Salaried Member: Disguised Salary: Fees generated
In some Professional firms, members are rewarded on the basis of fees they generate.
A realistic view of the arrangements needs to be taken. If the arrangements determine each partner’s share of the profits then it is an arrangement for the partner to be paid a share of profit, it will not be Disguised Salary.
If it is an arrangement under which the partner receives a cash amount (for example, a proportion of billings), the partner will be a Salaried Member.
This example looks at the “eat what you kill” model.
GGG LLP is a large professional LLP and operates a remuneration system under which each member is paid a profit share according to the amount of fees he or she has brought in.
The question is what does this mean? If it means that the share of the overall profits is dictated by the amount of fees, but the amount they receive depends on the level of overall profits, the Condition A is not satisfied.
To use a cake analogy, the member’s performance partly determines how large the slice is, but the actual amount of money depends on the size of the cake. An individual who receives a bigger slice of a smaller cake may have less cake than an individual receiving a thinner slice of a bigger cake.
The result is that the share varies with the overall profit.
In deciding whether Condition A is satisfied in respect of such “eat what you kill” models you need to look at the relevant arrangements and what it is reasonable to expect having regard to all the circumstances.
*Each member of the LLP was entitled to the entire fee for the work they have completed, less a percentage to cover operating costs. *
In effect X receives a 75 percent of the billings he generates.
X receives a sum that does not vary with the overall profits. X satisfies Condition A.