The “Cheap Grace” of Compensation Systems

I’m always impressed with how much time many of my clients spend wrestling with their compensation systems. The animating seduction of compensation typically doesn’t bring with it a law-firm appetite for changing what is already in place, but it does tend to make up a lot of firm mindshare.

When you think about it, though, that makes total sense. Compensation is an (and, perhaps, the) expression of managerial imperative and control – “Let’s just put together a bundle of rewards, incentives, and ‘punishments’ and people will do what they need to do . . . ” However, it often falls short of fulfilling its command-and-control potential, as firms can point to partner behaviors that run counter to the incentive structure in place. “The compensation committee and leadership have told the partners that certain ‘good citizen’ factors relating to teaming and collaboration are prominent objective features of the compensation system, yet we’re not seeing a lot of business-development collaboration among the partners . . . ”

Why is this? How can firms rely on managerial tools outside of the compensation system itself to give the system more efficacy?

I have one client that relies on a set of four (what they view to be) objective criteria for determining partner comp: originations, billable hours, receivables/collections, and collaborativeness/existing client growth. The four criteria are well explained and explicit, and the partners know what they mean. Despite this level of clarity, the partners are distrustful of the system and the application of its criteria. One problem is that the weightings of the four criteria are not clear. Also, the system itself is closed. Partners tend not to trust that their contribution relative to any one of the four criteria will result in a certain minimum income level. Moreover, because the system is closed, the partners assume that other (typically more senior) partners are getting the benefit of compensation that should be credited to them. Despite the objective nature and definition of the criteria, partners don’t trust the subjective, non-formulaic, and non-transparent application of the criteria to them. Consequently, many of the “good citizen” collaborative behaviors of which the firm would like to see more are in short supply.

Compensation systems – no matter how well-conceived and documented – can be a form of “cheap grace.” Firm leadership too easily concludes that the compensation-system objectives will be self-executing. Adoption, compliance, and motivation are presumed by the mere fact of documenting the compensation system elements; little effort is put into reinforcing the intention of the compensation through day-to-day communication and modeling. We find that more needs to be done in the typical firm to make the compensation-system inducements a more effective driver of performance. Below are some suggestions that firm leadership and firm “middle” management might take into account when trying to move partner behaviors and performance in an important direction:

1. Compensation is as much a snapshot of reality as it is a framework of behavior and performance-inducing incentives. It is at best an imperfect reflection of historical contribution and an imperfect driver of performance.
2. Firm leadership gains as much permission to lead as there is trust among the partners in the compensation system itself – trust that it means what it says, trust in how it’s applied personally and individually, and trust in how it’s applied to others.
3. Objective compensation criteria applied by a subjective “wrapper” (no weighting percentages, etc.) tend to lose their objective quality.
4. Make the criteria formulaic enough so that partners can know what their compensation floor is going to be if they hit certain objectives relative to some but not necessarily all of the criteria. For example, $1.5M in originations should translate into a certain minimum amount of comp, irrespective of performance against other criteria.
5. Manage and message – the Comp Committee comes down off the mountain once a year, but the day-to-day operational voices of the firm exist at the practice group level, geographic and office head level, and at other levels representing “the lieutenants” of firm management. These firm lieutenants need to communicate consistently, accurately, and often about what collaborative behaviors the firm is trying to encourage and reward. This is particularly important for less formulaic and more subjective compensation structures.
6. Model – management and leadership need to present an imbalanced model of the “good behavior” the compensation system is supposed to reward. If the system encourages partners to involve others in their own under-penetrated, high-potential client relationships, then the senior partners should be the best, most conspicuous examples of such.
7. Firm management should provide practice and geographic leaders with clear direction as to what it means to lead on these issues. For example, the tired old monthly practice group meetings should consume less time talking about existing work and more time talking about incented behaviors like collaborative selling, or remarkable forms of outreach, or elective credit sharing.

In short, the work of firm leadership and firm lieutenants really begins once the compensation system is nailed down and documented. Live it! Breathe it! Model it!