Beyond Eat-What-You-Kill: Determining Partner Compensation

Make sure your partner-compensation system encourages behavior that advances, not undermines, your firm's strategic goals.

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How much and how partners are paid are probably the two most challenging management issues that law firms face. Partners frequently advise us in confidential interviews that they are more dissatisfied with the method used to determine compensation than with the amount of compensation itself. Many law firms are struggling with compensation systems that no longer meet the needs of the firm and the individual partners. Failure to explore alternatives to failing systems often results in partner dissatisfaction leading to partner defections and disintegration of the firm.

What gets rewarded is what gets done

In many law firms, compensation systems have run counter to firm culture and failed to align compensation systems with business strategies. As more law firms move toward teams, many are incorporating new ways to compensate partners to develop a more motivated and productive workforce. Team goals are being linked to business plans and compensation is linked to achieving team goals.

Such systems reinforce a culture that significantly advances the firm's strategic goals. People tend to behave in ways that reflect how they're measured and paid.

However, be advised that compensation does not drive behavior ; it maintains status quo. Motivation requires leadership, which can have a greater impact upon a firm than anything else.

Reinforcing desired behavior

Law firms don't have to look far to find such evidence of compensation-system failure. Partner defections, firm breakups, personal fiefdoms, and maverick partners top the list. Other indications of trouble are the practice of hoarding work by some partners, a widespread perception that the compensation system is unfair, problems acquiring and retaining top legal talent, low productivity, client dissatisfaction, low morale, and disputes with former partners.

Firms experiencing these symptoms should consider evaluating and systematically redesigning their compensation system.

A well-designed system is aligned with the firm's business strategies, culture, and personality; reduces partner dissatisfaction; rewards performance and contribution as well as other behaviors that the firm desires to reinforce; is perceived as fair by the partners.

Firms must ask themselves what kind of firm they want to be ; "team based" or "lone ranger." Eat-what-you-kill systems might be appropriate for lone-ranger firms. However, they aren't appropriate for firms wanting to build and create a team-based practice, since such systems typically reinforce "lone ranger" behavior resulting in a "me first vs. firm first" orientation.

Compensation systems should do more than simply allocate the pie; they should reinforce the behaviors and efforts that the firm seeks from its attorneys. Many firms are discovering that desired behaviors and results must go beyond short-term fee production to include contributions in areas such as marketing, mentoring, firm management, and the like to ensure the long term viability of the firm.

Creating a fair and simple system

First, the firm must design a system that is perceived as fair by partners in the firm. To determine if a system is fair, ask the following questions: Do I understand the system? Are individual contributions recognized? Are group contributions recognized? Are the rules clear? Are the rules followed and applied consistently to all partners? Are the partners making compensation decisions trusted and respected?

The next step is to determine the criteria or the behaviors that the firm desires to reinforce. Typically, the following compensation criteria, presented here in unranked order, are used as a general framework: ownership, seniority, pro bono activity, teaching, writing, speaking, collegiality and team play, participation in training staff, expertise, leadership and management activity, fees collected, client retention, origination of new business, participation in community and bar activities, profitability, client satisfaction, productivity, and compliance with firm policies.

After compensation criteria have been determined, a plan must be adopted, approved, and implemented. There are four basic compensation-plan types.

Subjective plans review the performance of each partner and subjectively determine a relative value for each partner. These plans require evaluation of the individual, comparing the evaluation against those of all other partners and relating the determinations to available funds. Some firms use a democratic process in which each partner participates in the process, while others use a committee. Increasingly, partners are required to submit personal business plans each year that must be approved by the partnership, executive, or compensation committee.

Formula/objective plans use a formula to assign value to various criteria to determine compensation. Approaches can range from eat-what-you-kill plans that focus only on a partner's individual production to plans that assign values to the full range of compensation criteria.

Some eat-what-you-kill plans employ a profit center approach in which each partner is set up as a department in the accounting system and fee revenue is assigned based upon generation and indirect and direct overhead is allocated based upon a predetermined usage formula. Others focus only on revenue by allocating fee credits for generation (production of work) and for origination of business, weighting the two factors, and determining compensation based upon the results.

Combination plans are hybrid plans that combine elements from subjective and formula plans.

Bonus pools are used to supplement the above plans and reward individual or groups of lawyers for extraordinary performance.

Subjective or combination plans are most appropriate for firms desiring to build and reinforce a team-based practice. They focus on the long as well as short term and incorporate all or most compensation criteria. They also require more work from firm management. While formula plans are increasingly falling into disfavor they can be appropriate in lone-ranger firms that foster an eat-what-you-kill approach and nothing more.

Move slowly to revise your system

Avoid the temptation to make dramatic changes to an existing plan too quickly. Don't blame other management problems on compensation and attempt to solve them by overhauling your system.

Change your system gradually. Consider bonus pools and other adjustments initially and gradually deploy other plan changes. And go slow. It can take three or four years to completely change a compensation plan.

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John W. Olmstead, Jr. <jolmstead@olmsteadassoc.com>, MBA and PhD, is a certified management consultant and president of Olmstead & Associates in St. Louis. A member of the ISBA Law Office Economics Section Council, he provides practice management, marketing, and technology consulting to law firms. For more practice management tips, read The Bottom Line, the LOE section newsletter (free to LOE section members; to join, call (800)252-8908 or visit <http://www.isba.org/Sections/>).