Are you sublimely happy with your comp package? Are you amply rewarded for cross-selling? Are you fearful that you are funding someone else’s retirement while seriously questioning whether the model will fund yours?
I am working with some incredible forward thinking firms who recognize and are actively addressing partnership dissatisfaction, and in an effort to stem or increase the flow of lateral partner movement, many other firms are re-examining their partner compensation approaches.
As a legal recruiter specializing in partner placements, I have come across three main types of partner compensation systems:
1) Equality/lockstep – We all know this one. Compensation is determined mainly by survival, er, I mean seniority. I’ve seen
this system used by many small to mid-size firms and some very large US and UK firms. The advantage in this approach is that it is meant to encourage partners to work as a team, and for associates to strive for the goal of becoming partner, where all of their sweat, blood, and tears will be rewarded in-part off of the blood, sweat and tears of the associates now working for them. There is a pie to which we all contribute, and then all get the same piece. If I have a great year this year, I may not have a great year next year, but I know that over time it will all work out. This approach appeals to many, yet the disadvantages of this system in today’s “it’s all about me and my immediate needs environment” are fairly obvious. Many partners are upset if they feel other partners aren’t pulling their weight yet get the same comp. Superstars are not rewarded for their achievements, they are disincentivized to do more, and the system creates a risk that they will leave. As we are witnessing, many are and many will.
2) The eat what you kill approach – While the colorful language here conjures up images of testosterone addled unshaven Alpha Males with loin cloths and clubs, it is not only that. In nicer, kinder, more capitalist inclined language, comp is determined by personal production. I have seen a true formulaic version of this comp system used by small and midsize firms. It’s about the numbers, ma’am, just the numbers. And the numbers don’t lie, do they? Expectations are clear, as is the ability to determine comp at the end of the year. While there are clear advantages to this system, it is not without fault. Partners can play with numbers, hoard work, not ever really integrate with the firm, and the client’s belong to that individual partner, not necessarily to the firm. You have an incredible year, great! Better have a rainy day fund, because not every year may be just as good. The firm will love you when you produce, but you’ll be looking for new space when your numbers drop.
3) Black Box, Secret Formula, Nudge, Nudge Wink, Wink, Ai, Ai, Say-No-More
Yes, I know I am being annoying, but to many partners, so is this comp system. It is determined by subjective analysis supported
by objective factors. Doesn’t that sound clear? Usually there is a compensation committee, and together they take into account income generated, cross-selling, publications, bar associations, community involvement, and at some firms they even consider with sympathy and understanding personal matters that may have affected your billings. This system is used primarily by my midsize and large firm clients. It is kind of a hybrid between the lockstep and eat-what-you-kill approach, and has the clear advantages of both. Clearly the application and success of this system is contingent upon how it is applied, and how the firm as a whole either embraces or rejects the outcomes. In my experience, and in all of the research I have done for many of my firm clients as they consider revamping their comp programs, this system has been the most effective for increasing profits while also maintaining at least some level of partner satisfaction.
What I see as positive trends
The key trend I am seeing now is a reflection of the corporate style of growth in large and international firms toward more “corporate” compensation models, where comp is driven by performance within the parameters of the strategic goals of the firms. Firms are being managed and run like businesses, often with non-attorney managers leading the way.
Income inequality is the new catch-phrase amongst economists and politicians these days, and it is alive and well in law firm comp. In an effort to lure new rainmakers, and to retain current ones, compensation compression ratios are widening. While there is a danger of a very high compensation compression ratio (remember Finley Kumble?), in theory, by having intelligent attorney/CEO’s at the helms, and with proper planning this may be properly addressed.
While the CCR’s are widening, firms however, are providing incentives for efficiency, encouraging partners to lever more to others, accurately tracking and rewarding cross-selling, and are devoting time, creativity and dollars to institutionalize clients so that it is more difficult for the clients to leave. For those that do stay, buy-in requirements are increasing, and with the trend towards non-equity and hybrid partners, there are fewer equity partners so the potential for greater profits for equity partners is growing.
I am still seeing larger firms favoring subjective merit systems, while smaller firms are favoring objective systems. Happily I have been asked to recruit for both throughout the country! Let me know which appeals to you, and I will be delighted to discuss options. Large firms however for the most part are increasingly profitable, and we are witnessing that gap growing wider, so there may be something to the use of subjective merit systems which leads to increased profitability. Maybe smaller firms will come to the same conclusion.