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: