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What does 80% of parity for new practice partners actually mean?

Not for the first time, I have had a discussion with a client on how the rise to parity for a new partner should be calculated.

Now I am not going to say that my way is right (I did that a couple of years ago and lost a potential client!) but let’s just say that there is more than one way to do the figures.The practice which contacted me last week has offered its new partner a partnership at 80% of parity. Parity will be 25% so in this partner’s first year he will be paid 80% of 25% ie 20%. The other three full-time partners will get the difference so each will get 26.667%. This is the way they think of parity, and forms the basis of their offer. Assuming profits of £600,000, the new partner will be getting £120,000 and the continuing partners £160,000

The alternative calculation (my calculation) is to say that the new partner’s 25% share is discounted by 20%, so really there are three lots of 100 and one 80, so the new partner's profit entitlement is 21.04% and the other three get 26.32%. The new partner now gets £126,240, and the continuing partners get £157,920

Is this difference significant? I think it is. I have seen partnerships fall out over smaller sums. I think the message is that it does not matter how you share profits, as long as all parties understand the basis of the calculations and actually agree with them.

Incidentally, don’t forget that a GP’s entitlement to seniority depends on two things, the number of years they have worked as a GP, and their superannuable profits. It is not based on whether they are half time, three quarter time or full time. To get your full seniority, you have to have more superannuable profits than two-thirds of the average GP’s superannuable profits. If your superannuable profits are less than two-thirds  but more than a third you only get to keep 60% of your seniority, and if your superannuable profits are less than a third than the average, you get no seniority at all.

So the way that parity is calculated will affect the superannuable profits and can affect the entitlement to seniority, and since average superannuable profits are calculated centrally some years after the seniority is paid, clawbacks can and do happen.

A partner is leaving a practice that I look after, and I am telling the practice to leave some of his current account in the practice to cover any clawback of seniority. The leaving partner is not happy, leaving their money in the practice, but there you are.

So two points here, get the basis right when a partner joins, and put aside enough when a partner leaves. That way, it only leaves holidays and workload to fall out over.

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