As law firms have returned to offices and their balance sheets show increased strength, their leaders have noticed that past agitation over partner compensation has re-surfaced. We have been getting the calls. While these concerns are rarely about a firm meltdown, the calls for a compensation review have some common triggering reasons.
Senior Partner Departure
Remarkably, the departure of founders or high revenue generators is not given enough long-range planning. Now the senior partner expects a significant equity buyout or some continuing piece of originations and there is no clear agreed policy to handle the situation. One-off deals may be struck, but they form the beginning of bad precedents that will be the measuring standard for future ad hoc deals.
Generational Turnover and Transparency Issues
If a firm does a 10-year projection of retirements, they may notice that nearly all those who designed the current compensation system, and controlled the decision-making process, will be gone. The next generation may often believe that the past system lacked transparency and did not account for important firm-building activities. While silent about these concerns to this point, this generation wants to see some options for the future.
Compensation Not Aligned with Strategy
We see many firms with a well-written strategy that emphasizes collaboration, innovation, and client support teams. But several years on, they will admit that execution of the strategy is weak. When looking at their compensation system, outsized rewards go to individual financial accomplishments. True, there are subjective elements in the system, but they are not well measured nor aligned with strategic goals. You get the behavior that you reward. There are many new hybrid systems of compensation that address this problem, and we’re seeing some creative work coming out of compensation committees.
Partners Not Leveraging Work
Most firms set an annual target for billed and collected hours for partners. However, if the targets are onerous and cannot be balanced with other contributions like internal referrals and associate development, there is a good chance that the partner will hoard hours, rather than delegate them to more junior lawyers. This becomes most noticeable in the last quarter. Production targets should come with a strong message about delegated hours and building teams. We have seen firms reward that team building with explicit measures.
Your Best Potential Leaders Will Not Step Forward
I have interviewed many executive committee members and practice group leaders about the juggling act of leadership time and their client-facing practice work. I ask if their leadership commitment tums out to be matched by the firm’s compensation rewards. (Those rewards usually come via a stipend or a lowered production target.) The answer is invariably “No, but I knew what I was getting in to….”
Is this the best way to develop your high-potential leaders? Running a multimillion-dollar private enterprise should pay well. The best leaders should also get bonuses for meeting enterprise targets. Some of your smartest, most capable leaders are also business generators and reputation-builders. Why would they forego the rewards of their current role? Firms could do a better job of at least not penalizing their future leaders.
There Are Options
If your firm has recently faced one of these triggering events, there is a good chance that you have tackled it with a limited number of options. Few firms have a collective knowledge of multiple compensation systems and processes for decision-making. Opening a world of options and brainstorming solutions could only help your firm move past the perennial concerns about unfair compensation systems.