Q Can you advise of the range of
arrangements generally made in partnership or directorship
agreements for leaves of absence such as maternity leave or
sabbaticals or extended sick leave whereby you, as a principal or
shareholder in the business, are not actively working in the
business on a daily basis? I would be interested in the range of
issues, problems and solutions on this matter. I am in a situation
(on maternity leave) where I will not be working on a daily basis
in the business but am able to be involved in a shareholder
capacity ie monthly meetings.
A We put this question to our senior
contacts in local and global professional services firms and
received several generously lengthy responses - on promise of
anonymity. Sarah has pulled out the key themes.
Prepare!
Perhaps the bedrock in the answers we received is to prepare.
Whether the actual event is expected (like a sabbatical) or
unplanned (like a serious illness), policies that are fair to all
can be developed well before the leave needs to be taken.
I do think that it would be important to agree
things with the partner group up front first, including agreement
on what her involvement is expected to be and how she will fulfil
it so there is no perception of risk of exploitation by either
partner and all the necessary wheels are oiled beforehand.
"I would suggest the partners should agree a schedule [of profit
sharing] upfront: I would think most businesses would like to
encourage occasional extended breaks for all partners while at the
same time ensuring the business continues to prosper."
"My starting point with any such situation is "what is fair to
all parties concerned". There are many issues that need to be
balanced in the extended leave situations like maternity and
long-term sickness. These include, in no particular order:
- the needs of the leave-taking Partner
- the needs of the clients of the leave-taking Partner
- the management implications to the remaining Partners
- staffing implications
- the financial implications on the partnership as a whole
- the ability to plan cover for the leave-taking Partner's duties
(i.e. forewarned and planned versus sudden illness)
- the length of leave required, etc, etc.
Financial rewards
Two issues were identified here.
- Should the partner on lengthy leave be paid salary for time
spent attending regular meetings such as monthly partnership
meetings?
- Should the partner on lengthy leave be entitled to any profit
share?
Re 1:
The short answer seems to be that salary would be paid for time
spent in meetings of significant duration but probably not for an
hour here or there. The theme of 'agree it upfront' came through
strongly again!
Would the individual be paid for the time in these
meetings? My guess is that if an arrangement was made up front, the
firm would compensate for attending agreed meetings including local
monthly partner meetings (usually a half or full day), specific
specialty area meetings or worldwide meetings. This time could then
be paid either by approving the extension of the paid leave period
which would be the simplest (but not always most practical)
solution, particularly if on unpaid maternity leave, or paid as
salary.
Attending a one hour meeting or phone call here and there would
probably not merit salary… which is fair enough as partners should
not be expected to see their partnership role as time and
materials. However, I would be confident that if a more formal
involvement and contribution were agreed with management then the
time would be recognised and paid for.
This commentator also pointed out that all costs of travel to
significant meetings would also be met by the firm whilst the
partner was on extended leave. "After all, she is still a partner
of the firm with full decision and voting rights like any other but
she just happens to be on leave. "
Re 2:
In
general: Our respondents indicated that a lower profit
multiplier would usually apply during periods of extended
leave.
"It comes down to the firm's compensation committee (or
equivalent) applying the appropriate performance multiplier at the
end of the year considering the contribution. I would expect in
this case the person would get a 1 or 0.5 which means that get some
profit distribution upside but it is relatively small given they
have not been actively commercially contributing to the result.
It is important to remember that the 'ownership share' in a
professional services partnership is not like an equity share in a
company which guarantees all shareholders equal return on their
investment. In most professional services partnerships the
distribution is based on individual performance and contribution to
the overall profit pool and one cannot expect to share equally in
that pool if one is not contributing either commercially or
practice development-wise - which I believe is fair enough."
Sabbaticals: In one case
time away on sabbaticals counted fully towards profit share
allocation. It is perhaps noteworthy that sabbaticals were the only
type of extended leave covered by a policy on profit share in this
firm:
"We have a mutual agreement within our Partnership that each
Partner is entitled to a 5 week sabbatical leave, every 4 years.
Historically, the focus has been a combination of risk management
and partner well-being issues. We have an agreed sum that is made
available to the partner taking the sabbatical leave, and they
continue to receive their full profit share allocation when they
are on leave."
One response we received pointed out that the aim of a
sabbatical is to recharge the partner's battery. Generally,
partners who are off on sabbatical would not be expected to show up
for regular meetings…
Illness: What about profit
share during lengthy absence due to illness? Partnership Agreements
can deal specifically with the incapacity of a partner and provide
certainty both for the incapacitated partner and the remaining
partners.
"Our rules set that the incapacitated partner will receive the
share of profit equal to their grossed up (by the calculated amount
of tax) regular drawings for the first 3 months of their
incapacity. After the first 3 months, the incapacitated partner is
not entitled to any share of income until they are able to return
to work. Part time return to work is provided for by way of
negotiation."
Profit Share & Salary - Worked Examples
The senior administrator at one professional service firm
helpfully provided some concrete parameters for paid periods, and
for share of profits. Specifically:
"I would expect that partners would need to deal with absences
by apportioning the compensation between personal services (base
salary) and share of profits. If someone is absent from the
business then the base salary probably ceases but the share of
profits should continue for some agreed period of time and possibly
the portion of profits paid would vary depending on the any
contribution made.
The smaller the partnership the more likely that other partners
are picking up extra duties to keep the business running so those
left behind should get a higher share of profits. The partners
would need to agree how generous they want to be depending on what
the business can afford and how those left behind are managing.
Leaves of absence can have a paid portion depending on the
reasons for the absence:
- Maternity leave (12 weeks of full paid compensation: base
salary, profit share and superannuation)
- Short term illness (base salary continues until the statutory
entitlement is paid and then the company pays 70% of the base until
temporary disablement insurance kicks in to pay 70% of base. No
entitlement to profit share or super once the insurance kicks
in.
- Other extended absences such as 3 month holidays, time to write
a book etc. Normally no portion is paid beyond the regular vacation
balances.
I would suggest the partners should have a table like the one
below that they discuss and agree is fair to all concerned."
| Approved absence period |
Base salary |
Share of profits/losses |
| Up to one month |
100% |
100%
|
| 1-2 months |
20% |
100% |
| 3-6 months |
0% |
80% |
| 6-12 month |
0% |
50% |
| 12-24 months |
0% |
30% |
| above 24 months |
0% |
20%* |
*depending on investment in partnership / risk taken