Why Advisory Firms Need ‘Real’ CEOs

It probably strikes you that we are now describing a very large firm: an executive committee, all these executives and tons of overhead! Perhaps the entire structure requires a very large firm, but consider the fact that the largest advisory firms in the industry are easily exceeding $15 million in revenue and 100 employees. More important, consider all those structures as emerging. Perhaps your current board is “all partners,” but as long as you prepare thoughtfully for the day when the board will not include each and every partner, you will find this to be a natural evolution process.

As Tim Chase, CEO of WMS Partners, puts it: “You have to plan your governance structure for the future of the firm. The earlier you adopt the governance structure that will sustain you as a $20 million or $30 million revenue firm, the less friction you will experience as you grow.”

Compensating CEOs
According to Bob Bunting, former CEO of Moss Adams, “The economic impact of the CEO’s work vastly exceeds the impact of almost any other activity. The CEO can complete an acquisition that dramatically increases the size of the firm and enters new markets. The CEO can also recruit a new partner with new services and skills. The CEO can also help deal with an underperforming partner. The impact of the CEO on the firm is dramatic.”

Measuring that impact in compensation, however, can be notoriously difficult. We have some data from advisory firms suggesting that CEOs receive total cash compensation between $350,000 and $550,000, with bonus compensation between $50,000 and $150,000. It is our experience that much of the compensation information is influenced by the fact that the CEO is often the largest shareholder.

Against intuition, the CEOs we work with in the industry often choose to underpay themselves for the CEO job. They are either confident that the profits of the firm will reward them more than fairly, or they are simply passionate about the business and not too worried about the compensation.
Each firm should create its own philosophy for executive compensation, but there are some universally important questions to ask:

• Should the CEO be the highest compensated partner?
• Should there be a CEO bonus?
• What percentage of the profits of the firm should go to executive compensation?
• Can equity compensation play a role in compensating the CEO? (It certainly does in public company executive compensation, and for good reason.)
•  Can the current partner compensation system be modified to allow for CEO compensation?

Changing
The presence of a CEO does not mean that the rest of the partners can remove themselves from management responsibilities. In fact, involving all partners in managing is the first step toward establishing strong leadership. Much how a democracy requires everyone to participate and understand what they are voting for, an executive leadership model requires owners to understand the decisions facing a firm. Otherwise, the outcome is frequently a CEO without a budget or authority—a general without an army.

A CEO should not be a CEO for life. As a firm changes, the vision may change and, of course, the effectiveness of the CEO may change. It is probably best for each firm embarking on the process of empowering a CEO to establish a (term) limit of service and a mechanism for renewing the office or changing leaders.

A decisive leader must make the difficult decisions that guide a firm toward its vision. To be successful, a CEO needs the support of his or her partners and the authority to act on their behalf. While very few firms in the industry today have individuals who function in such a role, it is our belief that the successful, large and growing firms of tomorrow will all follow a strong leader—a true CEO.