5 Compensation Issues to Review at Reopening

Partner compensation cuts. Furloughs. Layoffs. High receivables. Clients in crisis. Despite all these dismal legal media headlines, there will be a reopening of the economy. Demand for legal services will return, perhaps more slowly in some sectors.

Meantime, your firm’s compensation cuts and adjustments are the pain still felt and talked about by all your partners and employees. They’re asking: “Will compensation return to normal?” As leaders, you’ll have to answer and consider tweaks to your pre-pandemic system.

To begin with, leaders should consider a self-assessment of how they handled partner and associate compensation issues during the pandemic. Warren Buffet famously said: “It’s only when the tide goes out that you discover who’s been swimming naked.” While self-assessment can be uncomfortable, it can also pinpoint surprising positives as well as criticisms of past actions. We’ve worked with firms who use surveys, interviews with partners and upward reviews to get honest feedback on their leadership or culture*. An assessment from within or with outside support applies equally to your handling of compensation in the Covid-19 crisis. While every firm will discover different strengths and weaknesses, we predict that these 5 issues will surface in most.

1. Transparency and Trust

In our conversations with partners, we frequently hear that transparency about how compensation decisions are made and what factors influence those decisions is a highly valued feature of a compensation system. In making decisions about recent cuts for partners and employees, leaders should have been transparent about who was affected and why. Ideally, leaders will have consulted those affected in advance. In the recent cuts, some of the best practices did not involve “across the board” or “equal treatment”. They affected partners first, and more significantly. Firms protected lower-salaried employees from any cuts.

How does your recent transparency record match what you normally do with annual partner compensation? To the extent that you were as transparent, or more so, your leadership credibility will be intact. If your self-assessment reveals lower appraisals of transparency, trust in leadership will be eroded.

Transparency builds trust. We hear time and again from younger generation partners that compensation decisions should not be made in a “black box” environment. They do not need to know every detail of each decision or even each partner’s compensation. But they want to know the criteria, have some idea of the weighting and have input about their past and future performance. Do you need to tweak transparency to rebuild trust?

2. Overweighting Originations

When the tide is out, we may find that originations from high performing partners are down, and that average performers had even weaker originations. If firms place high weight on originations, especially over only the past year, the quantitative compensation rankings may be very scrambled at 2020 year-end. There may be pressure to penalize or exit partners at the bottom of the rankings. Those same partners may have proven their worth in more qualitative measures but get little credit. The tweaks to consider will be:

• down-weighting originations, even in more flexible, non-formula systems;
• placing a specific weight on originations and other quantitative factors; and
• averaging originations over two years back, plus the current year.

3. Increased Weighting for Qualitative Factors

We often help firms articulate and measure qualitative performance that will be given weight in partner compensation systems. We think that, this year, some of these factors were very critical to the future of the firm, though we won’t recognize that importance until late this year. Looking at partner performance over 2020, review the partners who excelled at:

• Client relations. Keeping stressed clients informed and supported. Cross-referring those clients to other firm services, such as real estate partners who could help re-negotiate a lease.
• Mentoring, training and counseling. Even the best associates will be concerned about getting enough hours or getting feedback. In a remote working environment, effective partners replicated the office “drop-in” or coffee break discussion by making individual video calls or doing small-group check-ins.
• Innovation. What did partners do to pivot the firm’s business, attract clients to new services or create legal project management innovations? A crisis can be an opportunity for innovators. Does the compensation system recognize innovation efforts, even though some may fail?

If these factors do help offset weak originations and keep associates busy and onboard, should they not be upweighted in the future?

4. Your Benefits Package

When associates and staff reflect on their pandemic experience, the benefits of some meals and the gym membership may not seem as important as some other benefits. First among these, though not listed in the benefits package, is job security. Every associate and staff member will be thinking about this as we move toward reopening. Firm leaders and partners will have to take specific actions, mostly through communications, to “keep the keepers”. Reassure your best people. Talk them through their next level of development.

Health care, sick leave and disability benefits will be under a new spotlight. Firms may need tweaks or new plans to meet new employee and partner needs. For example, will some need leave to care for sick or disabled parents? Do you have such a benefit?

5. The Level of Monthly Draws

In most firms a core amount of partner compensation is really paid in advance of collected profits. These are monthly draws that are viewed by many partners as “guaranteed minimums” (but of course, they are contingent on actual collected profits). On reflection, do you need to re-balance the amount that is pledged to monthly draws compared to year-end distributions? Another common category is a bonus pool amount that is held for year-end, both for associates and partners. That category will certainly be downsized at year end. All the pieces of compensation distribution may need review, and if you are making those adjustments for 2021, the internal consultations have to start now.

We all hope the tide will come back shortly after reopening. A candid review of your crisis response and tweaks to your compensation will demonstrate leadership and stability. Above all, you won’t be swimming naked in 2021.

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*In addition to compensation reviews, Edge performs Cultural Assessments in law firms, to test the reality of the culture the firm believes it has. Contact [email protected] to learn more.

Partner Performance and Compensation

Three years ago in Communiqué, I wrote a two-part article on “Collaboration and Compensation.” Part I appeared in the September 2014 issue, and Part II in the October 2014 issue.  Since that time, I have received several inquiries in compensation engagements about partner performance. The inquiries go beyond financial performance and general “team building” activities. Leaders want to know how to reward – explicitly – the activities of partners who contribute to a lasting, profitable firm.

The interest in measuring partner performance more broadly may arise from two developments in U.S. law firms over the past ten years. First, we know that many firms, from global to mid-sized, now use competency models to evaluate and promote associates. These competency systems are a product of influential professional development staffs. They have persuaded leadership to look more thoroughly at who deserves the next tier of those expensive associate salaries. For associates, a competency measure is a specific, measurable skill, knowledge level, analytical prowess or business-development activity. Typically, associates progress through three or four stages of competency before making partner.

Convinced that this works better than lockstep annual promotion for associates, these same firms are asking us if we can’t also measure partner competency (but rename it “partner performance”).

A second influence comes from the recognition that getting and keeping top clients requires a high level of service, value billing and legal project management. A single relationship partner can no longer meet the expectations of big clients. It takes a team. Perhaps that’s why in April, global firm Linklaters announced that it was dropping individual partner metrics for compensation in favor of team-based and client-oriented metrics. Many competitor firms, especially those with dominant origination credit metrics, must be worried that Linklaters is right.

Compensation schemes that recognize a broad spectrum of partner performance do exist, but they have been slow to penetrate the AmLaw 100. Just as competency models were built on what we needed to see in associate development, partner performance models will grow from what we need in modern partners. And that means more than individual financial performance.

These are typical categories that we have developed for creating a partner-performance compensation scheme. I have provided a sample performance metric for each:

• Financial Performance: Partner managed above-average (associate and other) billable hours compared to practice group.
• Business Development: Partner participated in x formal client pitches and shared in a successful outcome in y of those pitches. (In compensation parlance, we term these performance measures [x] and outcome measures [y]).
• Leading People and Groups: Partner was the lead for running legal project management training in his practice group. The result was improved management and billing for three key litigation clients and reduction of write-offs. Net revenue per billable hour also improved.
• Client Relations: Partner led a client team that produced 20% greater revenue (year-to-year) from that client. Her specific leadership activities were: etc., etc. Client satisfaction, as measured in a year-end interview, improved over prior year.
• Firm Building: Pursuant to firm policy, partner transitioned client work valued at $3.2 million to other partners or teams. This was the highest value transitioned in the firm last year.

What do you notice about each of the partner performances above? First, they all involve data that has to be tracked all year, and is often compared year over year. Second, they are all specific; there are no sweeping generalizations such as “active at business development” or “well liked by clients.” Third, financial success and profitability are baked into performance measures that also have a team feature. While it is not always possible to connect a financial outcome, we find that credible measures must at least aim in the direction of firm building and financial success for all.

Is a partner-performance compensation system in your future? Given the expectations of clients and the increasing number of junior partners who were promoted in competency models, we think the answer could be “Yes.”

Getting Partner Performance on Track

At a recent summit meeting of U.S. practice group leaders in a global firm, I had the opportunity to run a leadership self-assessment (The Leadership Practices Inventory) and then ask the leaders to apply their insights to partner under-performance. The “takeaways” from this session may help any practice group leader who is charged with turning around under-performing partners.

Among the scenarios they tackled were:

Harry – a 60-year-old partner whose significant clients were providing 20% less business than before; yet Harry did not want to transition the clients to others or cross-sell potential work, even though his compensation had been suffering.

Andrea – aged 52, was running a practice that had become a commodity practice, and she tried to just work harder to maintain billings. That strategy was going to hit a wall but she seemed unable to go out and seek higher-priced work. In time, the firm might need to let the practice go altogether.

Mark – an aggressive partner in his early 40s with very high hours and strong numbers. But his style was driving associates out of the firm, and his demands were even affecting junior in-house counsel at his clients. He could not keep an assistant longer than three months.

For each of these partners, the leaders recognized that the issues could not be ignored; the consequences of doing nothing would create a ripple effect. Secondly, they recognized that they would need to apply the skills of a “difficult conversation” as well as effective leadership practices.

These were some of the practice group leaders’ insights:

• articulate a vision for the future of the practice group and demonstrate the value of all partners buying into the vision; this sets the stage for individual conversations (Harry, Andrea)
• listen to the partner’s side of the story before stating your observation (all three)
• ask the partner to do some problem-solving with a respected partner who is a model of positive performance for the same challenge (Harry, Mark)
• enable a “stuck” partner to move forward by offering options and support for new ways of practicing (Andrea, Mark)
• use the appeal of “legacy” for more senior partners; they may take pride in their clients growing with the firm (Harry)
• reinforce and celebrate small wins after the difficult conversation (all three)
• seek concrete individual plans from the partner, with measurable goals and a specific time frame (all three), and
• ask the partner to take ownership of the plan and the solutions; the leader should not be the micro-manager and half owner.

In a facilitated workshop session, these practice leaders generated smart, actionable ideas in about 30 minutes. They also highlighted today’s reality – that partner under-performance, however it appears, cannot be left to some default answer. Yet effective leaders can learn to meet the challenge with well-planned conversations.