Tag Archives: profit-sharing

Do We Need to Slice the Pie Differently?

1-couplandRecent client engagements have had a heavy emphasis on partner compensation. What makes this newsworthy is that many of these firms have historically been committed to equal profit share, but perceived differentials in performance are giving rise to tensions that some in the partnership feel can only be remedied through differential compensation.

Being part of a profession which is by nature cautious, firms which have changed their compensation system have done so only after thorough analysis of the current system and its shortcomings, careful review and modelling of the alternatives followed by an internal pitch to get everyone (or a majority) on board.

The choice of profit sharing system (and evaluation criteria) depends very much on the specific firm’s history, culture, jurisdiction, size and maturity. Whilst it is rare for all partners in a firm to be totally satisfied with the compensation system, for any system to be successful there has to be alignment between the methodology for admitting partners, partner performance criteria and the profit sharing system. The profit sharing system is really the last piece in the puzzle.

In order for a new compensation system to be accepted (or, ideally, successful) it should have the following characteristics:

  • It is fair
  • It rewards outstanding performance and contribution overall, not just financial performance
  • It does not create internal competition
  • It does not discourage partners from doing the activities that build the brand of the firm
  • It does not discourage partners from doing work the firm has traditionally done and wants to continue to do that is not as remunerative as some other types of work

I would also add to the above list that for any change to be adopted, it is introduced with a two-year sunset clause where there will be a thorough review before anything permanent is introduced.

Every system requires active and robust management to ensure that partners do not creep their way up to progression beyond their competence and contribution. Any movement away from equal profit share will necessarily involve a degree of subjective assessment. It is therefore necessary to revisit the current partner performance criteria to ensure it encourages partner behaviour that is consistent with the strategic direction of the firm. You will have to flesh out the following:

  • Baseline performance criteria – minimum level of performance for an equity partner in the firm
  • Individual performance criteria – tailoring performance criteria for partners based on their practice group, client base and their specific requirements in terms of the firm’s strategic plan
  • Methodology for assessing partner performance
  • Mechanisms for dealing with outstanding contribution
  • The role of management – this will range from the reports provided to partners, through to who will be responsible for sheep-dogging partners to hit their targets, through to the determination of profit shares.

Any changes to the compensation system will necessarily give rise to winners and losers. Assuming the compensation system has been designed with the characteristics of my first set of bullet points, in time all participants should be better off or at the very least more fairly compensated. Where the wheels usually fall off is if the primary design of any change means that a select group is able to win in the short term, or ensures that someone else does not win.

To conclude, in the Australian and New Zealand market I envisage the conversations around profit sharing will become more frequent as we see the transfer of equity pick up pace, and both incoming and incumbent partners consider it an appropriate time to review all aspects of firm management.

Are Traditional Profit-Sharing Models the Enemy of Diversity?

2 Fotolia_114409423_XSMethodologies for sharing profit among equity partners have been an interest of mine for many years. Some time ago I wrote a doctoral thesis on the behavioural consequences of alternative models, in particular the impact of various models on equity partner diversity.

When I started monitoring and consulting law firms in the late 1980s, equal sharing was the norm in Australasia; it is still common among many mid-sized and smaller firms in Australia and among all firms in New Zealand. While the number of performance-based sharers 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 as in North America, although that is beginning to change. ‘Performance’ often includes an assessment of subjective contribution, but by and large it usually comes down to ‘fees controlled’: individual partners’ billings, their teams’ (direct reports’) billings, and work introduced to other partners.

There’s nothing new in all that. It’s the way we’ve been doing it for ages. 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 classes 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 white, middle-aged heterosexual men did, ‘performing’ and ‘contributing’ in the same, full-time manner. The individual sinks or swims on his or her own merits.

It is intriguing that despite the best of intentions, despite all of the investment in enquiries, diversity committees, and diverse graduate selection (even ‘blind’ graduate selection), and despite 20 years or more of gender balance among graduating classes (it’s actually an imbalance in favour of females), law firm partnerships remain very male, very white and very straight.

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 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), 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 men.

I regularly present in new partner programmes in Australia and New Zealand, and I often hear aspiring 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. 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 those partners (the next batch of white, heterosexual men). 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’.

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: share profits on the basis of contributed profit.

First, to profit, and an extreme illustration of the principle.  Most firms can measure this accurately, smaller firms probably less so, but it’s straightforward: partners’ billings, their team’s billings, fees referred to other partners, less the direct attributable cost. The partner with the highest profit contribution gets 100 points; others share proportionately. 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 millennials arrive, they will require diversity and flexibility, and they will want 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 equity at partnership, and offers greater flexibility for all who want it. Think about it.