How much should a partner of a multi partner accounting firm be paid? Should it be equal pay because you have equal shareholding? If it is going to be equal pay then each person my pass the checklist of the ideal partner. Most should not be paid equal.
I have a view that a lot of partners in this industry are overpaid senior accountants. They are doing the work of a senior accountant but getting paid substantially more. There are many partners who are partners because of retention reasons rather than good business reasons. In today’s money you can employ a senior accountant for $150K (or thereabouts) to do the work of most partners.
If I am paying someone $300K – $500K (with dividend) then I would expect them to operate differently to a senior accountant who does the ‘delivery’ side of the work. As a minimum I would be expecting partners to bring in new business from existing and future clients.
High contribution partners should be doing just 3 things:
- High end work for a low percentage of time – advisory work at ‘value based fees’ high margins
- Nurturing existing clients – increasing the average fee per client with additional services sold – priced on value not time.
- Leadership – driving performance of the firm and making sales to new clients
So how much should you pay them?
To start the discussion you need to separate employee vs owner. There is no right or wrong answer (to how much) however I think a rule of thumb needs to be “what would it cost me to replace this person with another employee”?
By nature of the answer it means that there needs to be differing salary levels among partners.
I am talking about rewarding people with a package based on their contribution to the business. It is farcical to think that all employees of a business (partner group) should be paid the same amount if they are contributing in different ways.
As an example, if one partner is bringing in $300K worth of new clients per year and doing $200K of personal chargeable work then they are far more valuable than someone doing $500K of personal chargeable work and not bringing in any new business.
To get it close to right (and the number will never be right) there are 3 considerations to the total salary package of an employee / partner.
- Salary earnings – an amount that it would cost to replace you as an employee
- Bonus earnings – an amount based on ‘above salary’ contribution – it must promote over achievement
- Equity earnings – an amount based on your equity percentage and your dividend policy
Excluding equity, as an overall employee package, you should be thinking about “on target earnings” – OTE.
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To grow and develop an Accounting firm it needs 4 areas of focus – workflow, people, clients & revenue. The challenge is that if you just focus on workflow then revenue growth will not happen. If you just focus on revenue only typically the ‘wheels fall off’ workflow and people development.
The key is to focus on all 4 at all times. You need people who are leading the key areas to focus on the key areas. The outcome is more cashflow, profit, happiness, growth and improves lifestyle. All the good things in life!!
Most Accounting firms are operating their business by default – not operating their business by design.
Most Accounting firms just seem to exist. They get through the years with a limited plan, they seem to ‘acquire’ a bunch of clients who are ‘hotch potch’ of make, model & size. They do not typically run the firm like a business, and worst of all the Partners typically operate the firm based on leanings from the Partners of the firms where they used to be employees.
This beast that you own is a business – not a practice. You own it. You take all the risk. Your name is on legal documents. Your name is on the insurance policies, the credit cards, the loans, the leases. Your entire team will all leave one day (they eventually always do) and you’ll still be there. Your clients are in the deal for their annual fee and their work done. Your team members are in it for their salary and career progression. You are in this thing for millions!
This thing that you own is not a community service or a charity. However, many firms operate just like that. They operate like a not-for-profit, community-serving establishment taking on clients they don’t like, doing work they don’t like and dealing with people they don’t particularly like either.
Remember, it’s your business and no one else’s. You should be the benefactor of the spoils and the one enjoying it the most. One of the key purposes of a business is to create wealth for the owners. How’s that going for you?
Although most accounting firms are operated by sole practitioners (one owner), by my educated guess there are approximately 3 partners for every accounting firm in the world. And from my basic research there over 1,000,000 firms in the world. So somewhere in order of 3,000,000 partners. Worldwide it is estimated to be over a one trillion dollar industry. That’s nearly the GDP of Australia!
That is a lot of accounting firms and a lot of owners of accounting firms. Far too many of both in my opinion!
So how do the partners become partners? Here are some typical (and perplexing) scenarios. As an Accountant goes through the ranks and learns their craft at some point in time they ‘make partner’ – as if it is their given right. Sometimes a team member puts pressure on the partners and threatens leaving if they do not become a partner – and the partners cave in. Sometimes current partners think they must elevate a team member to partner status just to keep them – so they do. I even know of partners who have become partners and they do not even know the financial situation of the firm they are buying into. Who would want to be in business with someone who did not understand the financial situation of the business they are buying into.
There are too many partners who are there for retention reasons – not good business reasons.
What about the partner who starts his/her own firm? These are the real Entrepreneurs in this industry. It’s interesting how they come to be. The individual in question starts life as a junior accountant or graduate, learns how to do that part of the job, stays in the current firm for a few years, gets more experience and then shifts firms. They stay at the next firm for a few years and then maybe shift firms again. All the way observing how each of the partners conduct business.
One day (maybe sometime in the persons 30’s) they wake up and say to themselves “I am sick of being an employee of an accounting firm. I’m a good accountant. I want to go out on my own. I want to start my own firm”. They have just had an entrepreneurial seizure!
Off they (you?) go believing that just because they are a good Accountant that they know how to run a successful accounting business that provides great accounting services. Nothing could be further from the truth. Being a technician (knowing how to do the work) and being a business owner (knowing how to run a business that works) are two vastly different scenarios.
Here’s the issue. How did this new entrepreneur learn how to run the business they have just started?
From the partners that they worked for. They learned by osmosis. And where did those partners learn their great (tongue firmly planted in cheek) business skills from? The partners before them. – and so on and so forth.
If you want to run a better business you must first become a better business person.
If you stick to the traditional model described in chapter 1 the only real way to create wealth in this business is to have less partners in your firm and a higher leverage of people per partner.
There are plenty of sole practitioners around the world who hire 20+ people and as such they are making $1M plus profit per annum. The issue of low profitability starts when you have too many partners and the leverage (people per partner) is low. It’s very easy to prop up profits in an Accounting firm – just have the partners charge more time. They have the highest (apparently) charge rates so all time charged by partners of theoretically all profit.
Recently I asked a simple question at one of my coachingclub meetings. “If you could wave a magic wand then the ideal business partner is someone who……?” And then got them to answer the question. This is what the group came up with. The ‘ideal’ partner in an accounting firm is someone who…
- Brings something to the table – complements existing partners
- Is a good cultural fit in the firm
- Is a good communicator at the partner level
- Is a good communicator with team members
- Is a good communicator with clients
- Is stable – emotionally and financially
- Is profit and growth motivated
- Has a good work ethic
- Is reasonably fit and healthy
- Is at the same stage in life mentally
- Shares similar values and ethics
- Has an ability to respect other partners
- Knows what they want – goal orientated
- Is supportive of new ideas
- Is flexible in their thoughts and actions
- Is a good business builder
- Is fun to be with
- Shares the vision
- Walks the talk not just talks the talk
- Acts in the best interests of clients and the firm at all times
- Can bring in new business.
How many of these 21 can your current partners answer favorably? Maybe some partners that you have are not a fit. Do you need less, more or different partners?
Maybe some change needs to happen in your firm at the partner level.
This article was originally published in my first book ‘Accounting Practices Don’t Add up’. My latest book ‘Remaining Relevant – the future of the Accounting profession’ is now available. Click here to buy.