• Career Center

    Let’s Discuss: Non-Equity Partners in Accounting Firms

    By | November 23, 2015

    If you have career aspirations to be a partner at an accounting firm, achieving the status of a "non-equity partner" might not be what you had in mind.

    The whole point of being a partner, I think, is the opportunity to have some skin in the game. Yes, you also have a say on how a firm is run and help develop its future but my hunch is that the biggest appeal for most people is the ownership. And as the name suggests, non-equity partners do not have the benefit (or risk) of being an owner of the firm. But now, as CPA consultant Marc Rosenberg notes, there are more of them than ever before, writing that "Nearly half of multi-partner firms now have non-equity partners, almost double the number of 10 years ago." 

    Why would a firm want to have "non-equity partners" in the first place? Rosenberg offers several reasons:

    • A way to keep the bar high for equity partner.
    • A partner-in-training program.
    • A way to recognize the stature and contributions of  highly valuable manager who meet most but not all partner criteria.
    • A staff retention tactic.
    • For lateral partner hires, to provide both sides with an opportunity to test each other out.
    • A title for merged-in retirement-minded partners and retired partners working part-time.

    He also lists "features" of non-equity partners:

    • Attend partner meetings.
    • Compensation determined the same way it was when the person was a manager — management’s discretion.
    • Access to the firm’s financial statements and performance metrics with one exception: compensation of the equity partners.
    • Equity partners should never tell clients and staff that someone is a non-equity vs. an equity partner.
    • A small but growing trend is to award partner buyout payments to non-equity partners, albeit on a much lower scale than for equity partners.

    I'm sure partner meetings are interesting, but I'm not sure wasting more time listening to other people talking is what most people look forward to. Likewise, Bullet #2 is pretty disappointing since accounting firms don't have the best record when it comes to transparency about compensation.

    That fourth bullet is especially concerning: non-equity partners are held out as owners when, in fact, they are not owners. One of the most important things I'd want to understand is the balance between my responsibilities and my liability exposure, especially in worst-case scenarios. Another downside of being a non-equity partner is pretty well summed up by this tweet from Francine McKenna:

    If you could be let go at any time for any reason, that doesn't really feel like being a "partner" does it?  

    Call me cynical, but I kinda get the sense that at least part of the non-equity partner tactic is to move the goalposts on anyone who they deem "not quite ready" to be a partner when they don't have a better excuse. I wouldn't go quite so far to say that non-equity partners are second-class citizens, but some people might.

    But then again, maybe ownership isn't as important to most non-equity partners. They don't want to deal with the large buy-in, liability risk and responsibilities that come with managing the firm. In other words, being a non-equity partner might be exactly what some people want.

    Plenty of ink has been spilled on the subject, but we haven't really discussed it here. So for the non-equity partners out there, share your experience and perspective about your role and how you feel about your long-term prospects. If you're a manager at a firm, does a non-equity partner role interest you? Does it seem like step and toward the goal of being an equity partner? Or do feel it's just another senior manager parking lot in disguise?  

    • Smack That

      So, basically “Executive Director” as it’s known in Big 4?

      • liEYr

        Bingo. These folks are not really partners. The argument most often used for such a designation references a certain level of “book of business” required to be a full equity partner….or other similar mumbo jumbo. Glorified senior manager…or perhaps supreme bestus senior manager humongus. Regardless, you are not really a partner.

        • The majority of the Exec Directors are women from my own experience. A lot of them have specialties (EBP audits for example), and I think the main attraction to being an ED is a high salary and a lesser workload/more flexibility than being tied to a specific book of business.

          At least that used to be my impression. The fact that there are EDs out there doing all the things a partner would do without the benefits of ownership is pretty sad indeed.

          • buthurt

            Don’t they have more ED in advisory practice these days?

            • Maybe. I was only speaking from my visibility when I was in Audit.

            • buthurt

              Yea audit ED are usually HR/technical accounting/specialist

            • done with the rain

              Thats due to more non-CPA’s in Advisory. At Moss Adams, one of the firm’s top producers is a JD Tax Attorney collecting around $900/hr and he is just an Executive Director because he is not a CPA.

          • dumpus

            I’ve seen the same thing.

            Normally the difference between a woman ED and a woman Partner is children. I mean, the Old Boy’s Club is still alive and kicking in public accounting; one can’t be committed to raising the firm if they’re committed to raising other things, amirite?

        • Green Dot Peon

          Supreme bestus senior manager humongus – what a perfect title for public accounting

          • liEYr

            Well….the longer the title…the lower the expected compensation…or something like that. That’s what she said at least!

        • alicja1977

          Or, perhaps in a smaller firm, a “Senior Director of ___” would have a similar connotation?

      • Executive Director is similar if not the same as Director. Some firms use the term ‘Executive’ to differentiate between those who are good technically and have significant experience, so an asset to the firm but they not going to make Partner. And for the avoidance of doubt, they are not Partners (I don’t know where you go this from!) but do alot of the grunt work in terms of managing others, organising audits and keeping key clients sweet.

    • “Call me cynical, but I kinda get the sense that at least part of the non-equity partner tactic is to move the goalposts on anyone who they deem ‘not quite ready’ to be a partner when they don’t have a better excuse.”

      I don’t think that’s cynical Caleb. I’d say that’s right on.

      • N.E.R.D.

        I thought moving the goal posts was a feature of accounting, not a flaw? Without the option to customize project due date targets in an ever changing globalized commerce marketplace, how else could the firm provide a challenging career environment for its employees to grow to their fullest potential? Synergy, leverage, and technology.

        /s

      • liEYr

        He is spot on! I’ve actually seen that play out in partner meetings..of course without any admission the goal posts are being moved! There are situations where it does make sense for both parties to go down the non-equity route. A technical specialist in a small firm for example. However, it should be accepted with open eyes and with transparency from the firm. That, in my experience, is not always part of the conversation. The ultimate play is to look what you can get outside the firm…and if you can get an outside firm to hire you as a direct admit equity partner…go back to your existing firm and see if they will match. We live in a free country (at least for now) and that is the only real way to determine what you are worth in the market.

    • The Horniest Partner

      We have used non-equity as a short-term “training” period but usually it is an economic decision. Existing equity partners will not take a pay cut to admit a new equity partner (Firm Net Income / # of equity partners = net income per partner). You can make a deserving person an non equity partner and it doesn’t really change the bottom line significantly. When the numerator increases by firm growth or the denominator decreases by a retirement then the economics work.

      • How long is the wait on average for non equity partner to be made a full partner?

        I mean if I wait 2-3 three years that might be worth it…but I imagine 5-7 would be pushing it.

        • The Horniest Partner

          Only one year for one very solid guy, next guy (not as strong) will be longer, probably 2-4 years. A lot depends on firm economics. I am sure if you ask him, he is ecstatic to be non-equity and being first in line ahead of other sr mgrs.

          • B4Senior

            Is it guaranteed that he will make equity partner? Or are there perma-non-equity partners?

            • The Horniest Partner

              Never a guarantee but I am sure he was told what needs to happen to make the jump. This is a new concept for us so all the partners prior were equity day 1, with a couple odd ball exceptions.

        • You read my mind. It’s almost as if we’re BFFs.

        • DeloitteSerf

          I don’t see this happening anymore. Granted, I haven’t been around that long. It is usually a one shot promote, you either become Director or Partner/Principal and you’re locked in.

          I do think this was common in the early 2000s, but like I said, I personally haven’t seen the move to Director -> Partner.

          • iamthelolrus

            YMMV, in my LoS we don’t have any Senior Managers, they just call them Directors, and it’s the level below Partner.

            • DeloitteSerf

              yeah I know at PwC, Director is the equivalent to SM at Deloitte. I have noticed that Director level at PwC is not as much as a parking lot as SM at Deloitte.

      • N.E.R.D.

        “You can make a deserving person an non equity partner and it doesn’t really change the bottom line significantly.”

        But, why? Is it just a token promotion; the consolation “partner” title for managers?

        Seems simple to me; I wouldn’t consider myself a partner unless I was equal to the other partners within the firm (not equal %, but equity vs no).

        Non-equity partner smacks of marketing gimmicks and semantics games.

        Is there a legit argument to be made for non-equity partner I am missing?

        • The Horniest Partner

          We’ve had very solid Sr mgrs. who do 95% of the things other equity partners do. Might just need to work on an area or two but they handle a good client book of business. Making non-equity partner is a reward for them and from the outside it is seen as a promotion to “partner”. We don’t broadcast who is equity vs non equity but staff likely know.
          Being a “partner” helps them in the market place to be more accepted. On our website, on business cards and other daily interactions they are considered “partners”.
          Also there’s a little bit of a bump in pay.

          • BasisPoints

            Doesn’t this open you up to risks from these non-equity partners entering into contracts? While I’m sure none of them would be malicious, might some be a bit over-ambitious in their quest to make equity partner?

            • The Horniest Partner

              are you referring to taking on new clients? If so we have client acceptance and other q/c measures to mitigate risks.

    • DeloitteSerf

      I’ve talked about the non-equity/director level on here before, and it is one position I’d never want.

      I have lousy info about the actual comp at the Director level, but I can guess its anywhere from $200K-$400K give or take, at most of the B4. I’m sure some are over that. It actually works out good for the partners because they aren’t having to spread out their fat draw with a new partner, and the Directors are the ones in the office all the time (at least in my office) and do all the grunt work, scheduling, deal with the staff etc.

      Most are still selling, and I’ve noticed, they often “pick up” clients when there are shifts at the PPD level. Essentially, you have the same responsibility, but don’t get the pension, your compensation is way lower and you’re locked in. There are definitely some who like the position and are able to keep it 9-5 for the most part, but this is definitely not the norm.

      The firm can throw the lifers/senior managers a bone that they have to take and can get away with. The senior managers can’t leave without a massive paycut, and if they’re in Tax, they have almost zero options outside of the firm. I’d say in the next 10 years, we will see a lot more people being admitted to partnership (mostly in the specialties) since the baby boomer protectorates will be forced out. Although lately, we just direct admit partners from different firms who were forced out due to retirement age. I know some of our best talent got poached by other firms for direct admit, so I guess if you’re in this position, you should probably be looking around.

    • RG7

      most partners at big 4 have to move offices to become a partner. Unless there’s a significant need somewhere, they can’t just make someone a partner- but usually there is a need somewhere – so with the partnership comes a move across the country. Unfortunately, this is just the reality of staying with a company and taking promotions as limited as partnership promotions (or even after partnership into national roles):

      I’ve know senior managers become managing directors because they had a life, a house, kids, etc, and a much lessened work load. A managing director I know is completely respected (ie; the partners go to HIM for technical questions) and works from home 3 days a week. He also makes 250+ and bonuses. When you take a step back and compare that to partners in the area – maybe they are 300+ and will eventually cap out around 5-6 on average, 1m for rock stars, but they work ALL the time.

      Some people sit back and go “I’ve got 250-400 a year. I’ve got a relatively low key schedule at 40-50 hours, I have incredible flexibility and a family, do I really need 400-700 for extra sacrifices?” And the answer is an obvious no.

      It’s the same reason people go to industry for lower salaries and a better work life, but in the firm itself.

      Of course this is only true if the difference between equity and non equity partners is both the job and the pay. Not just the latter. Probably depends on the firm and office. Like everything else.

      • Not sure about this move office thingy Stateside to become Partner, as in the UK there are three main routes:

        1. Work your way up from the bottom, grind it out and eventually one day you make it, basically because everyone else has left or no-one else wants the job or is bothered.

        2. Win business, and alot of it. Pure and simple.

        3. Set up your own practice, call yourself Partner, thereby avoiding route 1 and hope you can go down route 2 very quickly, otherwise the only thing you will be pimping out is yourself.

        It’s just come to me. There is actually a fourth route which is similar to 2. See an opportunity in the market, capitalise on it (no pun intended) and sell lots of it. The people who can do this are very few and far between.

        Here endth today’s lesson.

    • anon51

      Audit directors and managing directors are not considered partners. This question is more along the lines of a 2 or 3 tiered partnership. A 2 tiered partnership can consist of both equity and non-equity partners, or equity and fixed-unit partners. A 3 tiered partnership would consist of equity, fixed-unit, and non-equity partners. From what I know, all of these types of partners can contribute to any non-qualified deferred compensation plans. All of the partners can bind the firm into contracts such as engagement letters and can sign audit opinions. In terms of the “pension” others mentioned, I assume this typically would be for the equity and fixed unit partners, who actually had to contribute capital to the partnership. Usually a fixed-unit partner can move into the equity partner role depending on a number of factors and criteria set forth, and this would take 1-5 years. Some firms allow fixed unit partners to stay on long term in that role as well, while others do not and the person must leave after a set amount of time assuming they don’t make it to the equity partner level.

    • Savvy

      I’ve worked at smaller firms where I would have preferred non-equity to equity. One in particular had some systemic issues that made me doubt its potential for long-term success–but non-equity partners still made bank. Take non-equity, get the experience of performing most of those duties (bringing in business, expanding your relationship skills, etc.), save up a nice bit of cash, and run like hell before the firm crashes and burns. Win!

      That said if you’re at a successful firm that you’d be proud to be an owner of–I can’t imagine settling for non-equity unless they have a structured agreement setup. Something like one year as non-equity before receiving the opportunity to buy in or whatever.

    • Big4Veteran

      This is basically a job that the firms created for hard-working senior managers that they don’t want to admit into the partnership (most likely because of serious deficiencies in the senior manager’s overall game). It allows the senior managers to continue working hard and for good money, when the partners can continue to sit on their fat asses and have their “non-equity” partners do all the work.

      As a client, I’ve worked with many “directors” or whatever the firms call them. For the most part, they are very experienced managers who lack the business sense and personality to be an actual partner. They are very good at auditing and crossing things off the checklist. The firms have created a home for all those senior managers who don’t have what it takes to make partner, and are too scared to leave the firm.