It’s not often I stumble into mid-sized and larger firms that have successfully retained a compensation system that can honestly be described as pure lockstep. Other than a number of the most profitable Wall Street firms, the rest of BigLaw and “not-so-BigLaw” long ago began incorporating some features that track originations and link individual compensation to “slaying the dragons.” Nonetheless, I do stumble into some relatively pure lockstep situations where moving on up to a higher compensation band is a creature of firm tenure and age.
A tenure-based system can be attractive to mid-sized firms as it can reinforce collaboration and cohesion, but given the revenue-growth imperative most firms embrace, I typically recommend that these firms engage some origination tracking in order to assess individual contribution – after all, if you don’t measure and reward certain behaviors, you can expect to get less of those behaviors. For many of these firms, the question becomes how can they dip their toe in the waters of “eat what you kill” without becoming the Darwinian mess they fear?
Partnership Evaluation Purposes
Tracking originations can help firms make individual assessments of current-year compensation, or it can help firms make individual assessments regarding entry to partnership. Firms that haven’t made even anecdotal attribution of originations are often well served by being pretty measured with their first step. A suggested first step might be to begin including a subjective, non-formulaic origination criterion in the partnership evaluation process. The subset of firm lawyers that has strong opinions about partnership decisions tends to be smaller than the subset of firm lawyers that has strong opinions about how the current year “pie” is going to be apportioned.
Current Compensation Purposes
It is an understatement to say that the work of an annual compensation committee can operate in a “charged” environment. Moving in a new direction – like most efforts at law firms – will be best received if accomplished in an incremental way. Below are a few suggestions as to how a firm could introduce a movement away from a tenure-based compensation system:
- Message, message, message – communicate with and educate the partnership on the reason for beginning to look at individual origination credit. The growth mission is a pretty uncontroversial concept, and aligning the firm’s incentive structure around that mission would make logical sense to the rank and file as long as it’s explained. An incidental benefit of this kind of communication is that it gives firm leadership an opportunity to reemphasize collective goals, which in turn reinforces an “all for one, one for all” firm philosophy.
- Preserve basic lockstep elements – departing wholesale or substantially can create problems. Continue earmarking most of the partner profit pool for certain lockstep bands, and reserve a smaller portion for individualized partner incentive compensation awards.
- Contingent on overall firm growth – A firm’s initial foray away from pure lockstep has a better chance of delivering its intended benefits if it is linked to overall firm growth. Establish a firm growth objective each year, and make the individualized partner incentive compensation awards dependent upon the firm hitting its revenue goal.
- Start subjective, then move to the objective – The transition’s effect on firm culture will be received more organically if it is gradual.
- Be nuanced – Allow for partial origination credit, as it tends to be reinforcing of the “all for one, one for all” philosophy undergirding.