A reader asks:
Why would anyone out there continue this rat race when the firms cut partners based upon politics and numbers that they manipulate?
That’s a good question, grasshopper, but really the second question. First we should ask: “What is the value of a partner?”
You might think the smarter you are, the better you are at your job, the more your staff and clients admire you, the more valuable you are as a partner. You would be sort of one-third right. PwC, for example, rates partners on the following criteria (same as staff but with different weighting): • People • Quality • Profitable Growth • Partnership and Teamwork. When PwC announced their “Exemplary Awards” last week, a kind of “partner bonus,” the “majority (~80%) of the awards were for efforts relating to growth and teaming on a cross-line of service basis to deliver the firm.” Firms should grow, especially if that means serving clients (in particular multinational clients) better. But I, for one, believe in the theory, “Small is beautiful.” What’s been lost are strong incentives for quality, technical knowledge, and mentoring staff. That’s what makes a good auditor and what fulfills their public duty to protect shareholders. Most partners are glorified staff, with no authority or influence over their business, strategy, or staff. They’re valued only for the ability to put deals together, as a team player. Although we’re seeing an increase in fraud and accounting manipulation, the economic downturn and diminution of the Sarbanes-Oxley gravy train means instead partners are being demoted, force-ranked out, had compensation cut, and marginalized. This is happening just when their knowledge, skills, and ability to coach younger professionals is at its peak and most needed.
You have to feel for them. There’s not enough lucrative business to support them and fewer staff to justify their existence. On average, “Exemplary” PwC partners received ~$100k bonuses, but the lucky ones were only 4% of the total. Some partners have been cut off at the knees; one day there’s a job, clients, staff, and a reason to get up in the morning. The next day you’re toast. I hear from them via Linked In, emails, and phone calls. In Chicago, Deloitte demoted and cut many across the board, KPMG and EY did the same in selected practices, and next tier firms cut everywhere. PwC took a different approach, cutting compensation over time, taking away clients, force-ranking them via performance appraisal hell, pushing them out, “feet of clay” first. Some resisted or settled their legal claims.
Severance is not as generous as you might think, being driven by one-sided employment contracts watered down — over and over — with little push back from partners themselves. The firms don’t expect them to fight back, so if they do they win a monetary battle, but typically not the war (you’d have to start a blog to do that). There’s little chance to move to another Big 4 firm. Next tier firms are not hiring big names unless you bring significant business. But if you had significant business and had been playing the game, you wouldn’t be in this situation. For some partners, if they haven’t overspent or have minimal family responsibilities, it may be the best thing that ever happened to them. Plenty of time to make real money. Rewards for partners in the Big 4 are fairly modest when compared to those of their client counterparts.
For some it was enough, if it weren’t for the lawsuits. When KPMG settled the tax shelter case, partners ponied up, on average, $500k each to cover the penalty. The firms don’t keep much in reserves and borrow for ongoing operational needs via factoring receivables and non-secured lines of credit. But financing choices are limited due to independence. Most partners know no other life – recruited right out of college and sold a bill of goods: “Do well, do more, and yours too shall be the prize.” The job market for CFOs, Controllers, and Chief Audit Executives is not so hot. Independence rules constrain their ability to go directly to a client. If the partner was not the designated spokesperson for the firm in an industry or a subject matter expert, outside speaking and writing experience is limited. You’d be surprised how many, when Googled, draw a blank, even after 20+ years of working.
It doesn’t help they’re not even publicly associated with the clients they served via their signature on an audit report.
Well, maybe in some cases, it does.