Cutting up the Partnership Pie

A couple of weeks ago I heard of a client being rung up by a partner in a law firm and the client being requested by this partner whether he (the client) would “mind” sending he (the partner) an email confirming that it was he (the partner) that introduced he (the client) to the firm and he (the partner) is the reason he (the client) is a client of the firm. Now what on earth would possess a partner of a law firm to do something like that?

In several law firms around Australia for the next few weeks the priorities of many partners and leaders of those firms will not always be directed towards their clients, undertaking billable work or getting the firm through the economic recession we do not have.

No.  Much of their time, energy, discussion, debate, division, angst, contemplation, endless drafting and redrafting of submissions (and appeals), will be put into how to equitably, fairly and sometimes politically divide up the partnership profits – and for some firms that may mean dividing up profits which could be considerably less than what they were a year or 2 ago.

Differential profit sharing in legal partnerships is nothing new.  Whilst equal profit sharing and lock step is still the hallmark of several firms over the last 10 or more years most medium to large firms have moved to some form of differential performance based profit sharing model. These range from the complex / over engineered / rigidly formulaic right through to the simple back of an envelope/ gut feel model.

I am yet to see 2 firms that have identical partner compensation models – even if the theory, wording and intent of the models may look the same the practical application of the models can be vastly different in each firm.

Of all the tools available to management the ability to reward (or in some cases to penalize) a partner financially is one of, if not the, most powerful management tools available.

Ideally any firm’s partnership compensation model should be aligned with the firm’s vision, goals, strategies and values, be designed to motivate and inspire partners to achieve and strive for such goals, as well as fairly rewarding partners who exhibit the “right behaviours”.  Whatever model the owners of a firm chooses to apply it should be discussed openly amongst all the potential participants before it is introduced (or changed) as it is critical participants not only fully understand but have ownership and “buy in” of the very model that allocates their financial entitlements.  It goes without saying that any model should also encourage partners to make the pie bigger.

Regrettably in some firms their compensation model achieves the very opposite.

Unfortunately many partner compensation models are totally demotivational and uninspirational for partners.  The firm’s vision, goals, strategies and values are not even mentioned in some compensation models and as such how could the leaders of the firm possibly hope to encourage behaviours the firm says it wants to encourage? Partners are not that silly- they will exhibit those behaviours that they believe they will be rewarded - financially - for.

In other firms I have found partner compensation models to have been either drafted and introduced solely “by management” or “purchased” off the shelf from a third party or “cut and pasted” from another firms model so it is practically a fait accompli by the time the partners get to see it and they not only have little if any input but the model and its criteria has little relevance to the firm.  With no ownership by the participants no wonder (especially if partner(s) are subsequently aggrieved by a decision) this results in little or no trust in the process or in those that are required to make decisions and a complete detachment by the participants from the model.

In many instances I find in true lawyer drafting style whilst well meaning in an effort to capture “everything” some compensation models are just so over designed, over complicated, inflexible and formulaic, and heavily top line financially focused, they require enormous man hours just to prepare and read all the material let alone the time to make and then appropriately communicate any decision.  Furthermore being the good lawyers that we are most models require an appeals process (lest their be breach of natural justice et al) which can further delay final determinations for several weeks or months even.

In short for many firms the time, effort, cost, angst and emotion put into their compensation models has such a negative impact on the firm that it would be far better for the partners to put such energies in several other things.

What then I hear you ask is the perfect compensation model?

Answer:  There isn’t one and never will be.  Each firm should adopt a model that best suits its culture, strategies, goals and aspirations at a particular time in the firm’s evolution.  What works well in one firm may be a disaster in another.  Similarly the model or the criteria for the model that worked 2 or 3 years ago may not work now.

Based on what I have experienced and seen I can however suggest that the better compensation models appear to have the following traits:

  • they have guidelines (and they are guidelines only not hard and fast rules) and criteria that are simple, easy and quick to understand and administer;
  • they have a “balanced scorecard” approach and when looking at financial performance do NOT look at revenue so much as profitability and financial hygeine;
  • they are less formulaic and rigid and involve a substantial degree of subjectivity and judgement on the part of those making the decisions;
  • they contain little or no surprises as hopefully the performance management of the firm is so regular and aligned that every participant pretty much knows how he or she is progressing throughout the year – not just at remuneration time;
  • designed to encourage and reward the behaviours the firm is wanting to encourage;
  • communication both prior to and subsequent to any decision between the decision maker(s) and the participant is honest, open and done face-to-face (i.e not by memo or email).

Of course if all this is too hard to implement and administer you might consider reverting to the new “old” model – whereby all the firms owners are equal.  They are treated as equals and rewarded financially as equals on the basis that each bring to the firm different but important and valuable skills.

If you are going to treat and reward all the partners as equals – then just make sure they all believe in the firm’s vision and aspirations(including financial aspirations),that they all play their required-albeit different-part in achieving this and they act and behave in accordance with the firm’s agreed values.  It then goes without saying that partner who does not do any of this rather than financially rewarding them less without hesitation should no longer be a partner.

Hmmm?  Tough call. Might be easier to pay them less!