Work in Progress – Guide to Partner Performance, Compensation and Rewards in Law Firms
My book on profit sharing is not intended to be of great length nor does it aim to be an academic exploration of concepts. Instead, it sets out to be a practical guide to assist partners – at every level within law firms and not just the firm’s leadership group – to get to grips with how to improve profit sharing methods and systems in law firms.
The subjects of partner profit sharing and compensation, as well as partner performance and progression are of world-wide interest to every law firm partner, member and aspiring partner. Law firms vary enormously in size, structure, specialisation, client types, and culture and changes also take place as the firm evolves. As far as I am aware, no firm has found the perfect set of answers to what has always been a difficult and sensitive area. Most firms struggle to find the optimal way of sharing profits and compensating or remunerating their partners. I don’t promise to have found the perfect suite of solutions, but hope that the guidance contained in my book will help partners to find some workable answers.
From the start, I would like to make it clear that I recognise that not all law firms are partnerships, but for ease I plan generally to refer to all law firm proprietors, owners, shareholders, members or partners as ‘partners’. The subject matter comes with different names as well. In the USA, for instance, the reference is chiefly to ‘Partner Compensation’. I prefer the terms ‘remuneration’ and ‘rewards’ as ‘compensation’ seems to carry an implication of recompense for suffering.
Whatever terms are used, there are some uncomfortable truths which seem to apply to the whole area. It seems that, however arrived at, no partner’s profit share is ever enough if it is less than that of some other partner. There is also an uneasy balance in any professional service firm between comfort and insecurity, happiness and misery, and between partner trust and distrust. There is, furthermore, no one system which can be guaranteed to work well at all times and within every firm. Equality of sharing and lockstep disadvantages the high performers and assists the low performers. Some of the worst schisms we have seen in partnerships have been where a small group of partners (or just one partner) feel they are carrying the rest of the firm. Equally, formulaic systems based on revenue generation (sometimes known as Eat What You Kill) encourage work-hogging and selfishness, and militate against collaboration and team work. Discretionary or flexible reward structures rely heavily on subjective judgments and assessments, and have been known to stimulate the outbreak of World War 3 where partners feel that favouritism, bullying and harassment by the firm’s prima donna partners have led to unfair decisions being reached.
In this context, I have found that partners highlight or experience some typical reactions and concerns. First and foremost, they are often more concerned with relativities and comparatives between partners than the sum involved – if the person in the next room is getting even a tiny bit more, this can cause huge anxiety, frustration and anger. Hence, the desire for fairness and equity continually outweigh commercial considerations. Additionally, partners like some element of certainty and continuity. Memories can be short and partners view their standing in the firm as ‘only as good as last year’s performance ’. Any system based predominantly on short term performance therefore tends to be viewed with some suspicion. Equally, many partners seem somewhat to lack self perception; they find feedback difficult to accept and, by virtue of their training, often go into argumentative mode if shortcomings are identified to them. Partner assessments and evaluations can also be massively time-consuming and if done explicitly for no other perceived purpose than for rewards and compensation, are often seen as divisive and inward looking.
As has also been proved by a number of studies, partners find that money – as such – does not motivate, but getting their reward packages wrong is heavily demotivating.
I do not propose ‘shrink-wrapped’ solutions, although I will be including some checklists, lists of questions, and the occasional template where it might be helpful. The crucial point to make right at the start is that whilst there are some basic principles and structures which underpin all systems, all performance management processes and remuneration or compensation systems must be tailored to the strategic and operational needs of each firm, recognizing individual, local and national cultural characteristics.
Having said that, there are currently some interesting trends and some commonly held assumptions. The main trend is the growing movement towards performance related systems or towards hybrid structures with a meaningful performance related element.
This trend was confirmed by a recent compensation system survey undertaken by my colleague Ed Wesemann and I which shows fewer and fewer firms globally with a pure lockstep system, with most firms opting for some measure of performance related system.
Before undertaking any review of a profit sharing structure and system, it is therefore important to understand the reasons for what seems an inexorable trend towards performance related systems and away from pure lockstep. It is also vital to consider the validity and the contextual relevance of the underlying assumptions which are currently affecting law firm thinking in this area. These underlying factors will be dealt with in my next post.