CP Hay wrote:LOL scares the crap out of the spouse. That’s true because people erroneously think that a corporate job is more secure than self employment. Nothing could be further from the truth. Just ask someone 50+ who is looking for a job.
+1. If you're an accountant 45 or older in industry, you have a huge target on you. Thankfully age is not seen nearly as negatively in public, though.
novacpa wrote:I was delighted to exit and not stay another 30-years slaving to payoff the long dead senior partners who were but a faint memory.
Thanks for telling that story, and I'm glad you got out of that one!
Wiles wrote:I have been thinking about this last sentence. I think I agree that the folks in this category who either choose to not become partner or, for whatever reason, are not fit to be partner are being under-compensated under the third/third/third model. (...)
This seems appropriate for somebody producing $125K to make $50K. But if you double that, paying somebody $100K on $250K of billings, it seems a little low.
I should put this together with my previous posts on the topic into a larger overall theory and self-publish this as a book
To start at first principles, everyone within a company has their own contributions to its success, plus the company as a whole has a contribution, and the overarching goal is that the sum of its parts together is greater than when separate. For an accounting firm, most workers do the actual accounting work, many of us bring in additional clients and maintain the relationships, some of us handle administrative and managerial tasks, and so forth. The firm as an entity supplies capital and entity-wide goodwill. And the fruits of all this need to be split up in a reasonable manner.
The entity-wide goodwill of the largest firms is enormous. So, the entity goodwill plus the capital requirements of such a large firm means that a large payment to the firm for its contribution isn't entirely unreasonable. This massive firm contribution is my guess on why the bigger firms have been able to lengthen the paths to partner and create these non-partner careers: it allows the firms to continue to capture the excess of a high level worker's billings over their pay, and to split that among fewer persons than it would have been split between in the past, but they're able to convince people that it's in their best interest for them. And, in fairness, the firms might not be wrong on that.
Where this falls apart for the small practice is that entity goodwill is much, much lower. Nobody comes to Donut CPA because of the Donut CPA brand; clients come because of the personal goodwill, contacts, and reputation of the Donut. And I think it's pretty similar for most of us on this board, that most or all of the goodwill in our firms is owned personally. Because the entity goodwill of small firms is so minimal, it doesn't seem reasonable to suggest that supplying the capital requirements of our small firms are truly worth a third of firm revenues.
When you look at a new staffer that we might hire, the staff is contributing only their time and willingness to learn. Their work needs constant review and they need mentoring, and they need someone to bring in the work. It's possible (even probable) that a new staffer who produces $125k is overpaid earning $50k. But as they advance, they no longer need as much review, they need less mentoring, and in particular if they're bringing in work on their own through their own developed personal goodwill, and then you can start to see how they might be getting the short end of the stick. It seems likely that they are, or at the very least they might feel that they are.