Subjective Law Firm Partner Compensation Systems
Asked and Answered
By John W. Olmstead, MBA, Ph.D, CMC
Q. I am a partner in a 12-attorney commercial litigation law firm in Palm Beach, Florida. There are five partners in the firm. We are contemplating merging with another firm in the area of similar size. We have done our due diligence and have come across a possible non-starter—our compensation system. Our compensation system is an objective, formula-based system. The other firm has operated under a subjective system and they are pushing for the firm to operate similarly. We would appreciate your thoughts on this method of compensation.
A. Subjective-based systems are the most commonly used approach to setting partner compensation, especially in larger firms. More and more firms your size and larger are moving to subjective systems as a result of the failure of other systems to account for the full range of contributions that partners make to the law firm. Subjective systems can take on a variety of forms, but the central theme of such systems is that they rely on a subjective assessment of partner performance, without reference to specific weighting of factors or a set formula. This is not to say that subjective systems lack structure or predictability, or that they don’t consider objective financial data. Successful subjective compensation systems include these elements and more.
Subjective compensation systems vary widely. Here are some of the most common elements found in subjective systems:
Prospective vs Retrospective System
Systems can take the approach that sets compensation at the beginning of the year by assigning relative shares of the profits and applying allocations as the profits are earned or await the end of year results before making major allocations of profits. Prospective approaches are more common than retrospective approaches. However, most prospective approaches reserve some funds for year-end allocation.
Who Makes Compensation Decisions
Since the system is not a simple plug and play using a formula, either a person or a group must be empowered with deciding how profits will be allocated among the partners – how they will be compensated. In most firms these decisions fall upon the executive or compensation committee. Often the success or failure of the compensation system hinges on getting the right people that are trusted by all of the partners on such committees.
Factors – What Does the Firm Reward
Most subjective systems have defined factors that the system is designed to reward. Some compensation committees have these outlined very specifically in writing and others simply communicate the factors or consideration criteria verbally prior to annual performance reviews or through general discussions of goals.
Data Review
The better subjective systems review financial performance data for each partners and subjective data for each partner often in the form of performance evaluation or peer review.
Client Origination
Some firms consider client origination as a direct factor, others simply track client origination, and yet others do not track it all.
Point Structure
May firms use a point structure in which partners are moved up or down depending up their performance.
Bonus Pool
Bonus pools are often used in such systems to reward exceptional performance.
In additional too subjective compensation systems some firms used hybrid systems that employs objective (formula) and subjective components.
Subjective systems are not for all firms. They will fail without strong, trusted, leadership. In very small firms it is difficult to structure a compensation decision making body.
It sounds like your firm and the firm you are thinking of merging with may come from two very different cultures. Subjective systems work well for firms that are “firm first” firms but not for lone ranger firms that often operate under eat-what-you-kill systems. If you firm is not a long ranger firm and you are in fact a “firm first” firm or aspire to be such you made be able to adapt to a subjective system. However, you may need a post-merger phase-in period. Another comprise approach might be a hybrid system.
Click here for our blog on compensation
Click here for our blog on mergers
Click here for articles on other topics
John W. Olmstead, MBA, Ph.D, CMC, (www.olmsteadassoc.com) is a past chair and member of the ISBA Standing Committee on Law Office Management and Economics and author of The Lawyers Guide to Succession Planning published by the ABA. For more information on law office management please direct questions to the ISBA listserver, which John and other committee members review, or view archived copies of The Bottom Line newsletters. Contact John at jolmstead@olmsteadassoc.com.