Accounting Firm EY Grapples With Partner Pay, Bear Market in Breakup

EY has made some tweaks in recent weeks to its earlier plan to split the firm, including agreeing to offer some payout to partners who retire this year or next, before the deal closes, according to the call.

One of the Big Four accounting firms, EY is considering a plan to break itself up into an audit-focused company and a faster-growing consulting firm that will advise businesses on matters including taxes, deals and technology.

The market downturn and a potential economic slowdown add to the challenge for the consulting firm to meet demanding targets for revenue growth and profit margins, according to internal documents. Meeting the targets will require cutting costs while increasing market share in a highly competitive market, the people said.

Partners headed to the consulting firm will get stock typically worth seven to nine times their current annual compensation. But their cash pay will be cut up to 40% to help trim costs to meet margin targets, the people said.

On the call, Mr. Di Sibio said pay at the new company “will be much more based on equity…so cash compensation will be lower,” but didn’t specify a figure for the reduction.

Mr. Di Sibio also revealed that future pay for partners in the mostly audit firm could be cut in some countries, depending on the profitability of those businesses. “Some countries, the profitability is very good,” he said. “In other countries, that’s less so, so they might make some less money going forward.” The audit partners are in line for typical cash windfalls of two to four times their annual pay.

Mr. Di Sibio’s call was scheduled by EY after the Journal obtained details of EY’s confidential plan, known by the firm’s leadership as Project Everest.

“We are investigating this [leak],” Mr. Di Sibio said. “If we catch the person or the people who do this, the consequences will be severe.”

Mr. Di Sibio, 59 years old, is one of a handful of the deal’s architects approaching EY’s mandatory retirement age of 60. The split would allow them to continue working because the spun-off consulting business wouldn’t have a set retirement age.

Other senior executives who could benefit, according to the people familiar with the matter, include

Steve Krouskos,

59, global managing partner of business enablement;

Kate Barton,

60, global vice chairwoman of tax; and

Jay Nibbe,

58, global vice chairman of markets. It isn’t unusual for EY partners to be granted permission to work beyond 60, the people said.

The split is predicated on the belief that EY’s consulting business can grow rapidly, and internal firm documents cite the success of

Accenture

PLC as a model. But Accenture was split from Arthur Andersen more than two decades ago, and since then the market has grown more complicated and crowded.

“It’s a ferociously competitive marketplace now,” said

Fiona Czerniawska,

chief executive of consulting-industry analyst Source Global Research.

One challenge for the new consulting company would be competing with a new name. EY is lobbying regulators, including the Securities and Exchange Commission, to allow the company to use the existing brand for the first couple of years, according to the internal call.

“It would be good if we could have EY in both names,” Mr. Di Sibio said. “That’s something that actually the regulators were asking, and I said, ‘Well, it’s up to you whether you’ll allow us to do that.’”

After EY sold its previous consulting business to

Cap Gemini

Group SA in the early 2000s, the SEC allowed the French company to use the EY brand for a short period.

A Big Four brand can help consulting businesses sell their services to companies, particularly for the tax-advisory work that internal documents show is projected to make up almost a quarter of the new EY company’s $22.7 billion initial annual revenue. But it can also be a drag on pitching for some types of new business, if clients see the firm as primarily an auditor, consulting industry analysts said.

“For the consulting company, losing the EY brand is not necessarily a bad thing, providing that it spends a lot of money building up the new brand,” said Ms. Czerniawska.

In addition to EY’s sale to Cap Gemini, there were two other sales of consulting arms by Big Four firms—KPMG and PricewaterhouseCoopers—in the early 2000s, amid regulatory pressures following the Enron Corp. accounting scandal. After the deals, all three firms built up new consulting businesses. Some in the industry think the new firms are now bigger than the ones that were sold, though it is hard to determine the size of the sold-off business.

Some of EY’s rivals have looked in recent years at the option of spinning off their consulting businesses and decided against it, in part because of the cost and complexity of any deal, according to people familiar with the matter.

Most recently, Grant Thornton considered selling a stake in the firm to private equity but decided not to pursue that route, according to people familiar with the matter.

Mr. Di Sibio said on the internal call that, ever since the news of EY’s plans leaked, “We’ve been frankly inundated by calls from private equity.” EY thinks the consulting unit is likely too big for a private sale, though the stock-market selloff could make such a deal more viable, according to people familiar with the matter and company documents. The firm plans to make a decision in principle in mid-to-late summer on whether to push ahead.

Write to Jean Eaglesham at [email protected] and Ken Brown at [email protected]

EY has made some tweaks in recent weeks to its earlier plan to split the firm, including agreeing to offer some payout to partners who retire this year or next, before the deal closes, according to the call.

One of the Big Four accounting firms, EY is considering a plan to break itself up into an audit-focused company and a faster-growing consulting firm that will advise businesses on matters including taxes, deals and technology.

The market downturn and a potential economic slowdown add to the challenge for the consulting firm to meet demanding targets for revenue growth and profit margins, according to internal documents. Meeting the targets will require cutting costs while increasing market share in a highly competitive market, the people said.

Partners headed to the consulting firm will get stock typically worth seven to nine times their current annual compensation. But their cash pay will be cut up to 40% to help trim costs to meet margin targets, the people said.

On the call, Mr. Di Sibio said pay at the new company “will be much more based on equity…so cash compensation will be lower,” but didn’t specify a figure for the reduction.

Mr. Di Sibio also revealed that future pay for partners in the mostly audit firm could be cut in some countries, depending on the profitability of those businesses. “Some countries, the profitability is very good,” he said. “In other countries, that’s less so, so they might make some less money going forward.” The audit partners are in line for typical cash windfalls of two to four times their annual pay.

Mr. Di Sibio’s call was scheduled by EY after the Journal obtained details of EY’s confidential plan, known by the firm’s leadership as Project Everest.

“We are investigating this [leak],” Mr. Di Sibio said. “If we catch the person or the people who do this, the consequences will be severe.”

Mr. Di Sibio, 59 years old, is one of a handful of the deal’s architects approaching EY’s mandatory retirement age of 60. The split would allow them to continue working because the spun-off consulting business wouldn’t have a set retirement age.

Other senior executives who could benefit, according to the people familiar with the matter, include

Steve Krouskos,

59, global managing partner of business enablement;

Kate Barton,

60, global vice chairwoman of tax; and

Jay Nibbe,

58, global vice chairman of markets. It isn’t unusual for EY partners to be granted permission to work beyond 60, the people said.

The split is predicated on the belief that EY’s consulting business can grow rapidly, and internal firm documents cite the success of

Accenture

PLC as a model. But Accenture was split from Arthur Andersen more than two decades ago, and since then the market has grown more complicated and crowded.

“It’s a ferociously competitive marketplace now,” said

Fiona Czerniawska,

chief executive of consulting-industry analyst Source Global Research.

One challenge for the new consulting company would be competing with a new name. EY is lobbying regulators, including the Securities and Exchange Commission, to allow the company to use the existing brand for the first couple of years, according to the internal call.

“It would be good if we could have EY in both names,” Mr. Di Sibio said. “That’s something that actually the regulators were asking, and I said, ‘Well, it’s up to you whether you’ll allow us to do that.’”

After EY sold its previous consulting business to

Cap Gemini

Group SA in the early 2000s, the SEC allowed the French company to use the EY brand for a short period.

A Big Four brand can help consulting businesses sell their services to companies, particularly for the tax-advisory work that internal documents show is projected to make up almost a quarter of the new EY company’s $22.7 billion initial annual revenue. But it can also be a drag on pitching for some types of new business, if clients see the firm as primarily an auditor, consulting industry analysts said.

“For the consulting company, losing the EY brand is not necessarily a bad thing, providing that it spends a lot of money building up the new brand,” said Ms. Czerniawska.

In addition to EY’s sale to Cap Gemini, there were two other sales of consulting arms by Big Four firms—KPMG and PricewaterhouseCoopers—in the early 2000s, amid regulatory pressures following the Enron Corp. accounting scandal. After the deals, all three firms built up new consulting businesses. Some in the industry think the new firms are now bigger than the ones that were sold, though it is hard to determine the size of the sold-off business.

Some of EY’s rivals have looked in recent years at the option of spinning off their consulting businesses and decided against it, in part because of the cost and complexity of any deal, according to people familiar with the matter.

Most recently, Grant Thornton considered selling a stake in the firm to private equity but decided not to pursue that route, according to people familiar with the matter.

Mr. Di Sibio said on the internal call that, ever since the news of EY’s plans leaked, “We’ve been frankly inundated by calls from private equity.” EY thinks the consulting unit is likely too big for a private sale, though the stock-market selloff could make such a deal more viable, according to people familiar with the matter and company documents. The firm plans to make a decision in principle in mid-to-late summer on whether to push ahead.

Write to Jean Eaglesham at [email protected] and Ken Brown at [email protected]