Partner Compensation in Law Firms – Objective vs Subjective Approaches

Question:

Our firm is at a crossroads concerning partner compensation. We are a twelve lawyer firm in Richmond, Virginia with nine partners and three associates. We are in our second generation of partners as the original founders have retired over the years. We do not have a managing partner or management committee – management decisions are made by all the partners. Our compensation is based upon compensation participating percentages set at the beginning of each year based upon the recommendation of a rotating member compensation committee recommendation which must be approved by the full partnership. These percentages are then used to allocate each partner’s share of firm profit. Monthly draws are taken against projected allocations and the calculations are trued up each quarter and at the end of the year. There is nothing in writing and it is unclear what is taken into consideration by the compensation committee. However, in general the primary metric is individual working attorney production collections. Supposedly, other metrics and subjective factors are taken into consideration but no one knows what they are. The majority of the partners have been relatively happy with the system but a few are not due to the vagueness of the system. I am wondering whether we should move more to a formulaic approach. What are your thoughts?

Response:

The trend in compensation, particularly in larger firms, is toward subjective or hybrid approaches and a movement away from strictly formulaic – eat-what-you-kill – objective systems. These systems are fine in “lone ranger” firms but often are unsuccessful in firms that are or want to be “firm first” or “team based” firms. The unhappiest partners that I see are in some of the firms with eat-what-you-kill objective systems. It sounds like your system has worked fairly well and a majority of the partners have been satisfied with the system. However, it may not be reinforcing the behaviors that you would like to instill in your partners if the only metric used, or is perceived as the only metric being used, is working attorney collections. Your firm is very partner top heavy and I would not be surprised if your utilization of paralegals as effective billable revenue producers is minimal. You are encouraging personal production period. What about delegation, new business origination, leadership, contribution to firm management, mentoring and training of associates, etc? Subjective or hybrid approaches often do a better job of dealing with overall contribution to the firm if they are setup properly.

I would suggest you fine tune your existing system. Consider the following:

Put your system in writing. Outline the performance factors that are considered and the general importance or weights of each. This includes objective or directly measurable factors and the more subjective or harder to measure factors.
Make more of the intangible or subjective factors measurable by requiring that a personal plan be submitted by each partner and reviewed with and approved by the compensation committee. This plan should contain specific measurable goals and objectives that are specific, measurable, attainable, rewarded in the compensation system, and on a specific completion timeline.
Require that the compensation committee conduct personal partner interviews each and every year prior to their deliberations on compensation. This interviews should be mandatory. Self evaluations with related narrative should be provided by the partner being interviewed prior to the interview and the approved plans should form the basis for the discussion and reviews.
The full partnership should either approve – up or down the compensation committee recommendation – not be allowed to pick apart or modify. If the partnership does not approve the committee’s recommendation the committee starts over and submits another recommendation. There should be a provision for what happens if a decision cannot be make – for example used last year’s percentages, etc.
There should be an appeal process if a partner has a complaint with regard to the decision concerning his or her compensation.
Consider extraordinary bonus pool for exceptional performance rewards.

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John W. Olmstead, MBA, Ph.D, CMC

Posted at 10:14 PM in Compensation
Tags: Approaches, Compensation, Firms, in, Law, Objective, Partner, Subjective, vs

Nov 12, 2019

Partner Compensation in Law Firms – Objective vs Subjective Approaches

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