Non-Equity Partnerships Increase As Tiered Systems Become Retention Tools

Local and regional accounting firms increasingly are turning to nonequity partnerships to create opportunities for high-level talent. At some firms, non-equity positions are way stations on the road to equity partnerships; at others, they're a destination for talented senior managers who don't have

According to IPA's 2005 Annual Analysis Of Firms, the number of non-equity partnerships is increasing at the nation's non-national firms. In FY00-01, the first year for which data was captured, nonnational firms reported 11% of all partners were non-equity. By this year, that number rose to 19%. Firms as small as $2 million in annual revenue report having non-equity partners, but the position becomes a solid fixture for firms with at least $8 million in annual net revenue, according to IPA's latest statistics.

Generally, non-equity partners are salaried employees who share in the bonus pool. At some firms, they have unfunded retirement benefits. Generally, non-equity partners receive 40% to 50% of the compensation that equity partners receive. Compensation for nonequity partners averaged $177,301 at non-national firms for FY0405; the average for equity partners was $343,539.

The need to provide alternatives to the traditional up-or-out career track is the primary driver for the surge in non-equity partnerships, says consultant Steve Erickson of Albuquerque, N.M. Depending on the firm and its policies, experienced senior managers who practice in the traditional accounting and tax areas but don't have the skills or desire for equity ownership are prime candidates for non-equity partnerships. The position is also prevalent among professionals with expertise in non-traditional areas who make significant contributions to firm profitability, such as specialists in financial services or pension administration.

"Ten or 15 years ago, if you weren't ever going to become a partner, the firm would tell you. Then you'd leave the firm and usually public accounting. Now firms want to keep those people, because their technical and client service skills are so valuable," Erickson says. For that reason, areas such as quality assurance are quickly becoming favorite places to provide opportunities and authority for non-equity partners, he notes.

Although some firms use non-equity partnerships as a stepping stone to equity partnership, Erickson usually sees non-equity partnerships used as a career apex. Those types of non-equity partnerships are attractive career choices to personality types that don't necessarily make the best equity partners, Erickson points out. "Equity partnerships require financial investment, risk, time commitments and a higher level of job performance. Some people see those things as turn-offs, but their skills are still valuable, and they nevertheless make valuable contributions to the firm's profitability. I hear that a lot: I don't want to be an equity partner because I don't want to take the risk,' or they fear not performing."

Allan D. Koltin, CEO of PDI Global in Chicago, says non-equity partnerships are "a very hot topic right now. Almost a third category of partnership is developing at some firms with established equity and non-equity partnerships that's a sort of contract partner position," he notes.

Koltin notes that the role of non-equity partners varies dramatically from firm to firm. Some firms practically have lines in the sand denoting equity and non-equity partners; at other firms, you can't tell by sitting in a meeting which partners have equity and which ones don't until it's time to vote. He frequently works with firms on cultural issues such as how to transition a non-equity partner to an equity partner, how to communicate the role of the non-equity partner internally, and even how to set up meetings in ways that don't invite uncomfortable situations. "It's always kind of awkward when it comes time to vote for the non-voting people to have to leave the room. That's kind of demeaning." Firms with successful non-equity partnership structures address those issues and revisit them as needed.

A few firms may allow non-equity partners to own an insignificant share of the firm, for example, 0.5%, but generally, non-equity partners have no voting power. Nevertheless, non-equity partners may wield considerable influence, especially in the next few years as the profession's succession crisis becomes more glaring and urgent. According to IPA's latest data, more than one-third of CEOs at non-national firms are older than age 55. At firms with $32 million to $350 million in annual net revenue, 40% of CEOs are over age 55. At firms with $12 million to $15 million in annual net revenue, 56% of CEOs are older than age 55. As the succession crisis influences the management model for accounting firms in the near future, non-equity partners may have an increasingly influential voice in the management of their firms.

The demographics of accounting firm management are changing, and not just in terms of aging partners. "The majority of hires are women. The average age of women working at accounting firms is 40. The average age of men working at accounting firms is 50. Project those figures out 10 or 15 years, and you'll see a very different model for managing an accounting firm," Erickson notes.

The importance of retaining quality technical staff "will have a more corporate feel," he predicts. "Generally speaking, non-equity partners are employees. They have jobs and bosses. Equity partners don't want bosses. Non-equity partners will increase the leverage of equity partners and provide more structure, much like high-level executives at a corporation who work for a salary and bonus and who report to bosses and shareholders.

"The larger a firm gets, the more it becomes managed as a business instead of as individual practitioners practicing public accounting. The impact of one person is lessened as firms get bigger, and firms don't need as many equity partners," Erickson says.

Subsequently, non-equity partnerships help drive up leverage ratios, a key driver of firm profitability. Erickson notes that, for the last few years, data indicates that leverage at accounting firms has been increasing at a rate of approximately 0.1%. "A partner with a $1.8 million book of business needs lots of different individuals to help manage that volume. Non-equity partners are ideal for that type of work, because they're the kind of people with great technical skills, great client services skills, and strong relationships with clients."