Law Firm Partner Compensation: Metrics – What Is Important – What Matters

Does Compensation Make a Difference in Motivation and Actual Performance?

By John W. Olmstead, MBA Ph.D CMC

As law firms are being forced to face new challenges and embrace change they are asking new questions and exploring new terrains. For example:

With thinner profit margins firms can no longer carry unproductive partners. Law firms are demanding more from their partners and asking everyone to think outside the box to help the firm innovate for the future and obtain/retain a competitive advantage.

This has renewed discussion and debate on the topic of partner compensation and in particular whether compensation can make a difference in motivation, actual performance, and contribution.

We are receiving many more inquiries from firms looking to overhaul and redesign their partner compensation systems. Based upon these inquiries we believe that many firms are expecting miracles from their compensation systems and are asking and expecting more than they will ever be able to accomplish. They are not just seeking to align pay with performance – but have far higher expectations. For example:

Expecting a compensation system to perform miracles such as these may be expecting more than any system can deliver.

Realistic Expectations

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 and must include contributions in areas such as marketing, mentoring, firm management, etc. to ensure the long term viability of the firm.

What gets measured and rewarded – Is what gets done

However, be advised that compensation does not drive behavior – it maintains the status quo. It serves as a reinforcing agent. Motivation requires leadership which can have a greater impact upon a firm than anything else.

An effective compensation system serves as a strong messaging and reinforcement agent that helps you obtain and retain top partner talent and helps align their goals and activities with the strategies and goals of the firm.

A well designed compensation system should provide:

While you must get partner compensation right in order to acquire and retain top partner talent as well as reward performance and reinforce desired behaviors, the starting point is hiring and retaining the right people to begin with.

Research from a classic business study that was heighted in the popular business book “Good to Great” (Collins, 2001) authored by Jim Collins found that the method of compensation was largely irrelevant as a causal variable for high and sustained levels of performance. Other research also bears out that performance and motivational alignment are impacted by intrinsic and other factors other than just extrinsic factors such as compensation or methods of compensation. Over the years I have seen too many partners leave lucrative situations in law firms to join other firms for less compensation or to start their own firms to suggest that it is only about the money or compensation package.

Jim Collins sums it up best in the following quotes from Good to Great (p 10-13)

“First who – then what”

“They get the right people on the bus, the wrong people off the bus, and the right people in the right seats.”

“People are not your most important asset. The right people are.”

Your compensation system should not be designed to get the right behaviors from the wrong people, but to get the right people on the bus in the first place, and to keep them there. Your compensation system should support that effort.

James Cotterman, Altman & Weil, Inc., (Cotterman, 2004) contents that there are two groups of employees for whom compensation is not an effective management tool. The intrinsically motivated (6% to 16% of partners perhaps) do not need compensation as an incentive. The struggling performers (another 6% to 16%) will not react favorably to a compensation system that rewards positive behavior.

I believe that the following three pronged approach is needed to strategically manage and motivate partner talent in your firm:

Get Maverick and Unproductive Partners off the Bus (Deal with Problem Partners)

Dealing with “maverick partners” is always a challenge. Of course they seem to always be the heavy hitters and this makes it that much more difficult as often there are major clients and large sums of money at stake – at least in the short term. This can also be major issues and large sums of money at stake in the long term if you don’t deal with the maverick partner as well. In addition you won’t be able to achieve the vision and goals the firm is trying to achieve.

Many firms have had to deal with the problem of a maverick “huge business generator” who just wouldn’t cooperate with firm policies and caused conflict and tension in the firm. It is an unpleasant task – but in the end – worth the investment. In the end he or she either conforms or leaves the firm. We have been advised by our clients that even though they may have struggled in the short term as the result of the loss of a major fee producer – in the long run the firm was better off and should have done it earlier.

Non-productive partners pose to be a challenge as well. In this case they are usually the “nice – easy to get along with folks” which makes it difficult to confront and deal with them as well. However, the longer that you let such problems fester the harder these situations will be to deal with in the long term. Layout performance expectations and deal with them in real time.

Consider:

Get the Right People on the Bus and in the Right Seats (Hire Right and Retain)

Many of our clients simply take a short-term view when hiring new associates or seasoned lateral partners. A much better job needs to be done in initial hiring and in the area of talent management generally. Then the firm must retain this talent. Policies and protocols should be established in each of the following areas:

Before even starting to look for a new hire the firm should decide on the specific competencies and position requirements including the personality fit that will be required to blend with the firm’s core values and culture.

Insure that the Partner Compensation is Reinforcing the Right Behaviors, Rewarding the Right People and Keeping the Right People on the Bus

Start by reviewing your compensation system to determine how well it is working and whether you are experiencing any of the following symptoms of failure:

If you don’t have any of these symptoms – your system may be working just fine. If so, leave it alone. If not, map out what the system should be doing for you.

Here are a few ideas:

  1. Over the past 30+ years I have seen just about every form of compensation system that there is – from “even steven” systems to “eat-what-you-kill”, other formula systems, profit center systems, objective systems, etc. No particular system is better than another system. It depends upon the firm – the culture – strategic goals – and the environment.
  2. If the system is working – sometimes it is better to leave it alone. There is nothing wrong with an “even steven” system as long as the contributions (fee generation, fee origination, firm management, and otherwise) are perceived as equal. Frequently, partners start out making even contributions and down the road contributions change (often due to life or family changes) and are no longer in alignment.
  3. When perceived contributions get out of alignment partners are reluctant to have the candid discussions that need to occur as well as changes in the arrangement or compensation system. It could be the system – percentage interest is fine – but as contributions have changed the percentages need to change.
  4. Resist the temptation to look at financial contributions in a single year. Look longer term – say the past three years.
  5. Consider not just the compensation as to whether people are happy with what they are getting – but consider whether the system is encouraging the behaviors that you need to achieve firm goals? For example – management of the firm, marketing activities, mentoring and training associates and others in the firm, etc. Often we discover that firms that are not realizing their strategic goals (those firms that have such goals) – for example growth – are victims of their compensation systems. The systems are motivating “lone ranger behaviors” rather than firm strategic goals. Often this is the primary reason that firms decide to change their system – to transition from “lone ranger” to “firm-first” team-based firms.
  6. Consider bonus pools and other methods of supplementing the base system.
  7. Start slow, put considerable thought into any changes you make with your compensation system.

Good luck!

John W. Olmstead, MBA, Ph.D., CMC, is a Certified Management Consultant and the president of Olmstead & Associates, Legal Management Consultants, based in St. Louis, Missouri. The firm helps law and other professional service firms improve the operations and management of their practices and the lives of their practitioners. The firm, founded in 1984 serves clients across the Globe assisting them with implementing change and improving operational and financial performance, management, leadership, client development and marketing.

Dr. Olmstead’s assignments have covered the spectrum of management issues. However, in recent years most of his time is focused on engagements helping firms with:

Dr. Olmstead is the Editor-in-Chief of “The Lawyers Competitive Edge: The Journal of Law Office Economics and Management,” published by Thomson West. He is currently serving as Past Chair, Illinois State Bar Association Standing Committee on Law Office Management and Economics and as a member of the Legal Marketing Association (LMA) Research Committee. Dr. Olmstead may be contacted via e-mail at jolmstead@olmsteadassoc.com. Additional articles and information is available at the firm’s web site:

www.olmsteadassoc.com.

© Olmstead & Associates, 2011. All rights reserved.

Bibliography

Collins, J. (2001). Good to Great. New York, New York: HarperCollins.

Cotterman, J. (2004). Determining the Right Compensation. Altman & Weil web site. http://www.altmanweil.com/dir_docs/resource/3e8e3c57-5a43-4169-9aed-d23720a1f78e_document.pdf

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