Ensuring partner compensation is in line

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

Video transcript:

You know your partner compensation is in line or out of line clearly by the behavior of the partners. Now, there is only one perfect partner compensation system in the universe, let’s start there. That’s called sole practitioner, right? One partner, looking in the mirror, what I make is what I earned. But in multipartner firms, this can be one of the most divisive issues around.

So, bigger firms have figured out the number one sand trap. The number one sand trap is called relative partner income. So relative partner income in 99% of accounting firms is an issue. The big firms, when you get to be $10 million in revenue or above, or the top 250 firms, many of them go to closed compensation, end of story. So that would be a big one. The second biggest one, however though, is the ratio of the highest-paid partner to the lowest-paid partner. The industry averages say that number for equity partners is somewhere around a ratio of 4:1. The question, when I come into a firm sometimes, I will see ratios as high as 10:1, 20:1. I will also see ratios sometimes as low as 2:1. And depending where you are in that ratio, you can imagine that’s the issue they are going to take with me.

The point is, there are different levels. If you look at professional sports teams, why do athletes on some teams that play on the offensive line, make 10 times more what someone else on the offensive line makes? Because stardom matters. If you are a high, high performer, the high performer should not be locked into a 2:1 or 4:1 ratio. And I have gone into firms, interestingly, where the ratio is 4:1 and there is about to be a campus revolt. I have also gone into firms where the ratio is 10:1 or 20:1, and the ones at the bottom are happy because they believe it’s a high-performing firm and they understand that whoever the individual or team is that makes that kind of money is obviously producing. If it’s fair and equitable, the ratios don’t matter. What’s important is that you pay your talent the right way.

The last one, and I would sort of say it’s not just a partner issue, it’s a staff issue, it’s just the basic premise: Overpay your superstars. Call it insurance, call it protection [for] when the recruiter dials in to take talent, because you never get a second chance. They are typically going to be gone. And when I talk to firms and I say, “What percentage of your payroll are true superstars?” Rarely is the number over 5% or 7%. To me, it’s a small amount of money. Lock those people out of the market. It will protect your stars and keep them with your firm.

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