As our colleague and friend Richard Rapp has written, the sheer variety of techniques firms employ to arrive at partner compensation is unheard of elsewhere across the economy (emphasis supplied):

As I have described elsewhere at length, the most remarkable thing about law firm partner pay programs is their extreme diversity and idiosyncratic nature. The range runs from lock-step by generation to “eat what you kill.”  Some pay arrangements are totally transparent; others totally opaque.  Some inculcate a strong sense of shared fate with firm-wide profit growth the main engine of individual pay growth; others are highly individualistic.  And so on.  To the best of my knowledge this diversity of pay criteria and administrative arrangements is very hard to find elsewhere in the U.S. economy:

 

Most people receive their pay in one of a very few ways –hourly wage, piece rate, salary + bonus and perhaps a few variations on each. In the upper strata of executive pay, we also find uniformity. Most corporate pay plans for senior executives closely resemble one another (salary + cash bonus + restricted stock + stock options tied to a relatively few business unit- and firm-level reward criteria). Hedge fund managers’ performance fees are usually the simple “two and twenty” formula, sometimes with a “hurdle” to reward excess returns over a market benchmark. Thus, for most occupations from the lowest to the highest earning ones, it isn’t hard to know how your pay is going to be decided.

The consequence of the diversity of partner pay programs is that there is no such thing as a market-wide wage for legal talent, even when the revenue and profit potential of a partner is perfectly well-known. …  No single plan type dominates others in encouraging productivity and improving the odds of survival.

Now, it would be far-fetched in the extreme to suggest that a firm’s compensation structure could be altered at random to a different model without consequences, perhaps extremely destructive consequences.

But I think we should entertain the possibility—this is really what my hypothesis boils down to—that we do firms and their partnership ranks a disservice to assume without probing analysis that any material modification of the way the compensation system arrives at its outcomes is unthinkable and inadmissible.  For one thing, I can assure you that if we looked hard enough we could find another firm, probably one not too dissimilar, that is doing just fine under the “new” and “other” compensation system.

In short:  What if the compensation structure matters less than we’ve been thinking?

Note that—studiously—I did not say compensation itself matters little.  I’m talking about the process, or the inputs, and specifically about the antipodal lockstep and EWYK models.  One way to think about the key input under lockstep is that it resembles what tax economists call “horizontal equity”–that people in the same position (in terms of seniority and presumed ability to contribute to the firm) should pay, or in this case of course receive, the same amount.  The desired results are to encourage collaboration and sharing within the firm internally, to deliver “the best lawyer for the client” on the instant matter, and to promote unvarnished candor in rendering client advice.

Analogously, the key input under EWYK can be thought of as “vertical equity”–that people who contribute more to the firm should receive more of the rewards.  The desired results are to encourage business generation, raising the profile of the firm, and keeping others (presumably without rainmaking skills) busy and productive.

If we think about the two systems this way, don’t they both have impeccable intentions to encourage productive and valuable behavior?  And isn’t each well-designed to incentivize the values it ranks more highly?  All I’m asking is that conversations on this topic actually focus on intended results on the ground in light of a firm’s strategic goals in its markets at this particular juncture.  Let us get past the bumper stickers and T-shirt slogans.

A final note on compensation itself.  It:

• Must be determined with some reference to going market-rate standards;
• Ought to be aligned with the firm’s strategic objectives (or put more simply, it needs to encourage behavior designed to advance the firm’s considered goals and discourage behavior inhibiting progress towards those goals); and most importantly of all
• Has to be perceived within the firm as fair overall and as being administered impartially and with faithful and conscientious adherence to the announced principles and rules of the road.

But study upon study upon study of motivation within organizations finds that compensation ranks somewhere below the top five or six drivers of behavior: Contributing to the firm, to one’s team, building something, serving clients, being able to take pride in what one does—these and similar values all consistently rank more highly than compensation.

Compensation must be fair and it must be perceived as being fair, but beyond that I’m coming to the view that we are making a categorical mistake to hang as much of firms’ identity on it as we do.