|The firm’s compensation system must be firmly aligned with its strategic objectives…|
Economists will tell you incentives matter and if you watch how lawyers behave you will find them closely attuned to the behaviors that bring the greatest rewards at year end. That’s why many firms come to us for counsel on their compensation structures—from a tweak to a clean-sheet-of-paper overhaul.
That said, every firm is different; we have no templates, no cookie cutters, no one-size-fits-all approach. Nevertheless, following are some of our high-level thoughts on compensation.
- Strategy always comes first
- The firm’s compensation system must be firmly aligned with its strategic objectives, since those objectives will only be obtained by individuals and teams performing and behaving in ways that advance those goals. For shorthand, call this simply “alignment.”
- Recognize that if strategic goals and compensation incentives diverge, compensation wins 100% of the time. The justly famous Peter Drucker often observed (we paraphrase), “if your strategy says black and your compensation says white, white you will be.”
- Open and closed systems both work; it’s moving from one to the other that’s difficult. Many firms have found success using transparent criteria for compensation but keeping individual results/outcomes confidential.
- Formulaic and subjective systems both work; again, it depends on how the firm arrived at the system it has in place. We do believe, however, that it’s easier to make incremental movements along this spectrum (in either direction) than it is to move along the open/closed spectrum.
- Smoothing over time (a 2—5 year “look back”) is good. People’s performance varies over time, for better and for worse, and short-term fluctuations are often not their fault, or at least are due to factors over which they had little control and perhaps would have changed if they did. Smoothing also lets people manage their personal finances somewhat more rationally.
- “Bands” of compensation are good; it does no one any good for people to be envious over (say) $10,000 differences, or any difference that is not, over the longer view and in the larger scheme of things, frankly not material.
- Clarity and relentless communication are essential; this applies both to how compensation is determined in principle on a firmwide, departmental or office basis, and on a case-by-case basis with the individuals in question, one-on-one or few-on-one.
- Origination credit in a for-profit enterprise is probably inevitable but not perpetual or even terribly long-lasting.
- Recognize compensation can be a carrot and a stick; don’t reward antisocial behavior.
As central to law firm performance and cohesion as compensation systems are, we also recognize that they should not and never will be a surrogate for leadership.