Sharing Profit and Millennial Partners

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By Dr Neil Oakes | Apr 29, 2019

The millennial generation, born from 1981 to 1996 (or thereabouts), now 23 to 38 years of age (or thereabouts), are THE succession plan for most law firm partnerships. I wonder if our sharing methodologies are ready.

Methodologies for sharing profit among equity partners have been an interest of mine for many years. A decade or so ago I wrote a doctoral thesis on the behavioural consequences of alternative models, in particular the impact of various models on equity-partner diversity. The millennial generation are the most diverse generation of lawyers the Australasian profession has experienced, ever.

When I started monitoring and consulting law firms in the late 1980s, equal sharing was the norm in Australasia; it’s still common among many larger, mid-sized and smaller firms in Australia and New Zealand. Some of our larger firms, having been performance sharers for years, are drifting back towards equality. When equal sharing (typically after a 5-year lock-step) was the dominant model, law firm partnerships were relatively homogeneous, typically male, typically Anglo and typically full time.

Changing Demographics

This morning the Australian Financial Review reports that a survey of 5000 staff from major Australian law firms has found that ‘25% of graduates and 20% of non partner lawyers are of Asian background’. The survey found that only ‘8% of partners are of Asian background’. Although not reported, I wonder what percentage of equity partners (as distinct from ‘non-equity’ or ‘fixed draw partners’) are of Asian decent?

Of course, we don’t need a survey to reveal the long-observed disparity between women graduates, employed lawyers and equity partner numbers relative to their male contemporaries. This has existed for over a decade.

No immediate solutions to see here, just some questions to ask around sharing models and their readiness for the next, diverse generation of partners.

In the past homogeneity among partners, for better or worse, made equal sharing work. I might be wrong, but I don’t think that equal sharing for perceived equal contribution is going to cut it among the next generation of partners.

While the number of performance-based sharers, seeking to reward on the basis of personal effort and results, has significantly increased, many of these firms apply performance measures ‘at the margins,’ with 80% of partners clustering around a new ‘equality’. The top 10% are topped up and the bottom 10% bashed up. Origination credits have not been institutionalised in Australasia to the same extent they have been in North America, although that is beginning to change. ‘Performance’ often includes an assessment of subjective contribution but, by and large, usually comes down to ‘fees controlled’; an individual partner’s billings, their team’s (direct reports) billings and work introduced to other partners.

Law firms see themselves as meritocracies. We promote people to equity partnership and compensate them accordingly. I suspect that’s why law firm partnerships seldom resemble the diverse nature of the annual graduating class of lawyers. We’ve assumed ‘merit’ as a virtue axiomatically but what does it really mean? Judging by the overwhelming majority of equity partners, it means doing what all of the existing equity partners did, ‘performing’ and ‘contributing’ in the same (typically) full time manner. The individual sinks or swims on his or her own merits.

There is a growing scholarly literature around merit and diversity. I’ll develop this discussion in a future article. I would like here to concentrate on one of the root causes of partner homogeneity, traditional equal profit sharing.

Equal Profit Sharing

The underpinnings of equal or near-equal sharing are pretty obvious – portfolio theory (I’ll be up when you’re down and visa versa, hence risk-minimisation if we share equally over time), equal effort for equal return, and the greatest incentive to share clients and cross-refer. For these elements to coalesce in favour of success, partners need to contribute equally, for a long time and in similar ways. Merit becomes a convenient verb for describing what all of our full parity or equal sharing partners do, and the way that they do it. In other words, role-modelling the successful (white, middle-aged male) partners, building and serving a client base as they built and serviced ‘theirs,’ leads to career progression and ultimately partnership.

I regularly present in new partner programmes in Australia and New Zealand and I often hear aspiring associates and new non-equity partners talk of their frustration with attaining perceived equal or near-equal contribution. They speak of the covert guilt that accompanies part-time or flexible partnership, and the overt assumption among their fellow partners that any part-time arrangement is a temporary privilege. They speak of inequity in opportunity. Who gets mentored by and wins the favour and friendship of influential senior partners? Well, not surprisingly, people like them (the next batch of pretty similar men from a pretty similar background). It’s as though many female lawyers and those from minorities perceive themselves as working in a different and separate workplace under the same roof with those who more closely conform to the traditional ‘norm’.

Contributed Profit

Achieving a greater level of minority group representation at equity-partner level is a big and complex task, a task way beyond the scope of this brief article. There is however one thought balloon I’d like to float in the interest of greater gender equity among equity partners, and a better way of achieving inclusivity with a more diverse generation: share profits on the basis of contributed profit.

In a ‘contributed profit’ system, the profit of a partner includes that person’s billings, their team’s billings and fees referred to other partners, less the direct attributable cost. The partner with the highest profit contribution gets 100 points; others share proportionately. (Most firms can measure this accurately, smaller firms probably less so but it’s straightforward.) This would enable partners to enter much earlier. It would cater for part-time partners (if I can contribute more profit working three days a week than one of my full-time contemporaries, why should I earn less? Similarly, if I choose to work six days a week, why should I subsidise those on flexible arrangements?)

Profit-derived profit-sharing is educational. It encourages and rewards partners who structure their teams in the most profitable way. It also future-proofs the partnership. When the Millennial partners arrive in greater numbers they will want greater diversity and flexibility (and their Millennial clients will demand it through ‘socially responsible’ procurement processes). They will want (in some cases, perhaps expect) the prize sooner. In five years’ time, compensating partners on the basis of fees controlled and time spent in the office will seem so ‘yesterday’.

Sharing entirely on profit contributed would be pretty extreme and probably a little short-sighted. Firms need to invest in practice areas from time to time, new partners need to be encouraged and supported, there are pro bono considerations, and the list goes on. I am just suggesting that measuring profit contribution in the mix (instead of fees controlled) removes a significant block to greater gender and diversity diversity at partnership, and offers greater flexibility for all who want it.

A director of FMRC for 20 years, Edge Principal Neil Oakes, PhD assists law firms with strategy and profit growth, partner/director management and profit sharing, key talent management, management structures, and succession management consulting. He regularly conducts law firm planning retreats and helps large and small, private, corporate and government legal organizations to function optimally.