Partner compensation is the perfect gauge for firm success, partner achievement, and partner happiness. Many firms have intricate compensation systems while others are less complicated. The common ground is that the system is expected to drive a behavior pattern.
If you are serious about M&A, all parties need to be sure that the compensation that will be in effect for merged-in-partners will drive a behavior pattern, too. You also need to have a system that will reward partners for expanding responsibility.
To optimize partner compensation in an M&A transition, focus on these 5 issues.
If you have a merger of equals, or a merger with a firm that will increase the size of your firm by more than 30%: Will you be ready to re-engineer the compensation plan for all partners? Will you take the time to figure out the footings before you proceed with closing a deal?
When merging a smaller firm into a larger firm, it’s common to keep the merged-in partner comp in place for a year or two, and then move the continuing partners into the successors’ plan. Think about creating a second two-year window with a formula approach that introduces parts of the successors’ plan.
When transitioning partners toward a slow-down, there will be start-up time for a successor partner and new staff. Consider setting a benchmark for the potential write-down, and reward or penalize performance that falls outside the benchmark, whether up or down.
Determine how much transition should be achieved by year and reward partners taking on the clients for expanding the service.
Partners who will be merging to secure an exit plan will generally prefer to retain their pre-merger comp if they perform in a range. Build a plan that pays based on collections and uses a ladder of percentages of collections based on specific achievement. Be sure to create a bonus for cumulative performance or a penalty if appropriate.
Every firm has their own views and preferences when it comes to compensation. But to succeed at M&A, compensation has to be a win-win.