Partner Compensation – We Now Know How It’s Done

We know more about how the largest audit firms evaluate, compensate and, in rare cases, terminate partners. As I reported recently when discussing the challenges audit firm partners have today, the largest audit firms recently disclosed this information to the ACAP Committee.

With the crisis in the financial sector impacting the number and size of the clients of the Big 4, these issues are forefront for the firms.  I believe partner layoffs for all of the Big 4 are very likely.

Here’s some excerpts from the report provided, with the help of Center for Audit Quality. 
Deloitte’s info leading off:
Partner Assessment
A. Annual Evaluation
At the start of the fiscal year, partners set goals for themselves based on their role in the firm and firm-wide objectives. These goals are generally in areas such as practice management and client service, leadership, quality, partner development, and people. Partner goals are reviewed by leadership. At a mid-year review, partners assess their own progress toward their goals and receive input from firm leadership. If necessary, partners refine and reassess their plan to complete their goals by yearend. 

At the end of the fiscal year, partners receive an appraisal for their actual performance. For the Audit function, the appropriate business leader recommends a final overall rating and takes into consideration the partner’s quality and people ratings. Quality, people and overall year-end ratings are subject to oversight, review and concurrence by the various leadership committees of the Board, and the chief executive officer.

B. Compensation
During the compensation review process, partners are subjected to peer comparisons based on a variety of criteria, including quality, client service, practice management, eminence, teamwork, and people management. These peer comparisons contribute to the earnings allocation process because the comparisons equate levels of role, responsibility and performance with levels of compensation.

Partners’ shares of the firm’s earnings are evaluated and adjusted each fiscal year to ensure that earnings are equitably distributed among all partners.

At the start of the fiscal year, partners are assigned units based on their level, role, responsibility, and performance (Le., overall appraisal rating). Unit allocations are initially recommended by appropriate business leaders and are subject to the oversight, review and concurrence by various leadership teams and a sub-committee of the Board. Final review of earnings allocation is conducted by the Board. At the end of the fiscal year, units are valued based on the firm’s performance with respect to its operating plan.

4. Capital Contributions
The Board approves the formula used to determine the amount of required capital a partner must maintain with the partnership.

Ernst Young
Partner Assessment
A. Annual Evaluation
Every partner participates in the Global Partner Performance Management process. Within this process, every partner creates goals for the upcoming performance year. These goals are developed jointly with the partner’ s direct supervisor and are developed around key aspects of the Firm’ s Balanced Scorecard. I

In addition to the Balanced Scorecard goals, every partner is required to have goals related to enhancing quality, reducing risk, and enhancing t he firm’ s people culture as well as goal s relating to their specific operational responsibilities. At the end of each fiscal year, the partner completes a self – assessment as to how well the goals set forth in the initial goal setting process were addressed.

During this same time period, the partner responsible for reviewing the individual partner’s performance gathers feedback which include an assessment of service quality by the cIients served; input from others who have worked with the partner during the year, and an assessment of the partner’s focus on quality and risk management issues. The self-assessment and information received from feedback are summarized by the reviewing partner and reviewed with the business unit leadership. This information is then reviewed and used by the USEB in making compensation determinations.

B. Compensation
The USES makes determinations with respect to partner compensation, with oversight by the AEB to ensure adherence to the AEB’s policy guidance. All partners participate in a single pool of earnings. After the firm’s earnings results are known, the Board solicits comments from various levels of leadership to provide initial recommendations for earnings allocations. The USEB considers past earnings and a partner’s performance history as a frame of reference, in addition to the information obtained from the annual partner evaluation process described above. Finally, subjective quality of judgment is also an important factor. A key function of the USES is to challenge the appropriateness of the overall allocation process, with the objective of ensuring fair and comparable treatment for all partners.

4. Capital Contributions
Capital for each partner is a fixed percentage of the partner’s prior fiscal year earnings, and is determined by the USES from time to time in its sole discretion, so long as the determination is made in a consistent manner for all partners.

Grant Thornton
Partner Assessment
A. Annual Evaluation
Grant Thornton generally assesses partners using five measures: (1) Quality (which is double- weighted); (2) People; (3) Client Service; (4) Market Activities; and (5) Profitability. Each year a partner establishes goals along these measures with his or her supervising partner and these goals are evaluated in a documented performance review. The partner receives a performance rating as a result of that review.

B. Compensation
Partners receive either unit-based compensation or fixed compensation based upon their experience and performance. The firm also provides a bonus plan for partners. The overall performance rating mentioned in the partner assessment process serves as the basis for compensation. In general, partners with less than seven years of experience are eligible for compensation adjustments each year and those partners with more than seven years of experience are eligible for compensation adjustments every other year.

28 replies
  1. Anonymous
    Anonymous says:

    Francine, will you please post your findings for KPMG and PwC? From the information you provided, I would not be interested in being a partner. The comp is so much more subjective than I realize. I guess that is why there is so much a** kissing and ready to layoff. Seems like if you do not do as you are told, your a** may be on the line.

  2. Anonymous
    Anonymous says:

    Thanks Francine – so this is helpful but how do these explanations translate into average $$$ for partners?

    Do advisory partners in firms make more if they generate more revenue (would seem so) – but how much? Could one make $2M, $3M, $5M???

    Also, how does AIG takeover by Fed effect PwC as AIG auditor – or does it not?

    Article on Bloomberg says estimates for professional fees from lawyers, accts and financial advisors on LEH bk could total $900M…sounds like partners may not be laid off as you have previously stated?

  3. Anonymous
    Anonymous says:

    Moral Hazard, anyone? Who isn’t too big to fail anymore?

    Should GAAP even have going concern consideration anymore since the bald and the beard will just rush save any and all?

  4. Anonymous
    Anonymous says:

    At Deloitte, who gets to decide whether a particular partner exudes eminence? Is the loud mouth partner who drowns all others out that exudes eminence? Or is it the white, male, excellent golfer partner that exudes eminence?

  5. Anonymous
    Anonymous says:

    Francine – the link you gave only gives numbers over the 6 largest firms – no mention of Pw or K.

    But to the above it looks like about ~700k on average per partner…wow. Thats a nice chunk of change but as the report points out comparable positions outside a firm pay more…so why do they do it – become partner?

  6. Francine McKenna
    Francine McKenna says:

    @Anonymous regarding AIG, LEH:

    If the Fed knows what’s good for them they;ll fire PwC. It’s about time. Since it;s not a bankruptcy, they don’t have to, but of course they can now do whatever they want to. As AIG sells assets, those units will inherit whoever their acquirer’s auditor is, so PwC’s client will become smaller one way or the other.

    With regard to LEH, PwC has been named administrator of the bankruptcy in the UK. In the US? Not sure. The difference between litigation support, corporate investigations and other advisory for a bankruptcy is that is not the same kind of annuity as an audit. The fees may be high but they are monitored by the court, have some constraints and come to an end. They do not save the audit side. As firms go under or combine there are less big audit clients like Goldman Sachs, which brings in $70 million a year for PwC. The firms would like to think they can make up for lower audit revenues with advisory, but it’s not the same clients and they have to win the work. There are more competitors for this kind of work than there are for Fortune 500 audits, especially of the size of Fannie Mae, Freddie mac, Lehman, Merrill and AIG.

    As far as revenue spread between Advisory partners an audit partners, it al depends. All the Big 4 have a common profit pool. So, as the whole firm goes, so do all of the partners equally. If audit is dragging, it drags everyone down. But partner compensation is individual. If one partner in Advisory does great and is awarded a lot of units (a very political, subjective thing no matter what they tell you) then they may do very well. But as was said earlier, consulting or Advisory revenues are big bursts, versus long annuities. Advisory partners have to sell every day and they have to sell more, since the average engagement, without systems integration is small. Even in a systems integration enabled firm like Deloitte, consulting is still only half the size of audit. Audit rules. One audit and a firm has to put audit first and follow audit rules.

  7. Anonymous
    Anonymous says:

    Agreed on the annuity issue compared to hustling for business on the advisory side. But 10% of those estimated LEH bk fees would make an advisory group’s year…could Pw get the US side of the bk…are there independence issues – or since its advisory independence is not as strict? Hope i didn’t open up pandora for you Francine, i know independence is a 4 letter word for you!

    AIG just put that audit out to bid recently too and Pw “re-won” the work…nice job fellas.

  8. Francine McKenna
    Francine McKenna says:

    @Anonymous With regard to numbers for the firms…. If you’ve been reading the blog for a while, you’ll know that one of the points I make most often is that the firms are not transparent, do not disclose enough information. Partner compensation, profits, litigation exposure, funding sources… What’s in this report to ACAP is all there is and more than there has been in a while. The only ones who know the real numbers are the firms and, hopefully, the PCAOB/SEC and neither are telling.

  9. Francine McKenna
    Francine McKenna says:

    @Anonymous With regard to PwC and bankruptcy assignment for US LEH. I don’t know why there is no news on US bankruptcy administrator. Maybe there’s just no news. Maybe there is a conflict. Or maybe there is still too much uncertainty about which US assets are under the order or will be. I just don’t know at this point.

  10. Anonymous
    Anonymous says:

    At D&T, in 2006, all new Northeast(Boston, CT, WFC, Parsippany, Princeton, Philly) new managers were told in a New Manager Day that brand new partners were coming in at about $300k/year, and I believe they said the avg was around $700k.

  11. Anonymous
    Anonymous says:

    300k and all that risks and a cap contribution…wow that seems grrrreat. What does it take 10, 11 maybe 13 yes to make partner? Sheesh, starting attorneys at biglaw make 190 (incl bonus)

  12. Anonymous
    Anonymous says:

    Disagree, disagree. Biglaw partners make $1M+ on average many make more than that. From Francine’s report Big 4 partners average 700k…

    Go look at a firm like WRLK…

    And an associate starts at 160k and a big 4 partner AFTER ~13 years of work makes 300k…so Biglaw makes what a first year Big4partner makes in half the time – Biglaw 5th year associate makes 300…and no huge risks like a Big4 partner and no capital contr…

    But hey, if you EXUDE EMINENCE…maybe you make more…

  13. Francine McKenna
    Francine McKenna says:

    @anonymous I have to agree with the you. Big law is much more lucrative for those who make it to partner. At the largest firms. And the law firms are not crying about litigation exposure and asking to be “capped”. They take it like real men when they make mistakes.

    That all being said, any firm run on a partnership model is ruthless and Big Law weeds people out in an even more detached fashion than the Big 4. The leverage model is much tighter.

  14. Anonymous
    Anonymous says:

    I respectfully disagree with Business Week and have decided to share with you my ranking of the Big 4 firms, from best to worst from an audit and tax perspective: EY, PwC, DT, and KPMG. DT’s eminence criteria just reinforces how cheesy this firm is.

  15. Anonymous
    Anonymous says:

    Francine – your Sept 16th 9:44pm CDT post states that "Even in a systems integration enabled firm like Deloitte, consulting is still only half the size of audit". Where are you getting your data from? For the fiscal year ended May 31, 2008, Audit represented only 31% of Deloitte revenue in the US, while Consulting & Advisory (C&A) represented 47%.

  16. Anonymous
    Anonymous says:

    The categories in the breakdown you cited are driven by Deloitte's legal structure in the US, not the actual nature of the services performed.

    Consulting and Advisory services includes our Enterprise Risk Services practice (9 percentage points of the 40% of US revenue reported for "Audit and Enterprise Risk Services"), our Financial Advisory Services practice (5% of US revenue), and our Deloitte Consulting practice (32% of US revenue). This and 1 percentage point of rounding error adds up to the 47% I cited for Consulting & Advisory services. This means that Consulting & Advisory services is nearly the same size as the Audit (31%) and Tax (22%) practices combined.

  17. Francine McKenna
    Francine McKenna says:

    @Anonymous I have published numbers to quote from. Are 2008 numbers available on the website or in a public annual report yet? Yours come from someone who is anonymous and is admitting that they are not based on legal entity structure but something else? Where are your numbers published? Why are you including ERS as part of Consulting and “Advisory” when your website includes it as part of Audit? ERS is IT Audit and Security. During the last several years, how much of these hours were billed to audit clients and how much was billed to non-audit clients?

  18. sean
    sean says:

    ERS is tied heavily to Audit and much of their revenue recently has been associated with D&T audits, so n,o that revenue should not be separated and be classified with consulting

  19. Anonymous
    Anonymous says:

    I disagree. ERS staff spend time assisting with Sox/controls related work on audits for which DT performs attest work. Those hours and fees are tracked under audit. The rest of ERS staff spend time on consulting engagements for various projects that have nothing to do with attest work. Any ERS only revenue would be for the R space clients — which are “relationship” clients and not “attest” clients. Therefore, ERS is part of AERS and supports the AERS client base, but they also do a fair bit of consulting for nonattest clients. My office has many fortune 500 clients for which we do project related consulting work that we would never want the attest work for (hence, the “R” space versus attest.) I think these blogs are great, but many jump to broad conclusions and get hung up on things without realizing that they don’t have all the facts.

  20. Francine McKenna
    Francine McKenna says:

    @Anonymous Hard to have “all the information” when what’s available is Deloitte’s published information and it contradicts other contentions. “All the other facts” have been provided here anonymously, via comments on a blog. Which one would a journalist use?

    If someone in an official capacity wants to reorganize the numbers, 2008 revenue$ and percentages, on record, and send to me, I’ll print them and correct my “broad” conclusions if necessary.

    BTW are you calling me a “broad”? Was that a sexist dig? LOL

  21. Anonymous
    Anonymous says:

    Do those numbers exude eminence?

    Beat it you DT lurkers unless you can pony up some corroborating documents to back up your numbers.

  22. sean
    sean says:

    no one is jumping to any conclusions without the facts. The very notion that ERS work is coupled with audit means it needs to be included under audit – at lesat in terms of viewing by outsiders. DT will not realese more information than they have to the public. The local office here has consulting projects as well, but without a realese by DT stating what is what to the public, then why try and seperate. You will be making an assumption either way. And i am sorry, but the general base of consulting only clients is shrinking.

  23. Anonymous
    Anonymous says:

    As always, there are many ways to cut the data. all of which are appropriate. But, I guess I don’t see the point in nitpicking?

    I also don’t see why some feel the need to post things as “beat it” –I would think this blog and related comments would be meaningless without various parties posting their viewpoints. Not everyone at DT has the liberty of all of the exact percentages of how the business is run (I am not a partner), but I do work in the offices and do have knowledge of what projects exist at a function level (eg. audit support vs. consulting type) — so, I think it is ridiculous to tell someone to beat it if they are not able to produce to the percentage detail.

    My main point was that while some functions serve in audit support, it is a generalization to say that the majority of their revenue is in audit support (e.g., tax and ERS.) Because I am unable to produce percentages, I guess the point is not worth discussing because it is not “published” data.

    I’m done — I found this blog interesting at the beginning, I now find it just a bunch of big 4 haters. I thought it would be nice to have a healthy discussion, but didn’t realize the level of immaturity that is obviously present here.

    I’ll go back to dealing with professional discussions where opposing viewpoints are welcomed and not told to “beat it”. Fact is, this blog would be nothing without the big 4 and opposing ideas. Having posts that serve no other purpose to call out DT lurkers and opposing views are told to beat it are ridiculous and unprofessional. Continue on with your hate, but realize those type of arguments only belittle your message. I respect opposing opinions, but not when they lack substance.

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