The single greatest failing of law firm partner compensation plans is the lack of transparency. Transparency means that the partners proactively and explicitly know which behaviors to pursue and the compensation available to them by engaging in these behaviors. Of equal importance, those partners who choose not to engage in desirable behaviors will know that the consequences include limiting their access to available rewards. Transparency is not achieved merely when partners can see what other partners earn, or when productivity metrics are widely available to all.
Ideally, an effective compensation plan eliminates the tough choices routinely faced by law firm partners: Do I act in my own economic self-interest and engage in this set of behaviors? Or do I act against my own economic self-interest by doing what's right for the firm and engage in this other set of behaviors?
Still, while a sub-optimal compensation plan — one that, for example, knowingly antagonizes clients, fosters internal competition, rewards short-term thinking, and encourages selfish actions — may not be good for the firm’s long-term health, it can still be transparent so long as everyone clearly knows the rules. Reasonable, competent law firm leaders know they can't stand by a compensation plan that substantially rewards selfish partner behavior while simultaneously exhorting or even begging partners to adopt a substantially firm-first attitude. That’s what inept leaders do. So how do good leaders foster a firm-first attitude? Simple. They align what’s good for the partner with what’s good for the partnership.
Adapting to a changing marketplace very likely requires partners to engage in new behaviors, and to encourage partners to pursue these new behaviors, they must receive incentives. So why aren't more law firm leaders tackling partner compensation? First, let's start with why some firms are forging ahead.
The most common reasons law firm leaders tackle partner compensation:
Reacting to partner underperformance. Using traditional performance metrics, low-rate partners are often perceived to generate low profits, and high rate partners are often perceived to generate high profits, and there's a perception that too many low-rate partners receive too much compensation. Or partners who have so far been able to withstand price pressure subtly or overtly demand more of the compensation pie that's currently going to the "weaker" partners. Or younger partners decry the imbalance in compensation awarded to older partners whose productivity has waned. Or the firm has hired several lateral partners by offering, even guaranteeing, high compensation, but enough of these laterals haven't delivered on their promises and partners who have subsidized these hires begin complaining of inequitable treatment. And so on.
Outsourcing the tough conversation. Law firm partnerships are curious environments, where autonomy is respected but collaboration is desired, where leaders are elected but other owners may freely meddle in strategy or operations, where high performance is expected but low performance is often tolerated, where assertive advocacy on behalf of clients is the coin of the realm but partners avoid confronting each other at all costs. Sometimes law firm leaders find it easier to address underperformance by changing the compensation plan in such a specific manner as to visibly disadvantage under-performers, so the under-performers hopefully take the hint and move on. Sometimes leaders find it easier to have an outsider introduce the notion of new performance expectations and new incentives, and potentially scare off under-performers. Anything to avoid having a "tough conversation" with a fellow owner.
Proactively adapting to the changing business climate. When price pressure abounds, when firms proactively or reactively embrace project management and process improvement, when clients demand AFAs, when management sees opportunities to lower costs by introducing new technology, hiring contract lawyers, etc., the traditional performance metrics no longer apply. A non-hourly fee agreement can be extraordinarily profitable, though not necessarily when measured by traditional billable hour metrics. Also with traditional metrics, a partner delegating work to lower-rate/lower-cost associates or paralegals might deserve punishment for not keeping the work and billing it at a higher hourly rate. But leverage boosts firm profitability and meeting client pricing demands improves client retention, so these may now be desirable behaviors. When management recognizes the current performance metrics are outdated, they know they need to link new performance metrics with new incentives to not just reward but to drive desirable new behaviors.
While every law firm compensation plan should undergo a periodic review, it's still more common for law firm leaders to avoid taking action. Some haven’t gotten around to it yet. Other law firm leaders have considered and dismissed the idea.
Here are the most common reasons law firm leaders don't tackle partner compensation, or tackle it ineffectively, and my reactions:
The leaders don't have enough political influence or organizational authority to make significant changes without a consensus, and they assume compensation plan changes will disadvantage enough partners to render a consensus impossible, and even a simple majority is risky.
They’re wrong. Partners want transparency and certainty, and some are even willing to give up a little get achieve this.
The leaders aren't sure where to start. They know or suspect that their performance metrics are outdated, and what might be considered underperformance by one standard might be very desirable and client-focused by another, but they don't know how which new metrics are better, or how to choose, and they want to sort this out first.
Management science doesn’t take place in isolation. Because they’re inextricably linked, it’s better to tackle profitability and compensation together.
The leaders know they need to change, but they prefer to make tweaks around the margins rather than launch a more robust assessment and redesign because they fear the risk of the unknown more than "the devil they know."
The market has proven that the risks and costs of doing nothing are far higher than the costs of taking action.
The firm has a subjective compensation plan and a hard-working compensation committee, so the leaders believe that any necessary changes, whatever they might be, can be addressed incrementally without the bother of introducing a formula or adding unnecessary bureaucracy.
A more transparent and more effective compensation plan often reduces complexity and bureaucracy.
The leaders know they need to change, but assume that of the partners who will be disadvantaged under new compensation rules, some are older and the problem will sort itself on its own in the near future, and some can be gently (or roughly) pushed out without the bother of wide-scale changes. So they defer action.
This may be true. But it doesn’t solve the challenge of transparency for everyone else.
They don't believe in hiring expert professional advisors because they're smart and believe they can figure it out themselves. Or they once had a” bad experience with a consultant.” This is a position they would, of course, ridicule coming from a client facing significant legal challenges who rejects hiring a lawyer. But perhaps more lawyers over-estimate their business acumen than business people over-estimate their legal acumen.
I don’t waste any energy with these firms. Next.
The leaders intend to, or are required to, return to a full-time practice at some point, and they don't want to be punished by their partners as their productivity ramps up (hopefully) to pre-management levels.
I get it. This is why a compensation review can also tackle management accountability and compensation, and we can build in a glide path for leaders to return to their practice.
Top rainmakers continually threaten to leave if they don’t earn more, and any discussion of changes to the compensation plan risks alienating one or more of them. Leaders don’t want to take this risk.
No real top producer fears an objective assessment. Analysis might reinforce that they deserve a big slice of the pie. If it’s revealed that they don’t have as much leverage as they think, management’s concerns are reduced. In reality, top producers typically thrive in any performance-based system once they know the rules of engagement.
The leaders themselves are at the top of the compensation food chain and they suspect any changes will likely disadvantage them. So they resist change. Yes, this happens. More often than you’d think.
A pessimist might say that partners get what they deserve when they vote in leaders like this. An optimist might try anyway. It can work, but only if and when the other owners are ready to take back their firm.
The reality is that, absent additional information, neither the law firm leaders nor I know whether the firm’s partner compensation plan has to change, and by how much. The effectiveness of a compensation plan is measured by how well it furthers the firm's strategy. And the effectiveness of a firm's strategy is measured by how well the firm's resources and capabilities are deployed to sustainably and profitably meet an identified market need. Just because a firm is profitable, or PPP has increased year over year, doesn't mean the firm has or is effectively executing a sensible strategy.
This is why the first step is to conduct a compensation assessment, to establish a baseline from which we can examine whether alternative approaches might be more effective. A compensation plan assessment doesn't have to result in any changes, let alone substantial changes. The firm might have sufficient flexibility to make minor changes, but without an understanding of the relative merits of available options, it's a question mark whether the changes will be beneficial.
Even a more substantial compensation plan redesign doesn’t have to be disruptive, particularly if it reinforces behaviors that have already been taking place without proper recognition. Some redesigns may even take several years to fully implement. It’s more effective to define the desired end state and then march steadily toward it than to take cautious, uncertain, inconsequential baby steps that generate more disruption than results.
The market has changed. Some law firms are struggling. Others are clinging to outdated business models. They may not be struggling in the short term, but they're missing opportunities to adapt and thrive. An effective, transparent partner compensation plan provides a clear roadmap to guide partner behavior during a time of great change. To paraphrase an old proverb of uncertain origin, the best time to plant a tree is forty years ago. The second-best time is today. Why wait?
Timothy B. Corcoran is principal of Corcoran Consulting Group, with offices in New York and Sydney and a global client base. He’s a Trustee and Fellow of the College of Law Practice Management, and is a member of the Hall of Fame and was 2014 president of the Legal Marketing Association. A former CEO, Tim guides law firm and law department leaders through the profitable disruption of outdated business models. A sought-after speaker and writer, he also authors Corcoran’s Business of Law blog. Tim can be reached at Tim@BringInTim.com and +1.609.557.7311.