Partner Compensation Systems: Five Design Challenges

Something is beginning to quietly brew with respect to large law firm partner compensation systems.

Winds of Change

The last major revolution in partner compensation began in the 1980s, aimed at increasing partners' focus on marketing and new business development. But, in the attempts to energize their partners to go out and market, many law firms may have overdone it ' and today are struggling with some of the resultant dysfunctional behaviors their reward systems have motivated.

Additionally, while these systems place a lot of attention on each partner's self-satisfaction and, in some cases, also the firm's well-being, less consideration seems to have been given to the impact of the reward systems on the firms' clients.

The Stakeholders

Rainmakers/Market Leaders. Much effort has gone into juicing up partner compensation to motivate those who can, or would like to try, to expand revenues. Such inducements include: elaborate new-business attribution measurement systems, bonus approaches aimed at rewarding marketing, recalibration of pay to favor those who can sell, and glorification of the rainmakers.

Firm. Nevertheless, some concomitant attention has been required to counteract the unintended divisive effects of these 'star' systems that may be overly attuned to rainmakers. In this regard, firm management has responded by exhorting their partners to embrace 'teamwork' and have implemented various remedial, although relatively minor, design changes in their firms' reward systems.

Clients. But what about a firm's key clients, the top 20-40 that provide a disproportionate amount of the firm's profits, prestige and professional enjoyment? It's not clear whether firms' reward systems actually motivate the partners to perform in ways that are always in the best interests of each of these important clients. And there is not much evidence that law firms have even focused on this issue.

The Challenge

Accordingly, it is proposed that firms re-evaluate their current partner compensation systems against a triple-headed standard that can be labeled 'Win-Win-Win Partner Compensation.' The first 'win' is for the rainmaker/market leader partners ' who in most cases today are already well taken care of. The second 'win' is for the firm as a whole, including all its partners, ie, the 'team,' and the firm's long-term strategic success. Regarding this second 'win,' possibly more attention needs to be given. And the third 'win' refers to the firm's major clients, including the long-term care they receive and the loyalty they feel toward their law firms ' an area that the author believes needs to be further explored.

Hence, in line with the triple-win framework presented above, following are 'Five Design Challenges' that address possibly the most critical current issues in large law firm partner compensation systems. To help the author test in each case the challenge and to generate some ideas for possible best practices solutions, he interviewed a number of Chairs/MPs of AmLaw 100 firms or their designees who were involved in their firms' reward systems.

1. Partner-Proprietary Client Ownership

Challenge

Origination attribution credits emphasize a partner's sense of ownership regarding 'my' client, sometimes to the detriment of the concept of a 'firm client' and also sometimes resulting in the demotivation of others who would work on the client. Some of the resulting unattractive behaviors include hoarding of work and some partners' refusal to work on a client where another partner holds title to the origination credits unless some of those credits are shared.

In these ways, the practice of rewarding origination has resulted in a slippery slope that creates 'non-teams' dividing the credit holders from those who are not. Many firms admit that partner-proprietary client ownership is a 'key stress point.'

Possible Solutions

• As one Chair/MP said, it's a question of 'where you affix responsibilities.' That is, attaching performance measurements to areas of responsibility that are too localized, such as individual clients, can cause an eat-what-you-kill mentality. Alternatively, measuring a partner's performance by standards that are too broad, such as the firm's overall wellbeing, are not motivating enough.
• Provide matter origination credits to whomever is responsible, even though origination credit at the client level is still attributed to another partner. In this approach to double counting, the client partner and the partner responsible for the matter both feel they have been recognized.
• Eliminate origination credits altogether, but attribute revenues to partners who fulfill the respective roles of handling the relationship, managing the work and/or doing the work. (Presumably, the motivation for bringing in business is to garner more credits in the role of 'handling the relationship.')
• Offset the proprietary motivations encouraged by new business attribution by offering special 'Teamwork' awards to partners who practice sharing with one another, despite what the metrics tell them to do. And punish counter-culture behaviors such as hoarding.

2. Point Inflation

Challenge

Rainmakers, as goes the tag line of an often-run television commercial, are 'priceless.' This is because rainmakers are rare and some other firm can always choose to pay a premium to try to steal away a business-producing partner. But the market value of what is commonly referred to as a 'service partner' is relatively much less. And no firm really needs more service partners, unless they come in a package with an acquired rainmaker. However, with the steep increases in profitability of large firms during the past 5 years, and due to 'point inflation' or other possibly unintended results of their firms' compensation systems, many of these so-called service partners are earning more than they ever expected or possibly need to be paid.

The end result could be considered a misallocation of resources, ie, profits are being unnecessarily diverted to a large group of rank and file partners, when instead these monies could be directed toward strategic in-vestments such as acquiring skills for new markets, opening new offices and completing acquisitions. The task ' if one buys into this view ' is how to get the service partners comfortable, without disenfranchising them, with their not participating pro rata in the firm's affluence.

Possible Solutions

• Change the compensation system to get away from awarding percentages of ownership or ownership converted into 'points.' Also, when compensation is reviewed, always start deliberations regarding a partner at his/her previous actual dollar amount. Such approaches help prevent unintended income inflation.
• Operate a system that utilizes copensation 'tiers' or 'bands' (often 10 or more of them), each representing a different level of partner performance. When compensation is reviewed each year, resist moving a partner up to the next band unless he or she has changed the nature of his or her contributions and has really earned it. Also, as firm profitability increases, move the rainmakers/market leaders up in the bands and add new bands above the top levels to create yet higher levels for the firm's most valuable partners.
• Start a bonus pool that is funded by 10%-20% of profits, coming off the top of all partners' incomes, and award bonuses to the firm's most productive partners.

3. Are Your Priority Clients Getting Priority Attention?

Challenge

A law firm's partner compensation system should be fully supportive of the firm's goals for its key clients ' the top 20-40 or more ' including motivating the firm's partners to ensure service excellence and thereby secure these clients' loyalty while at the same time positioning the firm for expansion of its services. This is particularly important because most large firms today have realized that expanding work with current good clients has greater upside than wild goose chases for new clients.

But, it is not clear whether firms' partner compensation systems are functioning constructively with regard to their key clients or, instead, are inducing unintended behaviors that could be harmful to the firms' ultimate success with these important relationships.

Possible Solutions

Review the compensation system to see if it always gets the firm to the right answers in response to the following questions:

• Who is the relationship partner ' or should be?
• Who is on the client team ' or should be?
• Are relationship partners being paid enough?
• Is service excellence being sufficiently rewarded?
• Is the client team performing like one?
• Is cross-selling and expansion happening?
• Is team or is solo marketing being encouraged?
• Are the motivations of departments and/or practice groups in concert with serving the key clients?

Should all key clients be considered 'firm clients' in the attribution system? (Note: A 78-question, 'Key Client Compensation ' Diagnostic Review' that expands on these questions is available gratis from the author, if requested, at [email protected].)

4. Use of Client Feedback in Partner Evaluations

Challenge

When considering how to measure a partner's performance, theoretically the ultimate measure in a service environment should be what the clients think of him/her. And while formal client feedback programs are relatively new for law firms, such programs are fast growing in popularity. And, why not ' the output is actionable feedback that can be used to correct service and/or relationship deficiencies before a firm's competitors get that same chance.

But, attempting to formally link such feedback to partner rewards is tricky. First, the solicitation of feedback from a client has to be accomplished by someone who is independent of the relationship partner and the client serving team. But even then, if partner pay is linked too directly with feedback from clients, 'gaming the system' can occur by means of the partner's directing the interviewers to only those client individuals who will give a good report or, worse, prompting the client interviewees to say only positive things.

Possible Solutions

Currently, input of client feedback into reward deliberations is accomplished, if at all, only anecdotally in cases where the firm chair/MP has conducted some 'one-on-ones' with a limited number of clients. The author suggests that, at least for now, what these chair/MPs are doing goes far enough.

Formal Client Feedback Programs are still in their infancy at large firms and potentially promise too much benefit to take the risk, at least for now, of creating possible conflicts with the compensation process. That is, more time is needed to fully develop the feedback programs with the objective of using the output for constructive purposes ' for the benefit of the clients and the firm ' instead of for punitive purposes such as might occur if client feedback is indelicately used in personnel evaluations.

5. De-linking Pay from Metrics that Promote Suboptimal Behaviors

Challenge

One of the slogans during the last revolution that accompanied law firms' push to create more partner accountability was: 'If you don't pay to maximize it, it will be minimized.' However, as mentioned above, maybe things have gone too far. Instead, as an opposing view, consider: 'If you measure it too much, it's all that's going to happen.' Thus, while some law firm Chairs/MPs agree that quantitative measurements provide a partner with the 'buttons he or she needs to push,' nevertheless as a consequence, 'Partners have become obsessed with the numbers [which] creates lots of grey areas and room for manipulation.'

Possible Solutions

• Attempt to counteract the possible undesirable behaviors that can result from partners' literal interpretation of the metrics by ensuring that firm management constantly provides oral clarity regarding the firm's values and what actual behaviors are expected. One Chair/MP aptly referred to this as 'non-statistical reinforcement of behavior.'
• Incorporate tiers or bands into the system, so partners are evaluated and assigned to the bands based on top-down subjective/holistic evaluations of competencies and contributions rather than more formulaic bottom-up methods.
• Ensure that 'fairness and the pecept-ion of fairness' abounds. Supporting this is the 'tone at the top,' ie, the way the rewards are actually divvied up should be in sync with what firm management preaches regarding expected partner behavior.
• Also helpful is to point out some 'exemplary partners' who, personal metrics be damned, do what's right for the firm and its clients. In fact, each firm's compensation committee should revisit the firm's Web site and ponder all the glorious things it says about how the partners work cooperatively to care for each of the firm's clients. Then, the ultimate measurement of a partner should be redefined to be the extent to which he or she 'lives the brand' as may be articulated by the Web site, the firm's mission statement or firm management.

Some Additional Thoughts

Several other issues relating to law firm partner compensation seem currently to be hot, or at least challenging enough to be included in some way in the deliberations along with what has been presented above:

• Multi-Year Cycles. The great majority of large law firms review compensation annually. But, why do something every year if it is so costly and painful? And how much change in a partner's performance occurs over a 1-year versus a 2-year period?
• Non-Disclosure. In only a handful of large law firms are partners' earnings not disclosed to the entire partnership. However, much time is saved and angst eliminated in those firms that have chosen to skip the annual, and often insidious, partner-to-partner comparisons.
• Peer Pressure. Few large firms still use a lockstep approach for compensation. But one of the benefits of lockstep is that partners in each class look after one another to keep everyone's collective nose to the grindstone. But in today's subjective systems, partners in many cases have abdicated to firm management their responsibility to push their peers. So, how can firms, without dismantling their current systems, inject back in some aspects of this valuable element of peer pressure?

Whither Go?

A consultants view: Law firm partner compensation systems are only nominally about splitting up the money. Instead, their real purpose is to be used as a 'management tool' to help herd the partners and their firms toward long-term strategic success.

And, in this respect, the partner compensation system should be considered as a competitive weapon. So, have you thought about whether your firm's compensation system needs some upgrading in order to be attuned to the competitive revolutions ahead?

Something is beginning to quietly brew with respect to large law firm partner compensation systems.

Winds of Change

The last major revolution in partner compensation began in the 1980s, aimed at increasing partners' focus on marketing and new business development. But, in the attempts to energize their partners to go out and market, many law firms may have overdone it ' and today are struggling with some of the resultant dysfunctional behaviors their reward systems have motivated.

Additionally, while these systems place a lot of attention on each partner's self-satisfaction and, in some cases, also the firm's well-being, less consideration seems to have been given to the impact of the reward systems on the firms' clients.

The Stakeholders

Rainmakers/Market Leaders. Much effort has gone into juicing up partner compensation to motivate those who can, or would like to try, to expand revenues. Such inducements include: elaborate new-business attribution measurement systems, bonus approaches aimed at rewarding marketing, recalibration of pay to favor those who can sell, and glorification of the rainmakers.

Firm. Nevertheless, some concomitant attention has been required to counteract the unintended divisive effects of these 'star' systems that may be overly attuned to rainmakers. In this regard, firm management has responded by exhorting their partners to embrace 'teamwork' and have implemented various remedial, although relatively minor, design changes in their firms' reward systems.

Clients. But what about a firm's key clients, the top 20-40 that provide a disproportionate amount of the firm's profits, prestige and professional enjoyment? It's not clear whether firms' reward systems actually motivate the partners to perform in ways that are always in the best interests of each of these important clients. And there is not much evidence that law firms have even focused on this issue.

The Challenge

Accordingly, it is proposed that firms re-evaluate their current partner compensation systems against a triple-headed standard that can be labeled 'Win-Win-Win Partner Compensation.' The first 'win' is for the rainmaker/market leader partners ' who in most cases today are already well taken care of. The second 'win' is for the firm as a whole, including all its partners, ie, the 'team,' and the firm's long-term strategic success. Regarding this second 'win,' possibly more attention needs to be given. And the third 'win' refers to the firm's major clients, including the long-term care they receive and the loyalty they feel toward their law firms ' an area that the author believes needs to be further explored.

Hence, in line with the triple-win framework presented above, following are 'Five Design Challenges' that address possibly the most critical current issues in large law firm partner compensation systems. To help the author test in each case the challenge and to generate some ideas for possible best practices solutions, he interviewed a number of Chairs/MPs of AmLaw 100 firms or their designees who were involved in their firms' reward systems.

1. Partner-Proprietary Client Ownership

Challenge

Origination attribution credits emphasize a partner's sense of ownership regarding 'my' client, sometimes to the detriment of the concept of a 'firm client' and also sometimes resulting in the demotivation of others who would work on the client. Some of the resulting unattractive behaviors include hoarding of work and some partners' refusal to work on a client where another partner holds title to the origination credits unless some of those credits are shared.

In these ways, the practice of rewarding origination has resulted in a slippery slope that creates 'non-teams' dividing the credit holders from those who are not. Many firms admit that partner-proprietary client ownership is a 'key stress point.'

Possible Solutions

• As one Chair/MP said, it's a question of 'where you affix responsibilities.' That is, attaching performance measurements to areas of responsibility that are too localized, such as individual clients, can cause an eat-what-you-kill mentality. Alternatively, measuring a partner's performance by standards that are too broad, such as the firm's overall wellbeing, are not motivating enough.
• Provide matter origination credits to whomever is responsible, even though origination credit at the client level is still attributed to another partner. In this approach to double counting, the client partner and the partner responsible for the matter both feel they have been recognized.
• Eliminate origination credits altogether, but attribute revenues to partners who fulfill the respective roles of handling the relationship, managing the work and/or doing the work. (Presumably, the motivation for bringing in business is to garner more credits in the role of 'handling the relationship.')
• Offset the proprietary motivations encouraged by new business attribution by offering special 'Teamwork' awards to partners who practice sharing with one another, despite what the metrics tell them to do. And punish counter-culture behaviors such as hoarding.

2. Point Inflation

Challenge

Rainmakers, as goes the tag line of an often-run television commercial, are 'priceless.' This is because rainmakers are rare and some other firm can always choose to pay a premium to try to steal away a business-producing partner. But the market value of what is commonly referred to as a 'service partner' is relatively much less. And no firm really needs more service partners, unless they come in a package with an acquired rainmaker. However, with the steep increases in profitability of large firms during the past 5 years, and due to 'point inflation' or other possibly unintended results of their firms' compensation systems, many of these so-called service partners are earning more than they ever expected or possibly need to be paid.

The end result could be considered a misallocation of resources, ie, profits are being unnecessarily diverted to a large group of rank and file partners, when instead these monies could be directed toward strategic in-vestments such as acquiring skills for new markets, opening new offices and completing acquisitions. The task ' if one buys into this view ' is how to get the service partners comfortable, without disenfranchising them, with their not participating pro rata in the firm's affluence.

Possible Solutions

• Change the compensation system to get away from awarding percentages of ownership or ownership converted into 'points.' Also, when compensation is reviewed, always start deliberations regarding a partner at his/her previous actual dollar amount. Such approaches help prevent unintended income inflation.
• Operate a system that utilizes copensation 'tiers' or 'bands' (often 10 or more of them), each representing a different level of partner performance. When compensation is reviewed each year, resist moving a partner up to the next band unless he or she has changed the nature of his or her contributions and has really earned it. Also, as firm profitability increases, move the rainmakers/market leaders up in the bands and add new bands above the top levels to create yet higher levels for the firm's most valuable partners.
• Start a bonus pool that is funded by 10%-20% of profits, coming off the top of all partners' incomes, and award bonuses to the firm's most productive partners.

3. Are Your Priority Clients Getting Priority Attention?

Challenge

A law firm's partner compensation system should be fully supportive of the firm's goals for its key clients ' the top 20-40 or more ' including motivating the firm's partners to ensure service excellence and thereby secure these clients' loyalty while at the same time positioning the firm for expansion of its services. This is particularly important because most large firms today have realized that expanding work with current good clients has greater upside than wild goose chases for new clients.

But, it is not clear whether firms' partner compensation systems are functioning constructively with regard to their key clients or, instead, are inducing unintended behaviors that could be harmful to the firms' ultimate success with these important relationships.

Possible Solutions

Review the compensation system to see if it always gets the firm to the right answers in response to the following questions:

• Who is the relationship partner ' or should be?
• Who is on the client team ' or should be?
• Are relationship partners being paid enough?
• Is service excellence being sufficiently rewarded?
• Is the client team performing like one?
• Is cross-selling and expansion happening?
• Is team or is solo marketing being encouraged?
• Are the motivations of departments and/or practice groups in concert with serving the key clients?

Should all key clients be considered 'firm clients' in the attribution system? (Note: A 78-question, 'Key Client Compensation ' Diagnostic Review' that expands on these questions is available gratis from the author, if requested, at [email protected].)

4. Use of Client Feedback in Partner Evaluations

Challenge

When considering how to measure a partner's performance, theoretically the ultimate measure in a service environment should be what the clients think of him/her. And while formal client feedback programs are relatively new for law firms, such programs are fast growing in popularity. And, why not ' the output is actionable feedback that can be used to correct service and/or relationship deficiencies before a firm's competitors get that same chance.

But, attempting to formally link such feedback to partner rewards is tricky. First, the solicitation of feedback from a client has to be accomplished by someone who is independent of the relationship partner and the client serving team. But even then, if partner pay is linked too directly with feedback from clients, 'gaming the system' can occur by means of the partner's directing the interviewers to only those client individuals who will give a good report or, worse, prompting the client interviewees to say only positive things.

Possible Solutions

Currently, input of client feedback into reward deliberations is accomplished, if at all, only anecdotally in cases where the firm chair/MP has conducted some 'one-on-ones' with a limited number of clients. The author suggests that, at least for now, what these chair/MPs are doing goes far enough.

Formal Client Feedback Programs are still in their infancy at large firms and potentially promise too much benefit to take the risk, at least for now, of creating possible conflicts with the compensation process. That is, more time is needed to fully develop the feedback programs with the objective of using the output for constructive purposes ' for the benefit of the clients and the firm ' instead of for punitive purposes such as might occur if client feedback is indelicately used in personnel evaluations.

5. De-linking Pay from Metrics that Promote Suboptimal Behaviors

Challenge

One of the slogans during the last revolution that accompanied law firms' push to create more partner accountability was: 'If you don't pay to maximize it, it will be minimized.' However, as mentioned above, maybe things have gone too far. Instead, as an opposing view, consider: 'If you measure it too much, it's all that's going to happen.' Thus, while some law firm Chairs/MPs agree that quantitative measurements provide a partner with the 'buttons he or she needs to push,' nevertheless as a consequence, 'Partners have become obsessed with the numbers [which] creates lots of grey areas and room for manipulation.'

Possible Solutions

• Attempt to counteract the possible undesirable behaviors that can result from partners' literal interpretation of the metrics by ensuring that firm management constantly provides oral clarity regarding the firm's values and what actual behaviors are expected. One Chair/MP aptly referred to this as 'non-statistical reinforcement of behavior.'
• Incorporate tiers or bands into the system, so partners are evaluated and assigned to the bands based on top-down subjective/holistic evaluations of competencies and contributions rather than more formulaic bottom-up methods.
• Ensure that 'fairness and the pecept-ion of fairness' abounds. Supporting this is the 'tone at the top,' ie, the way the rewards are actually divvied up should be in sync with what firm management preaches regarding expected partner behavior.
• Also helpful is to point out some 'exemplary partners' who, personal metrics be damned, do what's right for the firm and its clients. In fact, each firm's compensation committee should revisit the firm's Web site and ponder all the glorious things it says about how the partners work cooperatively to care for each of the firm's clients. Then, the ultimate measurement of a partner should be redefined to be the extent to which he or she 'lives the brand' as may be articulated by the Web site, the firm's mission statement or firm management.

Some Additional Thoughts

Several other issues relating to law firm partner compensation seem currently to be hot, or at least challenging enough to be included in some way in the deliberations along with what has been presented above:

• Multi-Year Cycles. The great majority of large law firms review compensation annually. But, why do something every year if it is so costly and painful? And how much change in a partner's performance occurs over a 1-year versus a 2-year period?
• Non-Disclosure. In only a handful of large law firms are partners' earnings not disclosed to the entire partnership. However, much time is saved and angst eliminated in those firms that have chosen to skip the annual, and often insidious, partner-to-partner comparisons.
• Peer Pressure. Few large firms still use a lockstep approach for compensation. But one of the benefits of lockstep is that partners in each class look after one another to keep everyone's collective nose to the grindstone. But in today's subjective systems, partners in many cases have abdicated to firm management their responsibility to push their peers. So, how can firms, without dismantling their current systems, inject back in some aspects of this valuable element of peer pressure?

Whither Go?

A consultants view: Law firm partner compensation systems are only nominally about splitting up the money. Instead, their real purpose is to be used as a 'management tool' to help herd the partners and their firms toward long-term strategic success.

And, in this respect, the partner compensation system should be considered as a competitive weapon. So, have you thought about whether your firm's compensation system needs some upgrading in order to be attuned to the competitive revolutions ahead?