Three best practices for partner compensation

Featuring Allan Koltin, CPA, CGMA, CEO of Koltin Consulting Group


Video transcript:

The three best practices I have seen in terms of how firms compensate partners are the following: One, compensation has to tie into the firm’s strategic plan. So going through the strategic planning process, determining what’s best for the firm and then looking at the individual partners’ strengths and figuring out how those strengths can help to implement the strategic plan.

Number two, and it’s very important, is that there is a risk component to the compensation plan. And what I mean by this is many firms pay big salaries and there is little bonus or incentive pool at the end of the year. We’ve observed in firms where it’s even a 50-50 ratio between guaranteed and at-risk year-end bonus, much higher performance, because there’s incentives built in. When you know what you’re going to make at the end of the year, there is a tendency to cruise, and that’s not a great way to handle partner compensation.

The third and final best practice, and I am very passionate about it, is getting the highest and best use out of each partner. And in order to do that, partners need to be open and candid with each other when they talk about what each other’s strengths are. Oftentimes partners love autonomy. They love to be left alone, and they love to do their own thing. Unfortunately, we call that the great profit gap, because it’s easy for any individual partner to see the fatal flaws of the other partners. Rare is it they can see their own fatal flaws.

So we actually go through a consulting session where we ask a partner to leave the room, we talk behind their back, the partner comes back in, and we say, “Look, here is the things you want to do, but here are the things you are really good at and we need you to do.” That gap between the autonomy of doing what I want to do and the accountability of doing what is best for the firm and best for the strategic plan is the difference oftentimes between high-performing and low-performing firms.

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