Memo to Wilson, Higgins, and Poncelet, LLC
As you embark upon your new partnership, it is critical to determine profit allocation at the onset to manage the expectations of all three partners and promote growth of the firm. First and foremost, it is critical to determine what percentage of profits will be allocated to an incentive pool, and what percentage will be reinvested into the business. After consensus on this point, there are several mechanisms by which you can pay out the funds in the incentive pool. Here, I propose the following two options, both of which are based upon a pay for performance paradigm.
One of the most effective ways to reward partner performance is the use of a scorecard system. Because each of you is contributing something different to the business (Wilson is responsible for the startup capital, Higgins is responsible for operations, and Poncelet responsible for sales), each partner will have different objectives for continued and profitable operations. In developing a personal scorecard, together, you must first formalize the goals of the firm, and then identify several practice areas that support these goals. With practice areas in place, the scorecards are then personalized by "weighting" each partners expected contribution to each of these areas. Year-end performance score is based upon predetermined metrics in each of these areas (see Exhibit 1 for an example scorecard).
In a related approach to the scorecard system, many partnerships, particularly those smaller in size, opt for a simpler approach consisting of objectives and annual goals. Using this approach, you determine up front what the payout percentage will be if all goals are met. For example, you may feel that an equal distribution (33% each) is fair. In this instance, each partner would be charged with a list of objectives for the year, which, if met, would support the 33% payout. Here, there is no competition between partners, which...