Making the System Work Well

Today, our guest is Kristen Rampe. Kristen, who is a CPA herself, is a consultant to CPA firms. She works with firms and practitioners across the country on projects such as partner compensation, partner agreements, and strategic retreat facilitation. Today, we’re most likely to be talking about the partner compensation end of that, but Kristen, welcome to The Unique CPA.

Thanks, Randy. I am glad to be here and to be talking with you about this topic today.

Yeah, I’m excited—I’m a complete and utter novice, I think, when it comes to partner agreements—I have no idea. I try to stay out of that end of things, partner compensation. So I’m looking forward to being educated today.

Obviously, I deal with CPAs across the country, and I’m always a little bit in the dark on how they do this. So historically, this has been my mindset of partner compensation—and I turned 59 yesterday, so I’m an old timer in this industry, at least in my mind. You know, a lot of firms you’re hitting 60…

Yeah, you’re approaching your mandatory retirement!

Exactly. So historically, I know, often, firms have based compensation on, you know, here’s my, as a partner, “here’s my book of business, here’s my realization, here’s my, what I bring to the firm from my clients.” And I know that’s not the way things are going forward. And so traditionally, I guess, that’s probably not the best way to do it. So what do you see problems with that? And how do you consult with firms moving forward to really find a better plan?

Yeah. So what you describe the sort of “my my my” orientation, we do still see that quite a bit, and one, you know, a couple of ways that that takes place: One is if a compensation system is a formula, which is kind of the most common, and then even within the formula category, there’s this special subset of formulas that we call the “P&L by Partner,” where the firm really does set it up such that you’ve got you know, Randy’s got his column, I’ve got my column, Joe’s got his column, Sarah’s got her column. And we’re all very concerned about our very own columns, because that’s what affects partner comp in those types of systems.

The challenge with that is that it really does reward that individual thinking, you know. Like, “How can I do the best for me, so that my P&L benefits.” Some things are still similar with with other systems where you know, more clients more revenue, more money, like that’s the case. But as this industry shifts towards more of a one firm concept where a firm operates more like a business or more like a corporate structure, rather than two, three, four, five, ten individuals under one roof, we see you know, good, good, prosperous things coming out of firms that do that. And so when your comp system is aligned with the things you’re trying to do as a firm—which has become more like a company, rather than, you know, four or five individuals operating under that name—when you have structures that support that, then then you’re gonna go further along with that.

The challenges we see with partner conflict, when firms come with us and come to us and say, “Hey, you know, we need help, something’s wrong,” partners feel like they’re missing some amount of transparency, like they don’t understand how their compensation is determined. Even with some formulas, you’d think it’d be obvious, but some of them get really complicated, and so it’s hard. In fact, I work a lot of firms who will say, “Oh, well, only two of us really understand how to calculate partner comp”. And then fairness, that that’s a big one, you know, that when when things get creaky, it’s because a fair enough number of people don’t feel the system is fair. And that becomes a problem.

So you have to have buy-in somehow. So when you’re seeing this then, is there a formula? How do you, I mean, how if it’s a one firm approach, how do you determine what partner comp is? Or what’s the—am I getting ahead of myself here?

[bctt tweet=”The challenges we see with partner conflict, when firms come with us and come to us and say, “Hey, you know, we need help, something’s wrong,” partners feel like they’re missing some amount of transparency.” username=”TriMerit”]

Well, that is the million dollar question, right? Like, how do you do it? Is there an answer? Is there a single solution? What we think promotes the best answer for a firm is taking a look at what matters to the firm. You know, is the firm trying to go towards this one firm concept, or are they not? You know, and there’s some situations that they don’t want to at this time in their firm’s development, that’s fine. So the goal is to find a system that rewards partners for doing what’s best for the firm. And then of course, it needs to trickle down to their pocketbooks as well. But when you incentivize those performance metrics and behaviors, that’s what matters.

And so one of the big changes that we see firms often needing to make is to get into the behaviors part of it, because  it is—I hesitate to say easy because it’s not easy—but to look at how much revenue. Randy like, if you were the partner, how much revenue you generate, versus how much revenue someone else generates, we can look at that, we’re kind of objective about it, we can say, “Hey, you brought in 50% more than this other person, so your comp should be higher.” But if we stop there, just on those things that have good things CPAs love, you know, good, hard metrics, easily calculated data, we’re leaving a lot off the table—which is, well, are you kind of upholding the values of the firm? Are you doing the things that help us reach our strategic goals? Are you mentoring that manager to become a partner, so that they can, you know, pay your buyout when you leave? So we got to make sure the system incorporates all of that stuff.

So then let’s say, historically, we have been following this approach where it has been the you know, based on my book of business—and there I go with “my my my” again.

Uh huh, it’s natural!

…and we want to change. We want to, you know, become maybe a more profitable firm, and that can happen, potentially by this, you know, “let’s look at clients as a whole, and what can we cross-sell” and all these other things. But when we’re looking at that, it’s got to be somewhat of a hassle to change from this one system of partner comp to another? Is it?

I would be lying if I said no. So, you know, it is a challenge to make changes like this. I mean, if it were easy, that would be great, and people could kind of do it and perfect it all the time. But—I would also put forward how much of a hassle is it to have partners that are frustrated with their comp system? Think about how much time is spent talking about the system, whether it’s in partner meetings, or probably more voluminously, in little side meetings—two or three partners at a time? “Well, I don’t like this. I don’t think that’s fair. Why is Jim always taking home more money, you know, when I did all this great stuff in this kind of category.” So it’s not a super simple thing. But I think, you know, it can be done, and I think it’s really important.

And you’d want to do it when challenges in this area start to affect partner relations. Because that—as you know—can just cause all sorts of disaster within the firm. And it’s a little bit chicken and egg. Sometimes if the partner relations are just bad in general, and there’s like a total lack of trust, and people are frustrated with each other, that complicates partner compensation, and vice versa. But, you know, I think that it’s an important change, when partners feel like, “Hey, it’s not working for our firm anymore.” So it doesn’t really matter what system you’re on. If it works for you, and people feel it’s fair, that’s great. If there’s a challenge with it, that’s when all of those hassle factors, combine together and probably make it worth at least kicking the tires on making the change.

[bctt tweet=”There are other (compensation) systems that also offer transparency. It’s not quite exactly as recalculating as having a formula, but it’s possible.” username=”TriMerit”]

So then if you’re going to make this change—if you decide that this is going to be best for the firm going forward—do you actually have to change a partner agreement as well?

Possibly. It kind of depends on what your partner agreement says about partner compensation. We typically recommend to our clients that your partner agreement itself say as little as possible about partner comp, because it’s one of the more fluid areas of firm governance. So if instead you just, in there, say, you know, “The leadership or management or some designated body is going to decide,” that makes it easy. But some firms do have the whole or at least a good amount of the parameters of their income allocation written in their partner agreement. And in that case, yeah, you would have to update your partner agreement along the way.

Okay, and so going back to the compensation, then. If we don’t necessarily have to say it in an agreement, what’s the mechanics we go through? Because, you know, is there a formula that you can put in place to say, “Here’s how each partner is going to be paid?”

That’s one option, is to have a formula. And for some firms, it seems like that makes the most sense. Formulas are really appealing to CPAs, for a couple of reasons. We like numbers, we like formulas, it’s a familiar, comfortable place. And the thinking is on a formula, that if there’s a formula, and we apply the formula, we will get the “right” answer. That’s sort of the thought process on the front line, but I’m going to add to that in a minute.

Formulas, also one benefit they have is transparency. There’s no judgement in many formulas. It’s just, “I’m going to take a multiply A times B, and there’s my number.” And so we don’t get this sort of feeling of “Well, what’s Randy doing to my comp?” You know, like, “What if he had a bad day before he had his comp committee meeting? Is that going to impact how much money I’m going to take home?”

But there are other systems that also offer transparency. It’s not quite exactly as recalculating as having a formula, but it’s possible. The challenges, though, with when we start to think about something like a formula, is that there is no right answer in partner compensation. We like to think that there is, and I think that’s the deceptive part of a formula, right? Is the like, well, there’s a “We put it in the formula and then we get the right answer,” but that’s not the case. And we do find that firms as much as it is a little bit difficult—firms benefit when there’s appropriate, trusted judgment involved in compensation.

Alright, so let’s say the formula is, you know, obviously, probably only one way to do this going forward. There has to be, I assume other methods of determining the best compensation methods for each individual firm. What would those be?

Yeah, there are a variety of different methods. And you know, even within formulas, different types of formulas you can have. And to reiterate something I said earlier, you know—I think the best thing for a firm is to find the system that works for you. For example, I have one firm I was working with recently, and we were talking about other topics: a buyout partner agreement. But I wanted to know what their comp system was, because that can feed into those as well. And they told me their system was “Paper and Pencil,” which is one where each partner writes down by themselves with their own thinking, how much they think themselves and all of the other partners should make. And then they average all of those numbers together to come up with partner comp for each person.

This isn’t a system that I’m out there promoting a lot. I think there’s some flaws, like every system, there’s some flaws with it. It’s not a super popular system. But what this firm says, they’re like, “It works for us, everyone’s content with it.” And I was like, “You know what, great. Stay right there. I don’t want to talk any further about it until it doesn’t work for you, then we can talk.”

Right.

So that that would be an example of one, although less frequently used. The other more popular ones we see though, compensation committee is for firms that have five, six partners, a compensation committee is a great option, because you have enough people to have a committee. Of course, you need people that the other partners trust—that’s an important part of that. For smaller firms, the managing partner decides. There’s another method, which is like comp committee except no committee, it’s just that one person makes the call.

But in both of those, you know, a lot of firms hesitate to switch from a formula to one of those systems because they think “Well, how would I know how much I’m going to get paid? And why does this person get to decide? And how would they decide?” But that’s part of the beautiful part of designing a system, is we make sure that the clarity is there, that the specific criteria are known by everyone: what you need to do to impact your comp. And there’s, you know, plenty of other systems out there, but those are some of the more popular ones, the ones that we see.

Alright, and then… So let’s assume whatever system that we put in place, we get this right, it works for the firm. What does that do for us as a firm in general, I guess?

Yeah. Turns your firm into a beautiful, perfect, well functioning oasis of profitability.

Nice. So this is all dependent on you. You coming out and getting this set up for firms. If we become that, what was the saying again? The beautiful?

Uh, I don’t know, perfect oasis.

Nice!

Yeah, all these things. So what I see better comp systems doing for firms, when they’ve got a system that’s not working for them, and they make a change: First of all, kind of the primary and obvious thing that happens is that partners are more and generally satisfied with their comp allocation. I’m not gonna say everyone’s perfectly satisfied every single year, but most of them feel like most of the time they’re getting their fair shake based on what they’ve done. So then partners spend less time discussing it—and spend their time discussing other challenges, which is fine. So partners feel the system is fair—fair enough over time.

It also reinforces the goals that the firm has, and so, in fact this is one of those like—it’s very related, but I don’t think partners are always thinking about it, when they think about partner comp. Comp can be a tool to incentivize performance. It is definitely not the only tool. I don’t want from thinking like, “Well, if I just put out a bonus, then they’ll do this thing.” It’s not the case, they still need to be managed. But a good comp system can also set up some extra structures, like goal setting, and partner accountability, which is a really big thing for most firms like, “Well, how do we hold them accountable?” Well, you have to have something to hold them accountable to, to begin with.

And then you have to have someone, or a group of people who are willing to be the accountability holders, you know. “Randy, I’m going to check in with you at the beginning of every month, we’re going to talk about your goals and what you’re going to do this month.” And just having the system sort of require that makes a huge difference in terms of achieving their goals, which generally speaking is going to achieve higher profits, which is most of the time where people are trying to head.

So lots of great things, and one other one that’s also helpful: incoming partners, or partner candidates. Some firms feel like it’s a struggle to have a conversation with these incoming partners about like, how are people compensated? Either because their system doesn’t work very well, or they’re not sure how it works, or it feels unfair to them. When this is buttoned down, you can have a nice conversation with those incoming partners say, “Hey, this is how it works. This is what we reward. And also we’re going to set expectations for what it means to be a partner from before you join.” That’s a nice thing too. So lots of good benefits from an updated system.

Yeah, and that’s one thing I was when you just mentioned that that I was thinking about. I was wondering: If you communicate this compensation method in general enroll before someone becomes a partner, does the firm in general know what happens when they become a partner, what their compensation will look like, how they get to it? Or is that something that’s a surprise—you become a partner here, and now we’re gonna let you know,

Probably depends on what firm you work for.

Yes, okay.

I’ve seen plenty of partners signed on to join a partnership, really not knowing a lot of things that I think if they had just sort of thought, or been coached to ask certain questions, they could have asked those questions and learned a lot. And it’s no—I mean, nothing against them, I think a lot of us go into situations that were just like, “Oh, I didn’t think to ask, you know, how this would affect me.”

But newer partners also can be a little bit tricky, especially in like a formula system, because formulas often work well, when the partners have roughly similar types of contributions to the firm. They generally break down when you’ve got, like, let’s say, you’ve got three partners who have been working together for 25 years, and now they’re going to add a new partner, because they realize they need some new partners to be able to eventually retire. Well, the formula might work great for those three people, because they kind of have similar production metrics, right? And you get this new person in who has a really tiny book of business, and all of a sudden, according to the formula, their comp drops below when they were a manager. That’s a problem.

[bctt tweet=”I’ve seen plenty of partners signed on to join a partnership, really not knowing a lot of things that I think if they had been coached to ask certain questions, they could have asked those questions and learned a lot.” username=”TriMerit”]

So for firms that are running on those, it’s recommended that they just carve out those newer partners, and maybe almost give them like a salary and a bonus that’s decided by the more senior partners, and then whatever is left can be allocated to the senior partners. So that’s one way of handling that for the the newer partners.

Yep. Because it always seems to me like—and I may be wrong—but that seems to be a surprise to new partners. And like you said, it depends on the firm, but maybe I hear about it when that’s a surprise to the new partners, is, “I didn’t realize our compensation was based on this or that the other thing,” and so it’s good to know, at least that, that there’s ways to advise on that, with the new partners coming in as well.

Absolutely. And we even have a program we do for firms where we help them with bringing in new partners, and it’s separate from a partner compensation project, but a big piece of it is developing all of these tools of what matters to you and your firm. Like, “What are the expectations of a partner? What are the duties and responsibilities of a partner? How do you get compensated as a partner? What does your buyout look like?” And this kind of, new partners buying in project is meant to give them kind of a high level sketch of it.

Of course, you know, if you want to know the buyer, you got to read the whole agreement, but we can at least give you the key pieces, so to your point, people aren’t coming in and saying, “Gosh, you know, like I didn’t know.” So I think it’s really good for firms to communicate at least a sketch of all this stuff when they’re considering a candidate so that there’s not that surprise moment.

And then just, I’m veering off into other areas real quick, but you just mentioned that—the buyout. So this compensation method that we’re talking about, you know, changing to, for firms that haven’t already, how does that affect the buyout in the future? Is it all based on that current partner compensation plan?

Yeah, there’s definitely a lot of different options there as well. A lot of buyout programs—the ones that we see being kind of working well for firms and being popular among firms—are somewhat dependent on partner compensation. One of them is the multiple of comp method, where you’re taking, usually it’s kind of around three times comp to value the partner’s piece of the buyout. And, yeah, so if your comp system is off, it’s gonna make your buyout feel off.

Right, right.

But on the flip side, if you’re gonna have like a huge change to your comp system, right near someone else’s retirement, you may want to lock that person into a specific thing. And it’s just a whole lot of figuring out what’s best for the firm in negotiations, and what, you know, really, the crux of it is, “What do we need to do to make sure that partners are not only incentivized for their current performance, but rewarded hopefully for their past performance?” and not making people feel like “Well, if we make this change, you just stand to lose” and walk out the door.

Exactly.

To make sure that people don’t, you know—unless it’s a situation where maybe they’d been getting something that they really didn’t create. In fact, here’s a fun story. I was working with a firm that had a pay equal comp system. Really large buy ins, and then an equal share buyout. So when you left the firm, you had been an equal owner and on the date you leave it gets valued at the value of the firm times your ownership percentage at that moment in time. Well, because it wasn’t at all based on partner performance, they had two partners retire in the same year, and one of them had been managing a million dollar book of business. The other one had been managing a $300,000 book of business. First of all, they’ve been being paid the same anyway. Second of all, they got the same buyout, and they think people wth that firm are starting to realize like, “Gosh, maybe something else might have made a little more sense in that situation.” So we look to help firms with all that.

Yeah, they could use your services in that situation, obviously, for sure. I’m sure we can do a whole podcast on the buyout portion and a lot of other services that you provide. One thing I did want to get to, and I didn’t mention this at the beginning—and I’m going to go into it real quick now. So we actually as a firm, you know, we’re looking into the partner compensation plans and all that. And I don’t even know how long ago—six, seven years ago, we talked with Mark Rosenberg, and were getting some good information from him. Well, you are working with Mark now. I mean, you have Rampe Consulting, and he’s got Rosenberg… Consulting? Is that—

—Associates.

Associates. And then, but somehow now you are—I don’t know if the right word is “merging,” but you’re working together, and it looks like the plan is you’re going to take over at least portion of his business as well. Is that how this is working?

Yeah, yeah. So Mark and I have been working together for several years now. And we we work together on all of our consulting projects in these partner comp deals, and it’s been really great. He’s got so much industry knowledge, you know, and legacy things that he’s created. We work together on the book program as well. He’s got sixteen books out there. So yeah, he and I, we’re working together, we’re serving all of our clients kind of in tandem, as we do these projects, and I’m looking forward to kind of continuing his legacy and his work in the CPA consulting space.

That’s nice. Yeah, I know, a lot of people out listening probably know Mark.

All right, Kristen. Well, I really appreciate the discussion on this. I know compensation is an issue that again—I really am a novice with—and so you helped educate me today. But is there things you’d like to leave us with, anything, we missed any important facts that you’d like to highlight going forward?

I just want to encourage firms like a partner comp is becoming kind of a challenge for you, having just honest discussions as a partner group about what’s working and what’s not working, a lot of the solutions can happen, you know, on your own. And maybe you’ve got a formula, and you just need to tweak it a little. In fact, one thing we’ve seen firms with formulas doing is carving out a piece for more of a discretionary bonus, or a piece for intangibles, or a piece for management, and saying like, “Hey, someone’s gonna be the managing partner. We’re gonna give them a chunk of money.” And maybe by making some of those small changes that will resolve what’s going on with the tension at your firm. But really, that that open and honest communication piece, if you’ve got people in your partner group who can help facilitate those conversations—that’s going to make a big difference in coming to comp success, you know?

And looking at other systems out there, seeing if it makes sense for you to change, go ahead and do it. Keeping that system working well really has a lot of benefits for firms, so I’d encourage them to have the discussions they need to have and make little changes or big ones if they need to keep that that system functioning well for them.

Yep, I think that’s great advice. And I think in general, you touched on this: that compensation, getting that right, just will help the firm overall with everything, and help the clients which is important as well. That’s the bottom line, they’re gonna do what’s best for the clients rather than what’s best for me. And as they’re doing what’s best for clients, they’re doing what’s best for the firm, and everybody has success. So I appreciate that. So if anybody wants to get ahold of you, is there areas that they can find you online, or?

Yeah, the good news is, I think I’m like the only Kristen Rampe in the whole wide world. So you just Google my name, and all of the places will show up. I don’t have any competition right now. Also, don’t name your child “Kristen Rampe” so I can keep this.

So there’s not a lot of Rampes around the country, is that right?

No, I don’t think so. I’m sure there’s more than one but in the CPA space too, guaranteed.

That’s it. Yeah, I think, now that you say that, I wonder if I’m the only—technically, Randall Crabtree—but Randy Crabtree out there. I got to take a look.

Then you can advertise yourself the same way—just Google my name.

Exactly! All right. Well, again, I appreciate you being here. I appreciate you being able to answer these questions on compensation to help me and help all our listeners.

Thank you, Randy. Thanks for having me.

Thank you for joining us today. And you can find all the links and show notes for today’s episode as well as more about Tri-Merit at TheUniqueCPA.com. Remember to subscribe and join us for our next episode where we’ll be going beyond compliance into forging new pathways of delivering value to clients, diversifying your revenue streams, and leading edge management techniques and styles.On