Public comments on compensation for inside trading CPA partner

There are a range of comments in public about the comp package for former KPMG partner Scott London, who is now in federal prison for insider trading. How can we reconcile those amounts?

Before my book on Mr. London goes into print, I wanted to write one more post about the salary numbers I’ve seen. Will roll this into the book. Hope to start the final, final editing, proofing, and link verification very soon.

High estimate

Francine McKenna speculated in one of her articles that her sources suggested Mr. London was earning a salary of between $1.5M and $2M. I mentioned this comment on April 21, 2013 here.

Mid-range estimate

The defense team’s Objection to PSR (presentencing report) was filed  with the court on September 23, 2013. I have a copy of the filing from the PACER system. The document is inside the federal PACER system and I don’t know how to link to it so you can see it. Thus, you can’t read the comment for yourself. Don’t know how to link to the document so you could read it yourself. Discussed it previously in my post on October 21.

Page 10 has a list of the various impacts on Mr. London’s future earnings capacity from the criminal charge. This is in the context of an argument against the $100,000 fine. In the filing, Mr. Braun (defense counsel) says:

“Mr. London’s loss of income is summarized as follows:

“Loss of annual income of $900,000 for the next 10 years. (Scott has just turned 51 and the mandated retirement age at KPMG is 60.)”

Low estimate

Quentin Fottrell interviewed Scott London. His report is Confessions of an insider trader on the eve of his prison sentence. I discussed this on June 21.

In the interview, Mr. London indicated his salary was more like $650K.

How to put those numbers together?

So, we have three estimates:

  • $1.5M or more, maybe $2M
  • $900K
  • $650K.

First guess

My best wild guess on reconciling those numbers is that the high number is possibly the profit allocation to his account, with a huge portion required to be retained in the capital account. Maybe the $900K is the amount allowed to draw with the $650K possibly being the actual draw net of withholding to cover estimated payments. Or perhaps the $650K is the draw allowed this year against the balance in the capital account last year.

Second guess

Or is the reference to a $650K amount just public modesty? Unless you are in the entertainment world, pro sports, or at the peak of the business world, our society doesn’t like talking directly about the amount of dollars in the paycheck.

Do you suppose the $900K and $650K are modesty?

Third guess

I’m guessing the compensation formulas for partners in large firms are complex. Probably a combination of base salary, return on capital account, extra for large book of business or high-profile clients, and huge bonuses for making lots of rain. Think back to partnership accounting in your advanced class to recall that after the various formulas are applied, the balance left over still needs to be allocated. So the amount going into the capital account finally includes an allocation of the extra or shortfall after all the above allocations are made.

If that wild guess is vaguely on track, then perhaps the three cited amounts (1.5m, 900k, 650k) are some combination of the various factors that go into the comp structure.

What do you think?

Thoughts about his salary?

Another distinct possibility is I don’t have any clue how Big 4 firms divvy up the bottom line.

Other ideas on how to reconcile $1.5M, $0.9M and $0.65M?

All comments welcome. Keep it professional, please. Remember that since this is my blog I get to decide what is professional.

2 thoughts on “Public comments on compensation for inside trading CPA partner”

  1. There are many ways that the amounts you cite could be both consistent and materially correct.

    I think the most likely explanation is that $650K is just Mr. London’s (base) salary, and the higher amounts include bonuses/profit sharing/other. CPA partnerships distribute profits prudently, but at least annually. Partners and partnerships don’t want bloated capital accounts.

    I doubt that $1.5M-$2M is all “salary,” as I understand the term. It is unlikely that 100% of Mr. London’s compensation was salary-based, and Ms. McKenna is unlikely to report a subtotal without saying so.

    The difference between $900K and $1.5M could be caused by the inclusion/exclusion of deferred compensation. Or, if deferred compensation is variable, defense and prosecution could be applying different estimates or assumptions of value to the same data. One figure might be the most recent amount and the other an average amount. One or both might be normalized.

    1. Keith:

      Most important part for nonaccountants to realize is your idea that all the amounts may be correct with the appropriate label. Partner compensation is based on multiple complex components. That also means comp can go up and down easily. As you mentioned, the amounts could be actual last year, estimate of this year, average of recent years, or expectation for next decade.

      Thanks for taking time to comment.


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