Partnerships & Compensation

I deal in many partnerships - venture partnerships, real estate partnerships, investment partnerships. I have seen and heard of different compensation structures within partnerships. It is interesting that there are so many blogs about start ups and compensation structures but I haven't seen that much about how compensation is set up within partnerships. Some partnerships are structured in a corporate fashion with different levels of compensation and ownership. Some partnerships are truly equal in that all partners have an equal share. Those in the latter category usually are only possible when all the partners are there from the beginning or if the partnership is relatively small.

Tonight I had an interesting conversation about compensation within real estate partnerships. A friend of mine was wondering what type of compensation is appropriate within a partnership of equals. Should everything be split equally? Should a partner be compensated extra or get a kicker on the back end for bringing a deal? Should partners be compensated for bringing deals by not putting up equity?

Interestingly, my friend who works in the real estate industry feels that it is common practice for equal partners to be compensated differently on each deal depending on who brought the deal, did more diligence, or enabled the exit. I had a different opinion, perhaps due to my greater experience in the venture industry where an equal partnership usually means that each partner gets the same piece of the pie no matter what. If one partner has more winners than the other, the partnership and its partners split the profits and carry without regard to this.

I submit that in true partnership, the partners are equal. They try to stay on the same side of the deal at all times. They do not divide the pie differently because each deal is different. At the end of the day all the partners have their strengths and weaknesses but the whole is greater than the parts. It seems to me that once partners start dividing the pie differently, the slope becomes slippery and eventually begs the question - why exactly are they in the partnership in the first place?

I would love to hear thoughts about this issue. I feel that one of the most important things within a partnership is to keep everyone happy, motivated, and on the same page.

Comments

[Zac]

I have run a couple partnerships in my day, and the best advice I can give is to keep the partnerships equal. Anything else is not a partnership and should be classified in a different structure. I agree the whole is greater that the parts...and that each partner brings different value. As long as everyone is maintaining the ethics of the partnership, maintaining the work needed to keep it going, and has an understanding of team a partnership should be divided equally.

Once you start compensating people differently based on performance, the relationships will sour and there will be more conflict. More than that, partners will question the partnership's value.