The Lawyer's Office

Our firm is often asked to help law firms evaluate, design and overhaul partner compensation systems. Partners frequently advise us in confidential interviews that they are more dissatisfied with the method used to determine compensation than with the amount of compensation itself.

How partners are paid, and how much, are probably the two most challenging management issues that law firms face. Many struggle with compensation systems that no longer meet the needs of the law firm and the individual partners.

Failure to explore alternatives to failing systems often result in partner dissatisfaction leading to partner defections and disintegration of the firm.

People tend to behave the way they're measured and paid. What gets measured, and rewarded, is what gets done.

Be advised, however, that compensation does not drive behavior; it maintains status quo. Motivation requires leadership, which can have a greater impact upon a firm than anything else.

Law firms don't have to look far to find evidence of failure. Here are a few examples:

Partner defections; Firm splits and breakups; Personal fiefdoms; Maverick partners; Hoarding work; System perceived as unfair; Problems acquiring and retaining top legal talent; Low productivity; Client dissatisfaction; Low morale, and Disputes with former partners.

Firms that experience these symptoms should consider evaluating and systematically redesigning their compensation systems.

The objectives of a well-designed system include:

• Alignment with the firm's business strategies, culture and personality.

• Reduction in partner dissatisfaction.

• Rewarding performance and contribution as well as other behaviors that the firm desires to reinforce.

• A perception by the partners that it is fair.

Firm leaders must ask themselves what kind of firm they want to be – team based or lone ranger (group of space sharers or partnership of individual firms).

Eat-what-you-kill systems might be appropriate for lone ranger firms. However, such systems are not appropriate for law firms that want to build and create team-based practices, since such systems typically reinforce “lone ranger” behavior resulting in a “me first vs. firm first” orientation.

Compensation systems should do more than simply allocate the pie. They should reinforce the behaviors and efforts that the firm seeks from its attorneys.

First, the firm must design a system that is perceived as fair by partners in the firm. To determine whether a system is fair, ask the following questions:

• Do I understand the system?

• Are individual contributions recognized?

• Are group contributions recognized?

• Are the rules clear?

• Are the rules followed and applied consistently to all partners?

• Are the partners making compensation decisions trusted and respected?

The system should be simple and understood by all.

The next step is to determine the criteria or the behaviors that the firm desires to reinforce. Typically, the following unranked compensation criteria are used in a general framework:

Ownership; Seniority; Pro bono; Teaching, writing, speaking; Collegiality and team play; Training staff; Expertise; Leadership and management; Fees collected; Client retention; Origination of new business; Participation in community and bar activities; Profitability; Client satisfaction; Productivity, and Compliance with firm policies.

After compensation criteria have been determined, a plan must be adopted, approved, and implemented.

Plan types include: Subjective Plans, Objective Plans, Hybrid Plans, and Bonus Pools.

Subjective or combination plans are most appropriate for firms desiring to build and reinforce a team-based practice. They focus on the long-term, as well as the short-term and all contributions (compensation criteria) to the firm. They also require more work from firm management.

While total formula plans fall increasingly in disfavor, they can be appropriate in lone-ranger firms that want only to eat-what-they-kill – nothing more.

Start slowly. Avoid the temptation of making dramatic changes to an existing plan too quickly. Don't blame other management problems on compensation and attempt to solve them by overhauling your system.

Change your system gradually. Consider bonus pools and other adjustments initially, and gradually deploy other plan changes. It can take three to four years to completely change a compensation plan.

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