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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.
“No one can say they don’t know where they stand,” says Allegretti, the MP and CEO of Canfield, Ohio-based HBK. “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 the f2020 IPA 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.”
This article originally appeared in the July 2020 edition of INSIDE Public Accounting. To subscribe to INSIDE Public Accounting Monthly click here.
