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How a Law Firm's Comp System Affects Profitability and Partner Satisfaction
Compensation systems are typically a strategic afterthought, seen as the means by which to allocate the spoils of a successful strategy. They're viewed as affecting the level of grousing among partners, but not a firm's performance. The data, however, indicates the reverse is true. Profitability growth has varied markedly by compensation system over the past decade, while partner satisfaction has been consistent across all systems. The choice of compensation system is thus best thought of as a critical strategy decision, with second-order implications that leaders need to think through and manage adroitly.
Let's start with the data. It comes from the biennial Major, Lindsey & Africa Partner Compensation Surveys of 2012 through 2018 and comprises 4,266 data points for U.S.-based equity partners. Firm profitability, a direct counterpart of partner compensation, has been on differing trajectories depending on the system — growing strongly at lockstep and open-system firms (those non-lockstep firms in which partners know or can easily learn what their colleagues earn), while plateauing at closed-system firms (those non-lockstep firms in which partners don't see each other's salaries). Partner hours and billing rates vary modestly across the different systems, but average originations diverge strongly, with those at closed-system firms being both appreciably lower and on a weaker trajectory.
A logical explanation for performance at closed-system firms is that partners' competitiveness and animal spirits are dampened by not seeing what everyone earns, and that they are therefore less inclined to hustle. The data shows there's a subtlety to this: It's not that partners at closed firms are working less than those at open-system firms — their average billed hours are actually the same — but that they sell less work (average originations lag by 19% over the time period) and they operate at lower leverage (an average of 1.9 versus 2.9). It's consistent with the credible notion that, absent countervailing pressures, lawyers will be drawn more to substantive legal work than to developing client relationships or managing others.
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