by Michael J. Anderson

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4. The Simple Unit Formula

The simple unit formula is designed to reward seniority, production, client generation and non-billable activities, using a relatively straightforward and totally objective calculation. A typical formula might be that each partner receives:

• one unit/point for each year with the firm
• one unit/point for $x of production (fees billed or fees received)
• one unit/point for x of client generation.

The non-billable units/points are awarded on the basis that the total available number of units/points is three times the number of partners. Then those available units/points are allocated on a pro rata basis for non-billable time recorded. Needless to say, when all of the units/points have been allocated they are converted to percentages and then applied to the net firm profit for the fiscal year to create each partner's individual income.

This system is not unlike the modified Hale and Dorr system in that it mainly rewards production in an objective manner. The biggest differences are that the simple unit formula also rewards longevity with the firm as well as some non-billable efforts.

Strengths

Simplicity is a key attribute of the simple unit formula. It is a straightforward calculation that most partners can readily understand and compute. And that is good! Remember the last truth at the beginning of this paper--K.I.S.S. (Keep It Simple Stupid).

The rewards under this system are for actual contributions in that it is a totally objective formula. Unlike most other objective compensation systems, however, the simple unit formula also takes into account seniority and non-billable time, at least to some degree.

Because production is at the heart of this scheme, there is less bitterness towards those partners who may be considered as under-producers or low profit contributors. These partners' rewards will be less when their production is lower.

Probably the greatest strength of the simple unit formula is that it lives up to its name. It is simple! Every partner knows exactly what they have to do to earn the income that they desire and they know at what level all of the factors are weighted.

Weaknesses

The major drawbacks of the simple unit formula is that it can promote the hoarding of clients and files. Individual partners want to make their numbers and on a personal income level, there is little value in delegating work or clients.Obviously, a system that encourages hoarding results in less collegiality and the competitive focus can become internal rather than external.

The units/points awarded for seniority can cause some animosity among the younger partners as well. This may well become a serious impediment to lateral hiring since the new partners would start at zero points/units in the seniority factor compared to peers in the same firm.

5. The 50/50 Subjective/Objective System

The 50/50 subjective/objective system attempts to overcome the problems associated with systems that are too objective or too subjective. It recognizes that both types of criteria are valuable to the firm as a whole.

The objective part of the scheme is that 40 percent of partner income is based on actual billings or receipts, while 10 percent of income is based on actual client generation statistics. Please note that these percentages are not etched in stone and can be varied according to a firm's vision of what compensation should reward and what weight it wishes to give the individual criteria within its compensation system.

The subjective portion of the system is based on the perception of all of the partners of two other criteria. Ten percent of the subjective portion is based on the perception of a partner's client handling abilities and 40 percent is based on the perception of all other criteria. Again, these percentages can be varied to reflect a firm's goals.

In large firms where partners may not have enough knowledge to accurately rate some of their fellow partners in the subjective criteria, some firms have opted to leave that part of the plan in the hands of the specific departments or practice groups.

Strengths

With a large portion (40 percent) of the subjective portion of this system being allocated to almost any strength a partner brings to the table, there is usually a great deal less animosity and more collegiality within a department, practice group and firm. This purposely undefined share of income can be used to reward unusual non-billable efforts, firm management, training of juniors, mentoring, being a team player, attempts at client generation that do not materialize immediately, or for being a nice person and an overall asset to the partnership.

This same 40 percent also can be used negatively.Awarding a low percentage can send a message to a partners who are not perceived as positive a contributors to the overall firm-- even though they may have very good objective numbers. It is in a partner's best interest to get along, because 40 percent of a partner's income will be based on his or her partners' perceptions of overall contribution to the department, practice group or firm.Negative things that may be taken into account and thereby adversely effect a partner's income are: file or client hoarding, being too demanding of staff and juniors, not contributing to firm initiatives, not complying with firm policies, not taking the time to properly train juniors, or just being an all-around pain.

Many firms and partners like this type of system because it allows for individual partner input into compensation through the subjective portion of the plan. As mentioned, some large firms leave this portion of the calculation to the department or practice group--the people in the best position to evaluate another partner's overall subjective contribution.

For those partners who demand that compensation be tied to actual performance, one half of remuneration is based solely on the objective numbers for billings/receipts and client generation. Under this system, the objective factors are recognized more than in some of the other plans but less than in schemes that are more eat what you kill.

In that partners allocate 40 percent of the subjective portion of income, the system can serve as a form of partner evaluation. This is especially true when an anonymous report outlines the considerations that the partners took into account when allocating the subjective share of the plan.

The subjective part of the system should also go a long way to overcoming the problem some firms face with file and client hoarding.

Weaknesses

The partners who dislike this system say that it does not provide a good enough idea of what it takes to make personal income goals. In addition, others argue against the subjective portion as being too touchy-feely. They want a more objective scheme that ties bigger rewards to actual production.

There is the chance that some animosity may develop over the allocation of the subjective portion. The Who do they think they are telling me what to do syndrome can set in and become divisive if compensation decisions are not properly and positively conveyed to every partner.

There can also be less collegiality some level of animosity aimed at the partners who do not meet expectations on the objective side of the equation because they may have been able to overcome that shortfall with the subjective criteria.

Perhaps the biggest argument against this compensation system is that, if not properly explained and implemented, the subjective criteria might be seen to being open to manipulation to some degree when this facet of the scheme is not backed up by data, in some form or other like a partner peer evaluation system.

6. Team-Building System

This is the ultimate team system of compensation. Individual contributions are given little consideration while firm profitability and practice group or department performances are paramount. It is diametrically opposite any form of an eat-what-you-kill system.

The formula for the team-building system bases 50 percent of a partner's compensation solely on how well the firm does financially. Another 40 percent is based on a practice group or department's financial performance, and the remaining 10 percent is based on the individual partner's performance. These percentages can be varied to suit a particular firm's vision of what the weighting should be for each of the three areas.

Strengths

Simplicity may be the greatest strength of this system.What could be easier than just focusing on the firm and practice group or department doing well?

There is little pie splitting animosity because the system is totally objective and it downplays the role of the individual. All partners in a group or department will sink or swim based on their collective efforts.

The concept of putting the team ahead of the individual is a powerful way to promote firm goals.When everyone pulls together we all succeed to the highest levels. And, again, the competitive focus is external rather than internal.

Cooperation and collegiality at the group and firm levels are the cornerstones of a team-building system. This requires a partnership of individuals who are comfortable with one another, who have faith in one another to always do what is best for the team--to willingly waive individualistic tendencies when they conflict with the goals of the team.

Firms using the team approach seldom have file and client hoarding problems. Delegation is usually at a high level because it is in everyone's best interests to push work to the lowest competent level. This provides better value to clients, training for juniors, challenges in professional development and greater job satisfaction all around. In turn, those results have a positive effect on firm profitability, thereby perpetuating the system of teamwork.There is also greater cooperation between departments and practice groups because that, too, can help improve both group and firm profitability.

Weaknesses

Some partners may feel that there is a lack of recognition for seniority and experience. Unless there are levels of partners within the system, all partners would earn about the same amount. The only variable would be the relatively small percentage allocated base on individual production.

Some animosity may develop toward partners who are perceived as being the weak links in a department or practice group. That can also be a strength if a firm acts on the weak links by setting minimum standards for all partners--standards that do not tolerate lengthy periods of underachievement.

The individual large contributor may well leave in search of a firm that will reward individual efforts more highly. In fact, some argue that this system promotes a lowest common denominator approach. In other words, partners don't make enough of an effort because they don't see the direct rewards of doing so and don't feel they need to perform at a level above some of their partners.

7. Eat-What-You-Kill System

By contrast to the team-building system, the eat-what-youkill system solely rewards individual efforts, with no recognition for anything beyond personal production.

One form of this type of system charges each partner a share of firm overhead, but each partner pays the salary of his or her secretary or assistant. Also, individual marketing, continuing education, personal technology and memberships costs are the responsibility of the individual partner. The time of juniors is purchased from the firm at set rates but charged out to clients at whatever billing rate the partner thinks is appropriate. Partners can also sell an interest in a particular file to another partner at a negotiated rate. (Typically, the client originating partner will get 10 percent of whatever is billed by the other partner.) Having dealt with all of the costs, the partner then gets to keep 100 percent of all receipts.

Strengths

Every partner has total responsibility for his or her income and clients--and partners know exactly what they must do to achieve the income levels they desire. There can be no blaming anyone else. The system provides incentives at various levels. First, the partners will want to bring in business for others because they get a percentage of the billing when they sell the file to another partner or when they get a junior to manage the file. There is also an incentive for hiring and retaining only profitable, hard working juniors so that they can maximize their own incomes. There strong motivation for partners to collect their receivables because it is their own money. Lastly, the firm will maintain tight controls on spending because partners will not tolerate too large an overhead allocation.

There is no pie splitting animosity because there is no pie splitting. Everything is dealt with at an individual level.

Weaknesses

Probably the greatest weakness is that, in most cases, there is a total lack of responsibility for managing the entity. Because no one gets recognition for non-billable time spent there is often a void when it comes to firm management, training of juniors, firm marketing or human resources. Eventually, that must lead to major problems and possible disbanding of the firm.

The system creates no need for collegiality other than as a method to market other partners for work for their clients. Often partners don't even talk to their colleagues unless they have a financial or personal reason to do so. That, in turn, spreads throughout the firm, creating a very difficult environment for most staff, juniors and even some partners to work in.

Some firms using this system have problems with the work-sharing aspects. Some partners may choose to not work for another partner's clients for myriad reasons, leaving the originating partner to fend for him or herself in an area in which they may lack proficiency. There is a definite hoarding of files and clients--that is what the system is all about. Sometimes this is to the detriment of the client. There are few common good factors at work because the individual good is paramount.

There is also little or no training of juniors because it is almost valueless under this system. Juniors find themselves in a sink or swim situation right from the start.

CONCLUSIONS

Are you wondering which, if any, of these systems would work best for your firm? As a starting point, you might try answering the question, What do we value most? Before you can develop a successful, comprehensive compensation system you must have a very clear and agreed credo as to what makes your firm tick--and a clear understanding of why this is the case.

Before exploring change, you must also gain a true reading of what your partners do and do not want in a compensation system. It can be very helpful to ask an outsider, someone with no hidden agenda or compensation baggage, to facilitate a brainstorming session among the people most affected: the partners. You may be surprised how agreeable your partners are once they have made their points of view known and considered the points of view of their colleagues.

No matter which compensation system you choose, remember these basic truths:

• There is no magic system.
• Compensation can not be legislated.
• Some of your partners will not like whatever you decide, no matter what it is.
• Relate the compensation system to the firm's strategic goals wherever possible.
• Try to get an understanding among your partners of the need and value for rainmakers, client minders and grinders. They need each other to be successful.
• Directly involve the people most effected: your partners.
• K.I.S.S.--Keep It Simple Stupid.

Download Partner Compensation Systems in Professional Service Firms Part II in [pdf].