Innovation in Big Law Partner Compensation Models

American Lawyer Media hosted a recent webcast to introduce the new Pacesetter Research* study, “Innovation in Big Law Partner Compensation Models.” Tomek Jankowski, director of Pacesetter Research, and David Gialanella, ALM’s editor-in-chief, invited Kristin Stark of Fairfax Consulting and me to join them in a discussion of the research findings and other recent trends in law firm partner compensation.

We covered a lot of ground, including how changes to compensation plans are driven by recruiting and retention challenges, the addition of a non-equity tier of partners in many law firms, and the need for better succession planning.

Which partner contributions matter, and the relative weight of these contributions, is a hot topic. In many compensation plans, certain “intangible” contributions are considered of low importance, despite being both tangible and accretive. I point out in our discussion that, in some law firm cultures, what this really means is “there’s no risk in measuring how many hours you billed and what cash came in the door last year. No one can game it. It's done.” In other words, in some law firms, it’s more important to build a system that limits the opportunity for partners to cheat each other than to build a system that rewards essential contributions.

Whether and how much to firm and practice leaders is also a regular debate. Curiously, despite the increasing complexity of running a modern law firm, there doesn’t appear to be a material increase in management training, either offered or required, for firm or practice leaders. In firms where partners fear “fearing the creeping professionalization of law firm management,” it’s no surprise they don’t want to pay a premium. On the other hand, unlike corporate CEOs who are hotly recruited for their ability to lead, even when changing industry sectors, there’s not a single recorded instance of a law firm leader recruited specifically to lead another firm. When leaders lateral to a new firm, it’s solely because of their track record as lawyers or rainmakers.

A recurring theme throughout our discussion is the unnecessary opacity of many partner compensation plans. Regardless of compensation philosophy, shared partner values, or competitive pressures, too many law firms make it challenging for their partners to know exactly which contributions are rewarded, in what proportion, and what measures partners can take to improve their compensation by increasing their relative value to the firm.

This graphic from the Pacesetter research highlights the strong correlation between transparency and satisfaction. I make this point regularly in my compensation practice: Transparency is key.

Most lawyers recognize they don’t do everything equally well. Many whose preferred contributions pay less accept this as a fair trade for not being asked to contribute in ways where they may not be happy or successful. Some lawyers, by contrast, are willing and able to adjust their contributions according to what pays best. In cultures with the most unrest, it’s often impossible for partners to reverse engineer why one partner who contributes in one way is paid materially more than a partner who contributes in a different way. Or is paid less than a partner who contributes in substantially the same way. Or why all of them are paid less than a partner whose contributions aren’t readily identifiable at all.

To access a recording of the webcast, visit Law.com Pro resource center (here).

To obtain a copy of the Pacesetter research, visit ALM Pacesetter research (here).

*Props to Ruth Sierra who led the research.

Tim Corcoran guides law firm and law department leaders through the profitable disruption of outdated business models. Tim is a former CEO, a Fellow and past Trustee of the College of Law Practice Management, past President and Hall of Fame member of the Legal Marketing Association, an American Lawyer Research Fellow, a past Teaching Fellow in the Master in Legal Business program at the Australian College of Law, a frequent presenter on business of law topics at law firm retreats and legal conferences, and a writer whose articles are published regularly in leading publications. Contact Tim here.