We’ve worked with a lot of law firms over the years and an evergreen topic of discussion is their partner compensation plan–how it’s structured overall, if it’s aligned to the firm’s strategy, and then all the devilish details to be worked out:
- where it fits on the lockstep/EWYK spectrum,
- the transparent/black-box spectrum,
- the qualitative/quantitative spectrum,
- how heavily weighted it is towards objective vs. subjective,
- whether there are “bands,”
- if there’s a discretionary bonus pool and if so how big,
- whether there are glide paths for raises and cuts,
- if it’s determined by the Managing Partner alone or a comp committee or the executive committee as a whole,
- and are 360 or peer reviews any part of the input,
- whether there’s a comprehensive top-to-bottom recalculation every year for every partner or whether that’s a biennial exercise with off-year tweaks and bonus/demerit fine-tuning (this strikes many as outlandish but we confess we’re fond of it; how often do you see any individual’s performance markedly depart, either exceling from or undershooting, their baseline in just 12 months?),
- how large the ratio can be between highest and lowest paid,
- and on and on and on.
Given all this variability–which immensely exceeds that in your typical corporation, where in general (Comp) = (Salary) + (Bonus) + (Deferred comp/stock options)–the key challenge is always to optimize alignment with the firm’s strategic direction.
Given that essentially every articulated law firm strategy we’ve ever seen has revenue growth as an objective, what tools do firms pull out to embed that incentive in their comp plans?
The most prevalent by far–essentially universal in one form or another–is to reward “origination,” or business generation. Hard to argue with, and we don’t.
The other two of the Big Three conventional comp plan ingredients are rewarding (a) individual/personal billable hours; and (b) responsibility for managing and running matters. But these two are easier said than done; our experience is that they are firmly second class citizens, or even where management means it, partners don’t have the same faith. Origination is King.
So far so good, but if put in place with no attention paid to the Law of Unintended Consequences (perhaps our #1 favorite law), rewarding origination can do more harm than good to the firm overall.
How so?
To answer that requires a brief but immensely worthwhile detour into the findings of a recent “natural experiment” addressing compensation.
Economists love natural experiments because the gold standard of data-driven research is the blind or double-blind experiment, where the subjects don’t know how they were selected for Group A or Group B or perhaps even that they’re the subjects of an experiment at all.
It turns out that the National Hockey League (improbable, we know, but bear with us) served as ground zero for such an ideal test back in 1990. At that time the NHL, like 95+% of the rest of the economy, hewed to the traditional assumption that no one knew what any of their colleagues made. But voilá, one morning the Montreal Gazette published a listing of every single NHL player’s salary. What happened next?
Plenty, as it turns out, but since pay transparency is one of the hottest new topics in regulatory disclosure, this may be far more relevant faster than many of us will be comfortable -. (Colorado already has it, California just passed it, and New York City appears to be close behind.) A just-released academic paper delves into the dynamics of the 1990 NHL shock, but the upshot can be described succinctly:
- Offensive production was and still is more highly rewarded (compensated) in the NHL labor market than defensive performance;
- Players who were underpaid (strong on defense) vs. the higher-paid (strong-on-offense) but were in every other respect their peers immediately redirected their efforts away from defense and toward offense;
- And, highly germane to Law Land, the bigger the team’s overall payroll the stronger the defensive-to-offensive refocus for players was. After all, the richer the team, the more they had to gain.
- But, and this is the diabolical part, the impact was asymmetrical: There was no corresponding reorientation of the offensive stars to devote more effort to defense;
- And the sudden short shrift given to defense cost the rich teams more in goals given up than the additional players focused on goal-scoring gained the team.
Bottom line: The bigger the team’s payroll, the more pronounced the players’ shift away from defense and the worse the results for the team’s won/lost record.
Great for the offensive stars, sure, but dreadful for the team.
So, shall we connect the NHL/partner comp dots?
- If goals on offense corresponds to origination of new business (“finders”);
- And if defense in hockey corresponds to less splashy activities like:
- willing and enthusiastic collaboration with colleagues
- sharing credit for success
- and doing the hard and unheralded work (“minders and grinders”)
- Then it might be high time to take a gimlet-eyed look at your firm’s comp system if it’s like the great majority of those we see in our daily practice.
The most common attribute of those systems is to put lone-wolf origination at the top of the rewards pyramid and dismiss or short-change selfless collaboration, unglamorous matter management, and getting stuff done on time with smart and efficient allocation of firm talent and resources.
You do this at your peril.
Or more pointedly, you (mis)allocate firm resources towards the charismatic and the gladiatorial personalities–the distinct minority of partners in your, or any, law firm, for whom business generation comes naturally–to the lasting detriment of what your Strategic Objective #1 should be in the market: WInning.
Courtesy The Wall Street Journal/Montreal Gazette
Very rarely do I read readers’ online comments on news stories (or anything else, for that matter) but this was business so I took a look, and discovered some real gems.
This is insightful for starters (emphasis supplied):
Some of the [readers’ remarks] focus on the fact that there are plenty of people who don’t pull their weight and are overvalued. … [which strike me as] very ‘surface level’ analysis. The takeaway should be how these teams have misplaced and inefficient concepts of value and pay to begin with. It seems to be that the real insight to be gleaned from the article and study is how teams and organizations can greatly misvalue employees and players. The point of any game it to win right? Sure, scoring points is a critical component but only a means to an end. You can score 10 goals but if your opponent scores 11 you lose. So the organizations overvaluing offensive players and undervaluing defensive players at the time was an inefficiency that was only discovered after the pay transparency. The sales team may be flashy and easy to quantify in terms of metrics but all the sales in the world won’t ensure the wheels stay on through all the business cycles.[–“Timothy Vaccari”]
Even more trenchant:
Another wrinkle is the difference between individual and collective success more broadly. Individuals can, and sometimes are, totally content with being a very expensive piece of a slowing sinking ship. To go back to the hockey analogy, I think its likely that at least some of the players who adjusted their play style to be more aggressive for more pay probably knew it had an adverse impact on the team. Some of them probably didn’t even care. An employee might not actually care about helping a company be as successful as possible, they might help enough to make sure the company stays afloat and pays their wage, but beyond that uses their the skills extract the highest compensation for themselves[–“Stefan Bratic”]
And finally:
What this piece seems to miss is the front office’s failure to value a skill set that was vital for its success. […] If an organization undervalues skills that don’t seem as important to them, they may be neglecting the people who really carry the company/business.[–“John King”]
You can’t blame the rainmakers for behaving rationally. You can’t even blame those you have rewarded with lavish and uneconomic guarantees. The guarantees, after all, are only “uneconomic” to your firm, not to the beneficiaries. They have not dealt themselves the hands they hold at the compensation card table. You have.
“The house always wins” assumes that the house is rational–and is in it for the Team, not the card sharks.
