There are two schools of thought when it comes to transparency and partner compensation at an accounting firm. Some favor transparency through an open compensation system; others say closed systems keep partners focused on their own goals and the overall mission of the firm.
Under an open compensation system, the earnings of all equity partners are known within the group. In a closed system, compensation is typically decided by a compensation or executive committee and partners only know their own numbers.
Firms typically move to a closed system at about $20 million in revenue. According to the 2023 IPA Practice Management Survey, 52% of participating firms between $15 million and $20 million have an open compensation system. That number drops to 28% of firms between $20 million and $30 million.
Firms decide to close their compensation systems for various reasons. A closed compensation system is more adaptable to changes in the firm’s structure, market conditions or strategic priorities. Sometimes internal issues within the partner group spark the change; sometimes it’s simply time to update the partner agreements and it feels like the right move.
In the May 2023 issue of IPA Monthly, Skeet Haag, MP of RBG, a $13-million firm in Memphis, Tenn., said of the move to a closed compensation system: “This system will allow a partner to focus on his or her own growth instead of worrying about someone else. It will also create a more harmonious partner group at the end of the day.”
In addition to the transparency of partner compensation, firms have philosophical differences about sharing firm metrics with staff. According to the 2023 IPA Firm Administration Survey, only 50% of participating firms share revenue with the entire staff. At 36% of firms, revenue is only shared at the partner level or above.
Unlike their approach to partner compensation, firms become more transparent as they increase in size. At firms below $10 million, 36% of firm share revenue with their staff. For firms of $10 million to $30 million, that number increases to 46%, and at firms above $30 million, 67% are sharing their top line revenue firmwide.
Find out more information on compensation systems, firm structure and KPIs across the profession by purchasing the 2023 IPA Practice Management Report. In addition, IPA offers three additional reports focused on Firm Administration, Human Resources and Information Technology.