We are all marinated so deeply in the PPP stew that we lose sight of this.
In what other industry would an analyst even dream of using executive compensation as a yardstick for a firm’s health, competitiveness, or even viability in the market? If anything, you might suspect they’d be negatively correlated. Put another way, when was the last time you saw a reporting company publicize figures on its management compensation levels, say, in its 10-K or annual report, as a competitive advantage or conversely as a risk factor? It’s “immaterial” in almost any sense that comes to mind—strategically, financially, or pursuant to Rule §10b-5.
At the risk of offending those who subscribe to the gospel of lawyers’ always knowing better—better than all of them!—the prominence of PPP in our industry-wide financial reporting is just plain weird.
“Hold on,” you’re thinking, and I will and I am.
Here’s what PPP is highly germane to:
- The risk of partner flight to peer-group firms (see above), which is to say at the extreme the firm’s survival itself.
- And the ability to recruit top-notch talent and pay it market rate.
- If you believe as I do that among other things Law Land is engaged in an ongoing war for talent, then management ignores PPP at its peril, and every MP and executive committee member I’ve ever met knows this.
So in what sense dare I minimize its importance in measuring the health of the enterprise?
At this point discretion advises that I let a reader, who prefers anonymity, describe what I’m driving at. This from an email I received in response to earlier installments in this series. He responded to my theme thus:
If [you’re seeking] a way of measuring the health of the firm as opposed to how much it is paying its partners, then I do agree that aspirationally that would be the most valuable thing to do. Things like, how much debt does the firm have, how strong is the culture, how dependent is it on a small number of practices, or clients, or partners, versus having broader support for its revenue and profit. And more importantly to the long-term viability of the firm, to what degree do lawyers (partners and associates) feel connected to the institution, proud of the institution, loyal to the institution, etc. In most ways, [these are] more important than per partner compensation metrics, at least within a range.
Our friend has nailed it.
As I analyze the meaning of PPP from a managerial and strategic perspective—its information quotient, if you will—I’m drawn to the conclusion that it matters only at the extremes: When it’s so low vis-a-vis your competitive set that headhunters begin their relentless circling, or conversely at the top of the scale where you need to land XYZ superstar and your compensation scheme does, or does not, put that in the realm of possibility.
Put more bluntly, glaringly uncompetitive PPP is an all-hands-on-deck crisis, and if you’re going after the superduperstars, you need the heaviest artillery any firm can muster.
Inbetween those extremes? I believe, as our friend evidently does, that it needs to be “within a [satisfactory and sufficient] range.” But our obsessive focus on year to year changes at this firm or that firm in the (-3%) to +3% range is, well, obsessive. Few firms are on the knife edge of survival and even fewer of us are Scott Barshay.
At the risk of stating the obvious, PPP also has next to nothing to do with the compensation of staff, business professionals, and associates, and very little in reality to do with the compensation of your rank and file B Team partners—the solid citizens who get the vast majority of the work done day in and day out, and who Jack Welch called “the vital 70%.” These are the people who actually comprise all but a vanishingly small proportion of the talent in your firm.
As our friend implies, these people need to be compensated fairly and squarely in light of their marketplace alternatives, but beyond that what gets people out of bed in the morning is feeling connected to a vision: Building an organization with values they believe in over the longer run.
Inadequate compensation for all these folks—staff, business professionals, associates, and B Team partners—will gut your firm. But if a 15% raise would lure them across the street, you have a deeper and different problem.
Laszlo Bock, Senior Vice President for People Operations at Google, a company that’s in a war for talent if anyone is, recently expressed it thus in an interview about what Google does to retain its winning players:
People look for meaning in their work. Mission. Transparency. Voice.
This is the truly “vital” conversation for your firm as an enterprise oriented toward the long run, and PPP has, I submit, nothing to contribute to that conversation.
Incorrigible believers in PPP may be persuaded by none of this, but has three decades of accepting PPP as the dominant and first-among-equals metric really helped us understand what our businesses are all about? What, for example, does PPP bring to the conversation about, “What do law firms sell?” Or about, “What do clients want?” Or about, “What’s our internal glue?” Or about, “What [if anything] are we building here together?”
I come back to where we started this dive into PPP. Do we really believe that the #1 financial yardstick for our firms is how much can we pay each other?
Seriously?
I won’t go any further today down the road from reason and a bit of emotion into ethics, but you might be moved to do so on your own time.
So what metrics might I suggest? For that, you’ll have to await the next installment.
