The Type Of Compensation System Doesn’t Matter, The Results Do, Say Two MPs

The Type Of Compensation System Doesn’t Matter, The Results Do, Say Two MPs

Open Compensation System

Chris Allegretti believes compensation can drive positive behavior, and for his firm, the best of inherently flawed compensation systems is one that is open and transparent.

Christopher Allegretti

Christopher Allegretti

“No one can say they don’t know where they stand,” says Allegretti, the MP and CEO of Canfield, Ohio-based HBK, a $94 million operation with offices in five states. “It’s right there, it’s in your face, it’s visible.”

At HBK, every partner knows what every other partner makes. The elected five-member executive committee makes compensation decisions for each partner over three or four days, considering input from PICs and consulting metrics to determine equity return, guaranteed payment and a discretionary bonus. The system is reviewed twice a year at in-person partner meetings.

Advocates of open compensation praise its transparency and accountability, but HBK is clearly in the minority. According to IPA’s national practice management survey, 74% of all firms over $30 million use a closed compensation system. Industry observers say a closed system is flexible and prevents partners from feeling slighted if they receive a smaller bonus than one of their peers, or smaller paychecks than a lateral partner hire. In a closed system, partners know average compensation, but not the details.

Open compensation critics say the practice is not only impractical but unfair in large firms and can spark partner-to-partner comparisons and questions.

Allegretti acknowledges that secrecy would reduce “back channel chatter,” but he won’t entertain any questions about why so-and-so makes X while so-and-so makes Y. “I mastered saying that the minute you start talking about someone else’s compensation, this conversation is over.”

In one-on-one partner conversations he will discuss how individual partners can make more money, coaching them on how to improve. He notes that at the beginning of the year partners know about 90% of their compensation.

Another criticism of open compensation is that it’s too formulaic. While that was once true at HBK, it’s not anymore, Allegretti says. When he was elected MP in 2004, he inherited an open compensation system in which every partner was evaluated using the same “silo-based” formula. The system now rewards a one-firm approach focusing on four pillars: the firm as a whole, people, clients and growth. Hard numbers can’t tell every story, particularly when it comes to developing future leaders. “We didn’t want partners just worrying about themselves.”

Firm owners know that their compensation is tied to results and the sustainability of the firm over the long haul. Once professionals are admitted to the partnership, they know that while it’s a huge accomplishment, it’s also ingrained in them that “no one put a crown on your head,” Allegretti says.

Overall, he believes mistrust is lowered, and the culture at HBK embraces openness. In fact, he conducted a survey of owners two years ago and found no appetite whatsoever for a closed system.

A successful compensation system shapes behavior, he says. It doesn’t really matter which model is used. “The best system is the system that works for your firm.”

Closed Compensation System

Determining partner compensation used to be a fairly straightforward exercise at Cassady Schiller: Every partner had the same salary, just different ownership percentages. Everyone knew how much everyone else made, and when the firm did well, the partners did well.

Mike Clark

As the Cincinnati firm grew, however – its FY19 net revenue is $11.6 million – the once-simple system became less workable. Management became more centralized, partner responsibilities became more varied and the partner buy-in requirement made recruitment of senior professionals more difficult. And was it really fair for a new partner to make the same salary as a long-term leader?

Mike Clark, with the firm since 1994, inherited the open compensation system when he became MP in 2016, but he pretty quickly grew to dislike it. Although the “we’re all in this together” aspect of transparency was appealing, the openness led to questions and comparisons. Clark says he spent a tremendous amount of time explaining the reasoning behind the numbers, particularly in his first year as MP.

According to IPA’s most recent data, open compensation systems do, in fact, become less popular as firms grow. Open compensation systems are used by only 25% of the largest 100 firms in the nation, 36% of the IPA 200 ($20 million to $39.5 million in net revenue) and 48% of the IPA 300 ($11.6 million to $19.1 million).

At Cassady Schiller, the two founding partners liked the open comp system and had misgivings about changing it, but once they realized how unproductive and unhealthy it was to go around and around talking about it, they supported the move, Clark says. “We prided ourselves on being open comp, but we realized the bigger we got, it was causing more issues.”

A few years ago, the partners decided to go from open to closed. Compensation is set by a committee of Clark, the COO and another partner, who is replaced every two years. Salaries are based on the partner’s level: a service line partner, for example, would make less than a department head. Salaries go up with tenure.

The bonus pool is harder to divvy up. About 80% of the bonus is determined by achievement of specified goals, Clark says. The remainder is more subjective. “I don’t want them comparing to other people because they don’t know all the factors.” Clark says partners are welcome to discuss their compensation with him. “I’ve left it open from that perspective.”

Overall, the new system has been fairly well received, in large part because a three-person group makes the decision. “They trust that we are being fair.” Support by the founding partners made it more palatable as well. “I’m lucky because I have a really good partner group,” Clark says. “It was supported, understood, respected and they know it’s not easy.”