In the accounting world, there has been a shift in the way CPA firms have been compensating their partners and allocating their profits. Historically there was a lock-step system dictated by a direct correlation between age and compensation; the older you were, the more you got paid—regardless of the value you were bringing to the partnership.
However, there was a pitfall to that approach. What if you have a senior partner who’s now kicking back and not producing much, while an aggressive younger partner is busy racking up more hours, yielding a bigger book of business? Clearly, the younger partner is more valuable, but under the old system, the senior partner got paid more.
Today it’s changed completely. The majority of partner compensation systems are based on the value you bring to the firm. You can see the reality of this change clearly in the latest Rosenberg Survey, a widely respected study I author that reviews the previous year’s changing accounting landscape.
For the past several years, we’ve seen the number of firms moving to the compensation committee method increase; in 2019, it leveled off (just slightly down). For firms of 13 partners or more, this method is still the overwhelming choice.
Based on our consulting work and discussions with other top consultants in the profession, it appears the compensation committee is the system of choice for larger firms. Why is this? Here are some of the reasons:
- It allows for subjectivity, so firms can reward intangible contributions.
- It takes the sole responsibility out of the hands of the Managing Partner.
- It possesses advantages over a pure formula-driven system, which has numerous flaws (such as overlooking intangible contributions).
- It creates a trusted group that looks out for the firm as a whole.
- It’s often the only system the partners can agree on.
In the table below, here’s the nitty-gritty of what we learned about the current state of partner comp systems:
In our latest Rosenberg Survey, published in 2020 but covering the state of the CPA profession in 2019, we learned a surprising fact: over 60% of all firms are using a compensation system that allows for recognizing intangibles such as leadership, niche responsibility, and department responsibility, using such methods as Compensation Committee, Paper and Pencil, MP Decides, and All Partners Decided.
Fifteen years ago,it wasn’t this way. Now we’re seeing more partner compensation systems that reward for intangibles and ultimately, overall value.
Here’s another interesting set of figures regarding the range in partner income, from high to low:
- Firms over $20M: 3.3 to 1 (3.6 to 1 in 2018)
- Firms $10-20M: 2.8 to 1 (2.5 to 1 in 2018)
- Firms $5-10M: 2.4 to 1 (2.2 to 1 in 2018)
- Firms $2-5M: 1.7 to 1 (1.9 to 1 in 2018)
- Firms under $2M: 1.4 to 1 (1.3 to 1 in 2018
However, I should add that the findings I’m citing are all pre-COVID. But good news: the 2021 Rosenberg Survey (covering 2020) is now open; we’re canvassing CPA firms and soliciting their input until July 15, 2021. If you’re a CPA firm, how do you participate in The Rosenberg Survey and learn its findings?
Simply go to www.rosenbergsurvey.com to begin the process. The survey is open and will remain so until July 15.
In our next article on The Future of Accounting, we’ll discuss partner buy-in. Stay tuned!