance pay by either accomplishing individual goals or group goals, they will almost always default to working on individual goals.  Therefore, when we work with managing partners, especially in the beginning of this redefined governance effort, we put hardly any financial emphasis on individual goals except for one.  The common individual goal exception for managing partners pertains to transitioning clients to other partners, principles or managers.  For example, we might set up 3 or 4 major firm objectives for the managing partner to accomplish along with an individual goals of transitioning $250,000 of client relationships in a given year.  We do this because if the managing partner doesn’t start transitioning client relationships early on, then he or she will never have the time, or be allowed the time based on client demands, to ensure that the firm achieves its objectives.  But understand that virtually no person put in the managing partner role will transition any clients without some protection regarding their future compensation should they be removed from that position (either voluntarily or involuntarily).  This is why we suggested the policy in Part 3 that protects the managing partner compensation-wise should they be removed.  Because if you don’t manage the client load of the managing partner, you will never really have one, nor will be likely ever experience the real economic or performance benefits this role commonly delivers.

Excerpted with permission from the book Securing the Future, Vol 1: Building Your Firm’s Succession Plan. Copyright 2014, American Institute of CPAs.