One of the things we do a lot of here—and seemingly more of in the past 24 months or so—is helping firms sort out, reform, amend, optimize, throw-away-and-start-fresh, their partnership compensation systems. And in every engagement of that sort, we try to keep two paramount realities front and center:
- Compensation must be aligned with strategy; and
- You cannot manage the firm through compensation alone.
Oh, and a third: You’re going to manage and implement the compensation system with full accountability, right? OK, so we needn’t have mentioned this one, because after all everything you do at your firm is managed with name/place/date accountability. That settles that.
These may sound obvious (and we hope they do—that’s usually a good place to start) but you’d be surprised how often they get lost once you enter the deep woods of actually changing compensation.
Let’s take them one at a time.
By “compensation must be aligned with strategy,” we simply mean it should encourage and reward behaviors that tend to advance the firm’s strategy and discourage or penalize counterproductive habits. Phrased differently, you can’t design a compensation system in a vacuum. Show me the firm’s position in the market—current and (feasibly) desired—and we can begin to make progress. Is it a young firm desperate to grow new business? Origination may take on a larger role. A mature full-service firm trying to institutionalize its client base? Collaboration and delivering “the best lawyer in the firm for the client’s matter right now” will be front and center. If you follow this out, the first firm will be closer to the Eat What You Kill end of the compensation spectrum and the second closer to the Lockstep end.
As another example, contrast a partnership dominated by mid-career and younger partners reaching and growing into their prime years of productivity and earnings with a firm whose partnership ranks are largely full of older members approaching retirement. Introducing clients to, and beginning to pass them gently on to, the next generation would be a non-issue for the first firm, but for the second, encouraging smooth client transitions to the leaders of the next few decades would be a priority.
These different priorities could find expression in the compensation system’s design by emphasizing a newish and expanding client roster in the first case and stressing collaborative baton-passing and gradual stepping back in the second. To be specific about it, client origination could be long-lasting for the young firm, but be tied to strict, and short, “sunsetting” rules for the older firm.
As for the second, sometimes we have found management attempts to take care of anything and everything through the compensation system. We worked with a firm (true story) wrestling with an overhang of underutilized associates, arguably aggravated by a compensation system that “charged” partners with responsibility for a matter with each assigned associate’s fully loaded direct and indirect cost calculated on the basis of hours billed. In other words, the more productive and busier the associate, the “cheaper” they were from the viewpoint of the partner trying to staff a matter at minimal cost for maximal profit (profitability of a matter was a key component of partner comp, as, on general principles, it probably should be). But of course this meant underutilized associates were shunned even more actively and the overburdened were sought after even more.
To mitigate this, one of the members of the committee responsible for reforming the firm’s compensation system suggested we charge out all associates against matters they work on at a single, flat firm-wide blended rate. When we suggested instead that the firm’s systemic problem of underutilized associates was not actually a problem properly to be addressed through the comp system, you could see the light bulbs going on.
But all of the above assumes, pace Econ 101, that people fine tune their behavior to maximize their own return given the menu of incentives in front of them. We would be the first to subscribe to the notion that incentives matter, but we’d be the last to stop there and pronounce our work done.
Here’s what we really believe matters most about compensation systems:
- They must be fair and be seen as fair.
- They must be managed and applied with integrity and dispassion.
- See ## 1 & 2.
By “fair,” we don’t imagine the ur-ideal of justice where no one whatsoever could take issue with the outcome; but we do mean that over time and on the whole, people pretty much have to admit they’re fair. A few % ± one way or the other this year or that is understandable; we’re all human. We’re not talking about differences of 1.00X vs. 0.98 or 1.03X. But over the long run people have to be ready to honestly confess that if Alpha took home 2X or 0.5X what Baker took home, they understand why and agree that it was, in the larger scheme of things, fair.
By managed with integrity, we simply mean the compensation system has to actually produce the numeric outcomes it was designed to do with nobody’s thumb on the scales and with no perceptible whiff of favoritism, in-crowd/out-crowd, special dealing or special pleading. If you tell me the system is purely formulaic, plugging in the numbers and producing the function’s calculated result, then for heaven’s sake stick to it. No do-over’s.
If on the other hand your system embeds a large subjective component—good citizenship, firm-first behavior patterns, volunteering for administrative matters, mentoring associates, cultivating the firm’s profile in the community, etc.—then managing it with integrity has different components but they need to be executed with no less rigor, conscientiousness, and force:
- Consult widely with colleagues about the individual’s performance and behavior on these measures; be thorough.
- Take into account year to year or periodic spikes and swoons that don’t constitute precursors of a long-term trend. (How do you know it’s “long-term?” When they cease being spikes and swoons and become patterns.)
- Most importantly, there’s a direct correlation between how much of the compensation determination depends on subjective judgments and communication about what those judgments are evaluating and how they’re made.
The last point has particular teeth. Formulas don’t require much explanation: Have wallet cards printed if you like, and call it a day. Subjective systems demand the hard work, devotion of time, and one-on-one meetings throughout the firm to consistently communicate what behaviors are rewarded and penalized, who makes those assessments, and how. The aim is obviously maximal transparency, understanding that the moment you opt for including almost any subjective ingredient you have introduced a bit of opacity.
But back to the fallacious belief that managing compensation takes you a long way towards managing everything at the firm, period. Type A’s require more than money to feel included, valuable, inspired, and challenged.
Roger Martin, Dean of the Rotman School of Management at the University of Toronto from 1998 to 2013 and author of several impressive business books, writes in a recent Harvard Business Review piece (The 3 Simple Rules of Managing Top Talent):
The general view in business is that top-end talent is highly sensitive to and motivated by compensation and that big monetary rewards are key to their management. There is a grain of truth to this — but only a grain. In my 36-year career, I haven’t met a single person truly at the top end of the talent distribution who is highly motivated by compensation. Not one.
Sure, I’ve met lots of successful people who are highly motivated by compensation: CEOs who pump up the perceived value of their company to sell it, hedge fund managers who destroy companies for short-term gain, investment bankers who get their clients to acquire companies they shouldn’t to earn big fees, consultants who sell their clients work that they don’t need, and me-first athletes who poison their teams.
But none are the kind of top-end talent who make their organization great for a sustained period.
Martin condenses his career’s worth of experience with the question, “What Do High Performers Want?” (my words, not his) into three precepts:
- Treat them as individuals, not members of a group
- Provide continuous opportunity, and
- Pat them on the back.
You might think (I admit I was tempted….) that telling senior partners or practice group leaders or members of your executive committee that being part of such an exalted group is their reward, but they actually want more; they want you to treat them as specific, distinct, unique individuals. Martin gives the example of an executive sufficiently senior to be entitled to unlimited paternity leave who asks for permission to take same and Martin replies—mistakenly, he later rues—that “sure, because you’re a Global Account Manager, at that level you can do it.” His GAM friend proceeds to walk off, “sullen.”
What gives? Didn’t the guy get exactly what he was asking for? Yes, but. Martin should have said, but did not, “of course, Rupert, if paternity leave is something important to you, by all means you have our full support.” Identical result, very different message.
Opportunity. You may have encountered this dealing with the supposedly inscrutable Millennial’s. They want to take on ever-increasing challenges, and right now, please. If you can’t satisfy that, they’re out the door. But of course, this has never been and hopefully never will be true only of Millennial’s. (I confess I switched firms as a baby associate for precisely that reason.)
Of course this isn’t a counsel of professional irresponsibility on your part. The juniors you favor with challenges have to be up to it at with some plausible degree of confidence, and you will be careful only to do it in circumstances where they’re provided a preferably-subtle safety net. But do it you had better, at peril of losing a high-performer-in-the-making to your competitor down the street.
Finally, praise and pats on the back. I have never forgotten the power of this in my own career, despite the episode I’m about to share with you having taken place over two decades ago. A more senior associate and I had just finished—with outstanding results—a months-long, complex, multifaceted matter where our client was universally acknowledged to be extremely difficult, and what did the senior partner who’d been in charge for those many months do? Told us to show up late to the office the next morning and he’d take us all to a lovely sushi restaurant. Unforgettable.
The lunch may have cost the firm $150, but it was an invaluable reward.