Designing Your Firm’s Compensation System to Reward CollaborationI start from the premise, reinforced by 20 years in large law firm management, that only by developing a collaborative culture can law firms realize their full economic potential by expanding client relationships. Law firms often are plagued by deeply embedded behaviors that create silos of service in a firm. These practice silos act as barriers to fully developing deeper client relationships. Most law firm leaders understand that the easiest path to success in creating more legal work is to devise the means to tap into existing clients to introduce new product lines and talent.

Frustration arises in law firms from missed opportunities to generate new legal work that results from the partners’ ignorance of the panoply of resources available in the firm. Missed opportunities can result from entrenched behaviors of ring-fencing clients to maximize individual partner compensation and ward off other partners who might encroach on an established relationship.

How best to move partners to the point where collaboration in client service and development becomes part of the cultural DNA of the law firm ? The challenge presents a particular problem in law firms that have flourished as a result of a cult of personality surrounding one or two marquee names, or firms that foster a partner star system or an eat what you kill compensation model. Frequently such firms rely on compensation systems that overreward individual initiative and self-promotion, often at the expense of the greater good of the firm as a whole. As consultants we see many such firms struggle with survival in these situations, when the partner stars or marquee names decide to leave or retire, and the partnership realizes that the clients have allegiance to the responsible partner and not the firm. The proven road to institutionalizing firm clients is by encouraging and rewarding partner collaboration.

Law firms that appreciate this dynamic will focus on devising a partner compensation system that measures and rewards efforts to share responsibility for clients, fosters collaboration, and supports effective client service teams. A culture of collegiality and collaboration makes good sense, not only in maintaining a positive work environment but also by ensuring maximum financial rewards in leveraging client relationships. Most American law firm partnerships have abandoned the lockstep compensation systems that depend primarily on seniority in determining partner compensation. Firms that adopt performance-based compensation systems have long recognized this model as the superior means of reinforcing behaviors that advance the strategies of the firm.

The question remains, however, as to the best means of identifying the right levers to encourage partners to open up their relationships and view their clients as clients of the firm, rather than individual possessions. When confronted with any attempt to drive new behaviors in a law firm, the common retort from a partner is: “Yes, but how will that affect my compensation?” Even when admitting that a change in behavior will improve law firm operations, many partners will resist that change if they view the overall improvement as a risk to their individual position.

In situations where partnerships are generally satisfied with their current compensation system, the shrinking market for legal services make it crucial to continually explore modifications to compensation systems that will further client development and increase firm revenues. Some questions a law firm should consider in revisiting its compensation program include the following:

  1. Is There Enough Transparency?

An open compensation system that allows partners to get the full picture is often the first step in fostering an atmosphere of openness in the partnership. An open compensation system also allows law firm management to communicate to partners by example, by showing that the partners who cooperate in collaboration are rewarded. The most common complaint of partners, after compensation, is based frequently on a lack of understanding as to what behaviors are viewed favorably. An open system, with transparency in the metrics and the results, eliminates the element of mystery in allocation systems. Shrouding the basis for rewarding partner behavior in an opaque system guarantees the kind of mixed messaging that frustrates firm strategy. Although closed systems can be made to work, their success depends on a high level of trust that may be difficult to create or maintain, especially when the partnership undergoes significant lateral growth.

  1.  Is the System Perceived as Fair ?

Notice that I use the term “perceived,” rather than just asking if the system is in fact fair. I found that the perception of fairness is the basis for the system’s reputation as a good system, and one that is worthy of respect. In my experience, such a perception is the bedrock for a solid, collegial partnership. It is inevitable that partners will discuss compensation among themselves, and that office water cooler gossip can undermine confidence in a system that has earned a reputation for inequity. The sense in a firm that the compensation process is not only open but fair takes work, but in the end will drive the right behaviors. On the reverse side, the perception that the compensation system is rife with favoritism, cronyism or rigged in favor of the leadership guarantees that partners will be self-absorbed and loose in the socket. Inherent in the perception that a compensation system is fair is the belief by most partners that the system is not rigged. In short, the system must demonstrate that things that the firm says matter actually do matter, and that fact will be evident both in the metrics for performance and in the final allocation of the profits. Ensuring at least some diversity of representation in the composition of the compensation committee is an important step in rebutting a presumption that the big players are rewarding themselves at the expense of the rest of the partnership. Coming up with a system that allows for input and meaningful participation by a diverse group of partners will support the perception that the system is equitable.

  1.  Are the Right Things Being Measured ? 

Partners will respect what their law firms measure. Law firm partners are generally competitive and goal-oriented. Coming up with the factors to be measured and communicating those factors clearly and frequently is one of the best ways to focus partners on behaviors that matter in the compensation system. My former law firm developed five factors for what we termed the definition of “The Role of a Partner.” These factors were set out clearly and in detail, communicated often, and, most importantly, relied on faithfully in determining partner compensation and partner feedback. In a truly collaborative firm, partners are evaluated not only for business origination but as effective leaders of client teams. Emphasizing the obligation of partners to include and elicit input from others and then devising methods to measure and report success in these efforts will ensure that collaboration is more than an aspiration.

  1.  Do We Have the Right Mix of Data and Subjective Judgment in the System?

Often as consultants we help to devise a dashboard of appropriate measurements which make up the objective data evaluated in the compensation process. Measuring and reporting the right things and making that information available to the partners over the course of the year will make the firm’s goals front and center in determining and evaluating partner performance.  Coupled with the right balance of subjective inquiries, the firm can customize their allocation system to encourages client teaming by demonstrating the value and weight of collaborative behaviors in evaluating a partner’s overall contribution and determining compensation.  An overemphasis on certain data points like revenue or origination will reinforce the idea that each partner is an island, working against each other for larger pieces of the same pie.  Introducing other concepts such as measuring cross-selling, soliciting views about client collaboration from other partners, and critically examining the cost of missed opportunities will help shape a system that encourages partner investment in the growth of the pie, rather than a struggle for a larger share.

In sum, it is increasingly important for firms to think critically about its partner compensation system and to ask tough questions about the compensation process. Such questions might include the following: Does our system of sharing profits reinforce our strategy of making the most of the opportunities present in our existing client base ?  Is our system perceived as fair by the partners ?  Is it encouraging behaviors that benefit not only the individual partners but also insuring the ongoing success of the enterprise ?  Are we measuring the right things and is our messaging about performance correct, clear and unambiguous?  Would we benefit from outside help in insuring that we are making the most of our compensation system to maximize profitability and expand financial returns ?  These are undoubtedly hard questions and easy to ignore when things are going well.  As the market becomes tighter, competition more intense, and pricing pressure increases, getting compensation right is a key element in insuring continued financial prosperity and the success of the firm.

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