Professional Services Accounting ARTICLE -
Ensuring a Successful Partner Compensation System

Target Audience: Law Firm Professionals, Lawyers, Law Firm Associates, Employees

As long as there are partners, there will be problems with partner compensation. Issues surrounding “fair” compensation can do more to fracture partnerships and generate more negative feelings than almost any other firm issue. A compensation system should be more than just a way of splitting up the money: A good system is a management tool that rewards, motivates, changes behavior and disciplines.

Aim for fairness

Compensation establishes rank and status and quantifies each partner’s value to the firm. Partners consider their compensation system to be fair when they have a high degree of confidence that their expectations, of what their own, and their partners’ compensation will be, closely matches what is actually distributed.

A fair system will produce happy, productive partners, who in turn lead a successful firm.

What not to do

Firms that have severe compensation issues typically have one or more of the follow problems:

An undocumented compensation system. Like the shoemaker’s barefoot children, some law firms operate without agreements. This can only lead to multiple disagreements over time.

An inconsistently applied system. This can happen in firms where an “old boy network” is still in effect.

Compensation doesn’t match up with the strategic plan. For example, a firm says it wants to pass on as much work as possible to associates so that partners are freed up for rainmaking activities, but then it bases the majority of the compensation on billable time. In cases like this, the firm will end up with a lot of confused partners.

The compensation system is veiled in secrecy. Once a year, for example, the managing partner or compensation committee tell the partners what their share of the pie is. No concrete feedback is given as to how the number was derived or what steps can be taken to improve performance for the next year. This is sometimes called the “black box” approach — data goes in and answers come out but no one is sure how or why they were derived.

Most often, a poor compensation system results in a loss of confidence in firm management, turmoil and disagreements among the partners, partner and staff turnover, and, ultimately, the loss of clients and even firm dissolution.

Get it right

Because what worked in the past may not work now, a good compensation system is adaptable and meets the needs of your firm as it exists today. Firm management, first of all, needs to determine the type of behavior that will be nurtured and rewarded. So, aligning the compensation system with the firm’s strategic vision is critical. To do that, develop clear and concise answers to the following questions

• What is the firm’s mission?
• What types of behavior do we wish to be identified with?
• How will those behaviors be rewarded?

Once you’ve considered and developed answers to these questions, communicate the results to your partners so that they know what is expected of them and how they can impact their own compensation.

For example, if the firm’s mission is to be the leading provider of legal services to local physicians, the firm must define what will be necessary to achieve that status. It may involve assigning responsibility for marketing efforts to the top physician groups to one or several partners and outlining a clearly defined reward program for successfully recruiting any of these groups to the firm.

Know where you’re going

Firms that have a clear vision of who they are, where they are going and how they are going to get there tend to have compensation systems that are aligned with that vision. No system is perfect and one that works today may not work tomorrow. But developing a good system will go a long way towards ensuring the firm’s future success.

Elements of a good system

Firms that align their compensation system with their strategic vision share many of these traits:

• Teamwork and associate development is encouraged.
• The system rewards the performance of everyone who contributes to the firm’s success.
• Partners have agreed-upon goals that act as benchmarks.
• The system is flexible enough to handle different types of partners, from rainmakers to technical specialists.
• The range of compensation is large enough to be meaningful.
• The system has a high degree of predictability, for example, “if I hit my goals I should earn something near $$.”
  
• The system promotes behavior that causes partners to act in their clients’ best interest.
• The compensation system is well documented and easy to understand.
• The process is consistent.
• How compensation is determined and why is clearly explained.
• These are just a few of the many benefits derived from a compensation system that is squarely aligned with your firm’s strategic vision.

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