Partner Compensation – Common Points of Confusion – Part 1

In the past, we wrote a 6-part series on Partner Compensation, that started out discussing the following:

• The Eat What You Kill (EWYK) model of operations and how that impacts Partner Compensation
• The most common criteria used in EWYK partner compensation formulas
• The Building a Village (BAV), or One-Firm Concept, model or operations and why partner voting has to be addressed to clear the way for changing partner compensation
• Addressing the retirement issue and separating it from partner compensation so that you are finally positioned to create a BAV partner compensation model

Based on our experience, these are all issues that need to be discussed and addressed before a firm WILL make the decision to move from an EWYK to a BAV compensation system. In the BAV system, to review some basics from part six of the last series, partner compensation should be built around:

• The firm’s strategy;
• Individual goals for partners established to support that strategy;
• Developing a clear understanding of what is expected of each partner, both objective and subjective;
• Management being willing to financially reward partners that do what is expected of them and punish those that don’t, to the point of termination, and;
• Providing the managing partner with a significant compensation stick to reward or punish behaviors.

Because examples of compensation goals and how they work are built around strategy, and I don’t know what your strategy is, I am going to provide some examples of strategy and then talk through how those might be reflected in a partner compensation model.

Let’s say one of your key strategic objectives for the next three years is to leverage the partners by increasing the average book size each could effectively manage. Based on the last series of columns, called The Long-Term Impact of the Upside-Down Pyramid, parts one through three, it is common to find that firms evolve through success to the point that the partners are doing too much of the detail work and acting more like over-qualified managers than filling the role they are being paid to do – that of being a partner. This typically occurs because the firm does not hire enough staff and adequately train them in proportion to the growth the firm is experiencing. Given this lag in capacity, not only does workload compression increase throughout all levels in the firm, but this is especially true for the partners and managers. In order to meet the client demand, partners and managers spend more and more time doing chargeable work, which is then rewarded by a short-term gain in profits (which gives a false sense that the partners and managers are doing the right thing for the firm). However, because the partners and managers are doing too much chargeable work, they fall short on many other fronts, such as developing the people immediately below them, implementing firm strategy, regularly visiting their good clients and referral sources, etc. So, short-term, because of the extra billing hours partners are delivering, while profits go up, a dysfunctional spiral starts to build speed. Because the partners are not spending enough time taking care of critical partner duties, organic revenue growth starts to decline or flatten, initiatives the firm wants to implement slow to a halt, and a gap in competency starts to expand between layers in the firm. The gap in competency occurs because the partners or managers don’t have enough time to train those below them because their personal chargeable workload is so high. Revenue starts to flatten because the partners and managers don’t have time to fill basic business development expectations. And firm strategy doesn’t make any headway for the same reason – there is no time left to do it. This commonly results in partners and managers needing to deliver a higher than reasonable (reasonable meaning the extra hours required start cutting into the time necessary to perform other critical partner/manager functions) number of billable and collectable charge hours each year. And in many cases, the number of expected charge hours will continually grow as well.

We tell all of our CPA firm clients that, by the time you get to be a partner or manager, what you do with your non-charge hours becomes as important as what you do with your charge hours. And how (the quality of) you spend your charge and non-charge hours becomes more important as well. For example, while we expect every partner to deliver a minimum amount of revenue based on their own billable time, we don’t want them racking up charge hours doing work others below them should be doing. What I am saying is that all charge hours are not alike. At the partner level, we are looking at advisory work, high-level review work, client-facing work like understanding client needs, keeping them looped into progress, planning work, etc. as being reasonable. But even more important, we want to have this same level of selectivity when it comes to how partners are spending their non-charge time. Most firms track all non-charge time in a nondescript account as if it doesn’t matter. And while I am not suggesting that if you created multiple, more descriptive non-charge hour buckets to track how that time is being spent that it won’t be easily gamed by the partners, it is at least more accountable than the way it is handled in the vast majority of systems today. Most firms track both, and don’t care much what you did to be chargeable or what you accomplished with your non-charge time. Our premise is that if you want to create profitable and sustainable leverage that allows your people to have work/life balance, it has to start by caring a lot about how partner and manager charge and non-charge hours are spent.

So, circling back to our strategy of partner leverage, that might break down – customized to each individual partner and their current level of performance in this area – to these kinds of initiatives.

1. Get the partners to stop spending so much time doing lower level technical work;
2. Require the partners to spend more time with their key clients to not only be available for higher level advisory work, but to be more visible, thereby creating more opportunities for the firm to assist those clients (business generation);
3. Force the partners to spend more time training, coaching and mentoring their direct reports to improve the technical competence of that group so that more difficult technical work could be delegated to them.

As you can see, now that these points have more clarity, it doesn’t seem so complicated. But it always is. So, let’s look at some of the likely issues that will get in the way of achieving these objectives:

• Many partners are currently being compensated predominantly based on their charge hours and book-size without regard to the quality of those charge hours;
• What partners do with their non-charge hours are often ignored in most compensation systems, and even when they are, they are compensated with menial dollars;
• Typically, the larger booked partners have more top clients to manage than they have time for, and the smaller booked partners don’t have nearly enough. Therefore, the group as a whole vacillates between either under-serving some key clients or over-serving some low level clients, depending on the size of book the partner is currently managing;
• Training culturally is considered a marginal activity. Those people that spend time developing others are often considered to be performing administrative duties rather than fulfilling key functions that are everyone’s responsibility;
• There is too little available capacity in-house to do all of the work so firms are always in crisis mode which does not allow time to appropriately monitor, assess weaknesses and train people at all levels to close competency gaps—which usually results in burnout and turnover of the people a firm least wants to lose;
• In order to reach higher incentive-pay, partners, managers and others in higher-level positions have learned to hoard work instead of passing it down to make sure they hit their minimum charge hour targets, which undermines the leverage system;
• Firms put too much focus on realization as they confuse realization with profitability. When you have idle people, while having them shadow more experienced personnel will lower specific job realization, it won’t lower the firm’s overall profitability since you are paying those people regardless. And rather than having them shadow people to learn, versus letting them fill up their entire day doing too low a level of work because no-one is around to train them doesn’t help either. So, most firms need to de-emphasize realization so that they can gain the benefit of lower level people learning and being able to take on high level work more quickly, which actually supports greater leverage and profitability.
• Many partners are comfortable being “order takers” waiting for the phone to ring and too busy to proactively be setting up appointments to go see them and make it their job to understand the holistic needs of those clients;

So, in order to achieve the firm strategy and overcome common hurdles such as these, firms incorporate individualized goal systems to focus the partners on the various actions each needs to take to play their part. All partners have their strengths and weaknesses, hence the need for customization in order to make sure that each partner is paying attention to those hurdles that are perceived to be directly in their way.

We will pick up here next time and get into the specifics of a BAV (One-Firm Concept) partner compensation system. We will start with some scenarios utilizing base pay plus incentive (performance) pay. In these scenarios, we will cover how goals are evaluated, how that evaluation impacts final pay, how you deal with a shortfall in profitability against paying out incentive pay, how you distribute excess profits, how base pay changes, and more.