By Alan G. Badey
The most successful partner compensation structures are rooted in individual financial performance, but law firms should take great care to include non-financial metrics in assessing overall compensation.
Other less effective partner compensation models include those that reward partners based on equal splits, seniority or even combinations of seniority, performance and ownership. Sharing profits equally, or based on seniority or equity, are the easiest models to implement, but can actually hurt the firm.
There”™s little incentive for high performers when they are compensated the same as poor performers. In the long run, an ill-conceived compensation plan makes it difficult, if not impossible, to keep the most talented partners and will really hurt when trying to attract new ones.
The key to creating a fair, profit-driven compensation structure is to start by identifying the firm”™s goals, including the all-important profitability goals. Understand the business drivers that will help the firm attain its goals, and then make sure your partners understand these goals and are rewarded for their achievement in the compensation plan.
The knee-jerk reaction regarding a firm”™s goals is often narrowly defined around direct profit drivers. While there is no doubt that profit is priority No. 1, there should be other less tangible goals, such as emphasis on technical superiority, being a resource to partners and staff, creating a great work culture, being socially responsible to the communities the firm serves and marketing the firm.
Take strategic planning as an example. Setting direction for the firm is no easy task, and is time consuming, as well. If it”™s not factored into performance measures and therefore not rewarded, then there”™s no incentive for partners to participate in the process.
How professional baseball players are compensated provides useful insight. The most successful players ”“ and not coincidentally the highest paid ”“ are those “five-tool” players that can run, field, throw, hit for power, and hit for average better than most others. But they are also judged on intangibles, such as clubhouse leadership, mentoring younger players, and even hustle.
Legal firms have an equivalent: The six-tool partner. These rare partners rank among the best in quality of work, billable hours, realization, client billings, collections, and new business and should be compensated accordingly.
While partners with all six tools should have higher compensation, the reality is that very few will have all six tools. Some, such as technical back office partners, won”™t, simply by the nature of their role within the firm. They won”™t have client relationships and therefore will not generate new business. When an important case is secured, high fives and congratulations are handed out throughout the office for the partner responsible. The technical review partner, on the other hand, is rarely publicly rewarded for improving upon a work product, such as catching an error that could have resulted in the loss of a client or worse, litigation. This type of partner is extremely important to the firm and demonstrates the need to have a compensation plan that adequately rewards the diversity of contribution of the expertise to the firm.
For a firm to be successful, three types of partners are needed: finders (those bringing in the new business), minders (those handling client relationships), and grinders (those performing the actual work). While compensation of these groups will be disparate, all of them are vital. As such, they all need to have performance metrics that determine appropriate compensation.
Additional metrics should include:
- Technical ability
- Client relationship management
- Cross-selling firm services
- Mentoring staff
- Recruiting
- Management / strategic direction
- Marketing the firm
- Being a resource to the firm
- Being a team player
Firms that don”™t reward both financial and nonfinancial performance will ultimately struggle. Unfortunately for many of these firms, it takes steeply declining revenue, key partner defections ”“ or both ”“ for leadership to come to this realization.
Revising partner compensation plans can be very contentious, resulting in heated discussions and bruised feelings. Nevertheless, compensation plans must keep up with the times, or firms run the risk of moving in the wrong direction. A well-conceived compensation plan will provide clarity for business objectives and motivation for the firm”™s owners.
Alan G. Badey is the managing partner of Citrin Cooperman”™s White Plains office and also leads the firm”™s law practice. Alan can be reached by phone at (914) 949-2990 or email abadey@citrincooperman.com.
