Partner compensation: Start making sense

I was chatting recently with a U.S. law firm managing partner, who asked me about the Canadian health-care system and how I’d compare it to its American counterpart. Stepping carefully around that minefield, I did allow that health-care regimes worldwide are like partner compensation schemes in law firms: there’s at least one thing seriously wrong with every version, but so long as you’re not constantly losing people, you’re probably okay.

Compensation has always been the third rail of law firm management, not least because there’s no perfect (or even great) system for measuring and rewarding people’s contributions to a firm. You can be guaranteed multiple pockets of unhappiness throughout the firm no matter what approach you adopt, since so many participants in the system consider it, reasonably enough, to be a zero-sum game. But that doesn’t justify the financial and cultural damage that these systems invariably inflict on the firms that use them.

I’ll be the first to say that I’m no expert when it comes to compensation systems. Cleverly, I’ve decided to construe that as an advantage. I’d like to submit for your consideration, from this outsider’s perspective, three suggestions for bringing law firm compensation into the realm of common sense.

1. Stop over-valuing sales. Broadly speaking, there are three categories of business functions in a law firm:

  • The generation of paid engagements (sales)
  • The management of people and processes
  • The delivery of products or services

In virtually every law firm, the first category (business generation, or sales) is the most highly valued. This makes sense — it’s hard to manage and deliver non-existent work. But historically, this role has been disproportionately esteemed — in most law firms, the great salespeople are lionized to an almost mythical extent — and compensated. Perhaps this is no surprise: most firms were founded by great rainmakers, so of course they would ensure that outsized rewards accreted to business generation. And for many years, when law firms were smaller and service delivery was less complex, maybe sales really were the alpha and omega of a firm’s existence.

But whether or not you think business generation is still far and away the most important function in law firms, you’d probably agree that it has far and away the most turbulent and disruptive impact on firms’ culture. Nothing skews the social order in law firms like compensation, and nothing skews more dramatically and damagingly than partner compensation for sales. Law firms reward sales far more richly than many other companies do — if you’re not sure about this, ask the next retail clerk or telemarketer you meet about their hourly wages — and that has knock-on effects for everyone else at the firm who also works hard and contributes value, but doesn’t bring clients in the door.

Notwithstanding that, though, the biggest problem with disproportionate rainmaker remuneration is that fundamentally, it values finding the client more than serving the client. Lawyers really want to bring in business, but they don’t always know what to do once they get it. Again, if you want proof, ask clients how they feel about being aggressively courted by a law firm, and then once they’re in the fold, being treated like just another email in the inbox.

To avoid that problem, law firms should try rewarding sales through a fixed, short-term, declining payment structure. Here’s a hypothetical: the rainmaker receives 75% of profits (not revenue) from the new client in the first year, 50% the second, 25% the third, and nothing thereafter: all future profits from the client belong 100% to the firm and the lawyers who contributed value to that client that year. Insert whatever other numbers and come up with whatever variations you like, so long as the formula is fixed, short-term, and declining.

The underlying principle here is that the purpose of a referral is to serve the client, not to enrich the referring lawyer. If you make the origination credit period too long or the referral rewards too rich, you reduce the incentive of other lawyers to invest their time and energy in the client’s case. That inevitably risks leaving the client out in the cold (not to mention depriving the firm of a new business opportunity).

I once knew a law firm that gave what amounted to permanent business origination credit: the rainmaker received a large share of revenue from that client practically for life. What do you think resulted? A firm full of salespeople, of course: everybody bringing in work, nobody motivated to do the work, and constant internal warfare over origination credit. Have you seen Glengarry Glen Ross? Do you know what happens when you place salespeople in direct competition with each other for huge amounts of money and social standing?

My claim here is not that sales are unimportant. It’s that (a) the sale is only the start of the client relationship and ought to be valued accordingly, and (b) other things in law firms are important, too. Which brings me to my next point.

2. Start properly valuing everything else. As we’ll discuss further below, most compensation systems allocate the great majority of revenue to business origination and hours billed. Again, there’s obviously nothing wrong with rewarding the finding of clients and generation of work product. But you and I both know there’s more to a successful law firm than that. Here’s a partial list of law firm functions and activities that are not remotely compensated as highly as sales and hours (along with suggested metrics for measuring their value):  [do_widget id=”text-7″ title=false]

  • Client relations (measured by client satisfaction ratings generated through monthly “checking in” inquiries and closing surveys)
  • Project management (measured by performance against expectations of legal project timeline and budget targets met)
  • Legal marketing (measured by number of leads generated, industry speeches given, blog posts written etc., against plan)
  • Leadership activity (measured by specified annual stipends for executive, management committee, or practice group chair service)
  • Recruitment efforts (measured by on-campus interviews, associate committee service, bringing in new partners who stay 3+ years)
  • Community investment (measured by pro bono work or community activity performed, against firm’s annual average hours)

Given the growing importance of process improvement, workflow management, client relations, and all these other factors in the success of modern firms, it doesn’t make sense to continue to overlook and undervalue the people who contribute to these lower-profile but still significant activities.

In any work environment, you get what you pay for. Compensate people according to hours billed, as most firms do, and you’ll get mountains of hours and not much else. Pay people for rainmaking, and that’s pretty much all you’ll get too. Instead, start also paying people for how well they manage projects, how often they speak with their clients, how well they develop future partners, and how seriously they take the firm’s standing in the marketplace — and then watch as your firm becomes something different, and better.

When you create a compensation system that recognizes the multi-dimensional nature of success in a law firm, and you use that system to motivate an array of helpful behaviours in due proportion, then you start to build something that looks like a modern enterprise — rather than a medieval fiefdom, which is what many sales-obsessed law firms, let’s face it, most closely resemble.

3. Stop paying partners to bill hours. It’s been 20 years since I served my articling term at a large national law firm here in Canada. Some memories of the experience are understandably fuzzy at this point, but I do remember quite clearly the widespread assumptions around career progression. You worked hard as an articling student in hopes of being hired on as an associate. You worked even harder as an associate — we could see the brutal workload shouldered by the juniors above us — in hopes of becoming a partner.

But once you made partner, well — at that point, you could reasonably expect to enjoy the fruits of your labour. You’d still work hard, of course, but it would be at a higher, more refined, more engaging level — no longer churning out hours on basic legal tasks, but being an expert in your field, a highly regarded advisor, a director of the firm, and so forth. Even back then, though — I also remember this — there were rumours circulating that the associate’s afterlife wasn’t quite as heavenly as all that. Partnership, it was whispered, was actually a lifetime supply of More Of The Same.

It mystified me then, as it mystifies me today, why that has come to be the case. I always thought the point of achieving partnership was that you didn’t need to keep racking up the hours. You could spend more time building your business, sharpening your skills, increasing your profile, and yes, leveraging the work of those below you. Not a perfect system, nor even a necessarily admirable one — but at least it helped explain the appeal of partnership: you earned your reward and you didn’t need to be a billing machine anymore.

So why have law firm partners helped create a partner compensation system that rewards them in large part for the least attractive aspect of being a lawyer? Why have they overseen the development of (and ferociously defend) a reward system that has made their lives less enjoyable, not more?

One managing partner suggested to me it was because Millennial associates don’t like to work hard, while Boomer partners do. Even if that’s true, that still strikes me as kind of crazy. The associates don’t own the firm and they don’t make the rules — in theory, 80% of the reason for even having associates is to generate leveraged revenue for the partners, while 20% at most is to develop future partners and keep the system going. Adding associates should allow the partners to work differently and much less frenetically.

So it boggles the mind that partners have instead invented a system under which they are essentially still associates, plowing away in the fields every day under a hot sun. And I wonder if part of the reason for this is that law firms do a generally poor job of training partners to be anything else other than superannuated associates with an expensive equity stake — and that lawyers themselves, in the absence of any clear management direction (or personal affinity) for doing anything else, revert to the safest, most familiar form of business activity they know.

Accordingly, my final thought experiment is this: Imagine a firm where partners received no compensation credit for billed hours. Think for a moment about the change that adjustment would induce in how partners keep themselves occupied. What would they do all day? How would they apply themselves to the development of their expertise, the increased productivity and profitability of their practice and the firm, and the firm’s future development and prosperity? And if it turned out that a given partner had no interest in doing any of these things, then why is that person an equity holder in the first place?

In most law firms, the compensation system is the only really effective instrument for influencing behaviour. But there’s no rule that says it has to be a blunt instrument. Even if you decide the three foregoing ideas are completely unworkable in your firm, I urge you to use them to start thinking differently about how people get paid in your firm, and why. Smart law firms know they can’t operate like it’s still the late 20th century anymore, and that’s great; it’s time they brought their compensation systems into the present day as well.

Jordan Furlong is a lawyer, consultant, and legal industry analyst who forecasts the impact of the changing legal market on lawyers, clients, and legal organizations. He has delivered dozens of addresses to law firms, state bars, law societies, law schools, judges, and many others throughout the United States and Canada on the evolution of the legal services marketplace.


Comments are closed.