Leadership Links with Partner Performance and Profit Sharing

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By Nick Jarrett-Kerr | May 4, 2014

by Nick Jarrett-Kerr

Partners in law firms are not easy to lead. They may be content to transfer a great many management and administrative tasks to a management team, but there is a raft of sensitive subjects which remains close to their hearts. In these areas, they often consider intervention by professional managers to be unwarranted interference. Additionally, partners remain anxious to assert and protect their independence from further erosion as and when they can. In close-to-the-heart issues, the leadership roles of the managing and senior partner become critical in tackling sensitive issues. The issue of partner remuneration is one such sensitive subject. Indeed, I cannot think of any thorny subjects about which partners consistently feel more strongly than how partnership profits are distributed.

Before tackling any leadership topic or challenge, it is important to prepare the ground thoroughly and there are at least three leadership projects which have a significant impact on the challenges of partner progression, performance, compensation and rewards. The first leadership issue is the visionary task – to find an agreed and common sense of purpose and direction for the firm. The second leadership issue is the issue of trust – the important challenge of building trust and reducing paranoia. The third leadership issue is to clarify the expectations of partners so that they spend time and devote energy on their career, skills development and behaviours, thus working to improve their overall contribution to the firm.

Project One – Creating Vision and Direction

It is part of the leadership day job to establish the firm’s overall strategic goals. In achieving the firm’s overall objectives, it is also important to ensure that the systems for partner performance, progression and rewards support those goals. This can sometimes be difficult if the firm does not have a clear view of its overall direction and destination. Lawyers’ eyes start to glaze over when the subject of vision is raised. It can seem like meaningless waffle. What is more, a lot of firms have found that having a ‘Vision’ or a ‘Mission Statement’ means little and changes absolutely nothing. However, it is clearly vital for all partners to have a common understanding of the hopeful and attractive future and desirable state for the firm which they can all work towards – a sense of purpose which unites the partners.

As Mike Pedler, John Burgoyne and Tom Boydell put it1 in their excellent book on leadership, “A sense of purpose runs deeper than the popular notion of vision. It builds on the foundation of established values and thereby honours the past in looking to future aspirations. A key element in purpose is the sheer force of will, the determination and persistence without which visions are mere dreams.” Hence, the systems for partner progression, compensation and rewards, as well as partner performance management become an essential part of the credibility and realisation of the firm’s vision being both credible and achievable. In short, the firm’s systems must be able to support, encourage, value and reward the commitment of partners to work towards the firm’s vision. Visions are meaningless concepts unless they are linked to action. The firm’s systems for partner performance management should become part of the foundation which helps to turn concepts into reality. The key visionary propositions are answers to questions like “Where are we going? What do we most desire? What is our common dream?” The key implementation action points then in turn need to be answers to questions such as “How do we get there? What are our core competencies and how can we improve them? What objectives and action points can we establish? How do our partners need to behave in order for us to succeed? How do we think that our partners should be held to account and managed?”

There is another important point here which concerns change. As has often been said, there are really only two things which motivate change in law firm partners – fear and conviction. Partners will only modify their attitudes and behaviour if they really have no viable alternative or if there is something in it for them. Whilst it is no doubt possible to impose a partner performance system on a firm by an exercise of dictatorship or martial law, it is clearly better for the firm to reach a common view of what is best for the firm– and for the leaders to persuade and convince partners of this. There needs here to be clear dialogue within the firm, but not necessarily a mediocre compromise of views which can result from attempts to achieve consensus. Rather than wishy-washy compromise, what should be sought is an informed, sophisticated and educated structure affected and influenced by the inputs of the whole partnership.

Project Two – Building Trust and Reducing Paranoia

The dynamics of any people business are both complex and fragile. Law firms, more than most, can be hotbeds of insecurity, paranoia and mutual distrust. Part of the reason for this stems from the lawyers training – analytical, suspicious, testy, sceptical and cautious.

Lawyers are used to evidenced-based decision making and shrink from conclusions which are based on balancing probabilities or result from subjective opinions or qualitative assessments. Whilst many partnership dealings can survive and even prosper on a very arms length clinical and formal basis, issues such as partner progression, promotions, compensation and rewards are all areas where trust and good faith between partners need to be at a premium. As David Maister points out2 “The ways of thinking and behaving that help lawyers excel in their profession may be the very things that limit what they can achieve as firms.”

Partners in law firms also love their independence and react against any measures which they perceive might jeopardize their autonomies. Maister goes on3 “Committees proliferate to address all topics, large and small. They are designed not only to ensure extensive participation, but also to put in place checks and balances intended to circumscribe the ability of any individual (or group) to decide anything on behalf of the firm.”

Partner progression and rewards can seem somewhat easier at larger firms, where there is a greater acceptance of the need for formal decision-making processes and where the remoteness and perceived objectivity of a Remuneration or Compensation Committee can make progress. It definitely seems to help if partners do not necessarily feel they are being judged by their peer in the next room. Problems can however exist in big firms, where partners sometimes feel they have to walk a political tightrope and conform to corporate guidelines. I was disheartened, for instance, to talk quite recently to a partner at a major UK law firm who told me he takes great care to keep all his communications and emails anodyne and inoffensive, to ensure he is seen to be doing the right things and to obey the rules at all times. What is more, another partner at an international firm recently told me that he felt more and more like an employee and less and less like a partner as time went by.

If trust is not high within a firm, it can be quite tricky to try to migrate to a partnership reward system which is based on discretionary factors and the exercise of judgement and wisdom. Unless partners trust both the system and the judges, there are benefits in sticking with the relative certainty of an equal sharing or lockstep model at one extreme or a formulaic model or Eat-What-You-Kill system at the other extreme.

It follows therefore that law firm leaders and all partners should contribute towards “making the firm a better place”, where people are valued and there is a true spirit of collegiality and shared identity. A firm with high mutual levels of trust can be both creative and effective.

Project Three – Clarifying and Defining the Expectations of Partnership

Before deciding the best method of compensation and profit sharing in law firms, it is important to be clear about what the firm expects of its partners and what roles and responsibilities it needs them to perform. Partners equally need to be clear how they are to discharge their various roles as owners, managers and producers. The current trend away from the more revenue and formulaic systems is no accident. Firms are increasingly responding to the growing realisation that such revenue driven systems reward only a very restrictive set of behaviours and at times actually serve to penalise longer term entrepreneurial activities.

Law firms have at last therefore accepted the importance of developing management and leadership skills in their partners. This recognition is somewhat patchy and inconsistent and there is often a mismatch between what law firms say they value in their partners (in terms of the competencies and characteristics) and what they actually reward (often by recognising and rewarding billing efforts mainly or exclusively). Additionally, there is a reluctant but growing appreciation that skills and competencies can be developed across the management /leadership spectrum, from a base level through an intermediate level to an advanced state of leadership. There is an initial point of confusion which lawyers make when considering management and leadership skills. The tendency of main law firms is to confuse management skills with the context in which those skills operate. Law firms tend to look at the different areas of management in their firm and define their expectations in terms of the behaviours, indicators, goals and outcomes which they would expect to see in those critically important areas of performance. Thus, firms may talk about people management skills, or business development skills. In truth, ‘People Development’ or ‘Business Development’ do not form specific skills in themselves, but comprise situations or contexts within which certain skills are needed. The underlying skills and characteristics to meet the firm’s outcomes and goals in the key areas of performance then tend to become rather vague and undefined. This makes it all the more important for the individual partner to gain a deep understanding of those attributes which he or she needs to develop in order to attain the firm’s objectives.

If growing law firms are to be run as well coordinated and properly managed businesses then partners must be prepared to develop their roles from legal technical professionals into business people. They need to be active contributors in various critical or key performance areas which are critical to their firm’s strategy.

It is therefore vital to focus on the changing role and responsibilities of the modern law firm partner or member and how such new roles and responsibilities are demonstrated by partners’ day to day expected behaviours. Not only is this topic an extremely important one for the ongoing strategy and governance of the law firm, but it is also critical that every firm should decide and define its expectations of partners before contemplating any changes to the firm’s compensation and reward system.

We are witnessing right across the globe a trend towards firms that attempt to be well coordinated rather than just loose groups of individuals. Partners in more firms are beginning to work more closely in teams. We are seeing the development of a one-firm approach where consistently applied and agreed methodologies and processes are brought to bear upon clients’ matters. To some extent these trends are client driven. Clients want to see firms deliver a consistent and not a patchy service. All too often clients complain that the quality of service and indeed the style of service can vary enormously from partner to partner, from practice area to practice area, and from office to office. We have even seen clients complain that the style of documents (including fonts, prefixes, numbering and file names) differ in some firms between departments and from office to office; clients are not impressed. The imperative therefore is for firms to be run as businesses with well designed systems and processes. Firms need to find ways of streamlining their services wherever possible. Clients do not usually want to pay for the wheel to be reinvented. They prefer to see the experience of the firm, garnered from previous similar engagements, put to use in their matter in a cost effective manner.

The management challenge is to put in place the systems, processes and disciplines which are necessary or appropriate to achieve a consistent and coordinated firm. But here’s the point. Even with all the best systems in the world, it takes leadership to bring about changes in the way partners behave from day to day.

Implicitly or explicitly, partners understand the behaviours and attitudes which actually count and do not count in their firm. When partners start to make themselves absent from team meetings, for instance, it will be clear that they do not feel that their absence will be noticed or penalised. The unwritten rules of behaviour at any firm can only be learned by working at the firm or studying it from inside. They illustrate the way things are actually done in the firm, and include the underlying assumptions, behaviours and attitudes which in reality drive the way the firm operates. To bring about changes in the way partners are valued and rewarded, leaders have to set about creating some forces and influences which will gradually affect partners’ experiences and then their attitudes and behaviour. For this, firms need three things. First, a set of performance criteria or a ‘balanced scorecard’ approach encourages partners to believe that there are other things which the firm values in addition to financial performance. Second, the firm must have in place the policies and procedures which will help to give partners the comfort they need to be able to trust in the new arrangements. Third, the firm must work hard on the firm’s climate and environment to ensure that a supportive culture exists.

All these issues require leaders to work effectively in managing the firm’s partners towards the firm’s overall objectives, and to define very clearly exactly what behaviours and contributions the firm requires of its partners. Then the firm must ensure that those expected behaviours are reinforced, valued and ultimately rewarded. In addition, the firm must take care to ensure that the fine words of both leaders and the partners then match the music of everyday behaviour.

The thrust therefore is for leaders to devote time, energy, skill and focus in achieving the difficult but not impossible challenge of developing a firm with a shared sense of direction and destiny and where an atmosphere and environment of trust exist and where partners know what is expected of then both in terms of their contributions and their day to day behaviours. If the leaders succeed in this, there is every chance that partners will clearly know what they have to do to be personally and individually successful in their partnership careers and then the issue of reward become easier to handle.

1Mike Pedler, John Burgoyne and Tom Boydell “A Managers Guide to Leadership” (2004) McGraw Hill at page 51
2 David Maister (2008) Strategy and the Fat Smoker Spangle Press at page 229
3 Ibid page 332