PAYING PARTNERS: WHAT SYSTEM WORKSby Joel A. Rose
“Compensation is always an issue,” says the managing partner of a mid-size Philadelphia law firm. “I don’t see how you can avoid it. Everyone knows what is going on. If there are problems over compensation,” he says, “the root causes are elsewhere in the firm.”
“If you have adequate profits to spread around and if your firm has a good culture to begin with, compensation may not be that big a deal. Some give-and-take exists. The more highly paid partners frequently share with others. Either everyone in a firm agrees about how profits will be distributed among the partners or a more equitable arrangement is found.”
But not all firms - large or small - have “adequate” profits to spread around or have an idyllic culture.
The combination of the changes in the relationships among partners in law firms and the pressure exerted by clients on law firms to lower fees and the effect this has on retained earnings brings subjective peer evaluation into the picture, saying in effect, one partner is worth more than another.
Some firms attempt to deal with anticipated rifts over differences in partner compensation by keeping the information quiet. The majority of firms, however, believe complete disclosure to all of the partners about the process for allocating profits and the amount of compensation paid to each partner is necessary, whatever the consequences.
This article describes the author’s observances about selected partner compensation systems and methods for their administration in mid-size and larger law firms.
The organizational relationships among and between partners will determine, to a major extent, the compensation system to be employed for allocating draws/salaries and bonuses.
Plainly stated, do the partners want their firm to operate as:
A single, full-service law firm consists of lawyers who serve their clients as a single organization, rather than as a group of individual practitioners, characterized as an alliance or a coalition.
Partners in most mid-size and larger firms prefer to practice in this manner because the many facets of legal matters handled are too demanding for an individual attorney to perform alone. Unified firms generally recognize specialty practice areas and view clients as belonging to the firm rather than to any individual partner.
This style of practice calls for the subordination of lawyers’ individual egos to the recognition that clients are better served by lawyers who are, at least to some degree, specialized and that the lawyers in the firm are all, in their own areas, competent to serve any client.
Firms that are organized in this manner do not generally divide income on a purely statistical formula driven basis which may include client origination, work produced, etc., although they may expect partners and associates to work a certain minimum number of productive hours, produces a certain amount of revenue or a combination of both.
Firms that are structured in this manner usually set firm standards for the acceptance of cases, tend to share support staff and manage the other partners and associates. In today’s highly competitive environment, unified firms develop firm marketing initiatives to further the interest of the firm, as well as departmental and individual marketing strategies.
Implementation of these initiatives usually call upon the expertise of all of the firm’s members. Members of single law firms usually acknowledge that their individual incomes will increase as the firm’s retained earnings available for distribution to partners increase.
A significant majority of mid-size and larger law firms utilize a committee to allocate profits to their partners. This committee may be the firm’s management or executive committee or a separate compensation committee.
To the extent it is the latter, one or more members of the management/executive committee usually participates in these decisions.
Committee members may be appointed, elected or are chosen by a combination. Election/appointment may be representative of age groups or classifications of attorneys - such as senior, mid-level and junior partners, heads of substantive departments and offices; chosen at large; membership chosen in favor of a particular classification or equal, etc.
Tenure of all or some committee members may be permanent (at the pleasure of the partners), rotating or a combination.
Partners’ Concerns with Committees
Absence of agreed upon criteria for allocating profits to partners, committee members usually have their own preference about which contributions or criteria are considered to be more valuable than others and their appropriate weighting.
Objective data may be overemphasized because of their relative ease to obtain; subjective contributions may be de-emphasized because they are more difficult to obtain and/or value. Further, committee members may not be as aware of the subjective contributions of those partners they do not work with on a regular basis, who may be on a different floor within the same building or are in a different location.
Committees succeed when the partners understand the “rules of the game,” the criteria for allocating profits, and how they will be weighted by the committee in making their decisions.
Two common complaints about the committee system are that:
(1) Partners do not know the criteria against which they are being evaluated; and
(2) The criteria, and how they are weighted, may change without notice or warning.
Unless partners have confidence in the members of the committee to evaluate fairly the contributions of every partner, and not “feather their own nests,” take care of their friends or take their charges seriously, the best compensation system will be doomed to failure.
Gathering, Interpreting Information
More mid-size and larger law firms are gathering objective data about each attorney, department, office and so forth and interpreting it subjectively. Also, more firms are actively seeking input from department heads about the objective and subjective contributions of each member of their department.
More committees are seeking to obtain information from each partner about their contributions to the firm. This information is usually obtained through personal interviews by the committee with each partner.
In those firms in which partners are required to prepare “partner game plans,” a segment of their evaluation is predicated upon how effectively they achieved, exceeded or failed to achieve their “approved” plan and the reasons why.
Partners may be requested to rank every other partner or assign points or dollars of projected profits to every other partner, based upon objective data and subjective information provided about each partner.
The objective data is compiled by the firm’s accounting department. The subjective information is usually obtained through questionnaires. A package which contains copies of the completed “subjective” questionnaires and the objective data about each partner is distributed to every other partner.
Each is requested to award to every other partner points or a dollar amount of the “projected salary pot” for next year and the “bonus pot” for the current year. The allocated amounts are collected and submitted to the committee “for advice only.” The committee then allocates the salaries from the projected salary pot for next year and awards bonuses to partners from the projected bonus pot for the current year.
Most mid-size and larger law firms budget incentive bonuses into their compensation system. The bonuses in the incentive pool are usually “up to” 25 percent of the total net income. More firms allocate fewer bonuses, but bonuses to deserving partners are of higher dollar amounts - often not less than $10,000, rather than smaller bonuses, $1,500 to $3,500 to many more partners.
The author recommends that bonuses be used to recognize those significant, short-term contributions of partners. Quality performance is not an attribute for which a partner should receive a bonus. After all, partners are expected to provide high quality service.
However, if a partner sacrifices himself/herself in behalf of a client that is clearly above and beyond the performance level expected of a partner, or the partner has contributed tremendous value to the firm or to a client, then that partner may quality for a bonus.
Allocating bonuses to deserving partners for their short-term contribution to the firm is preferable than progressing a partner to higher compensation level with the expectation that he or she will continue at that accelerated pace, only to find that they are unable to do so and have to be demoted to a lower compensation level two or three years later.
The trend has been to reduce, rather than increase, the number of tiers within the compensation system. Values of dollars or compensation points are set forth for each tier.
This trend is designed, in part, to minimize the smaller relative differences between and among the compensations of partners and to emphasize that greater contributions to the firm will be required for partners to progress to higher tiers.
Progression between the tiers occurs when contributions are not only meaningful, but also of a continuing nature. Short term or one-shot contributions of partners are recognized through bonuses, without changing their tiers. Changes in their placement may occur as the result of a partner’s continuing contributions to the firm such as those based upon two succeeding annual evaluations by the committee and continuing historical contributions.
In those firms in which compensation reviews occur every two years, partners whose evaluation results suggest the possible reductions of a tier are usually reevaluated as to placement the following year. In the event this reevaluation does not result in the change of tier placement, the bi-annual evaluation cycle will resume.
In the great majority of mid-size and larger firms the author has worked with, movement of partners does not exceed one step up or down between tiers.
However, in appropriate circumstances, movement may be greater than one tier.
Criteria For Rewards
The following list includes those criteria most frequently considered by compensation committees when assessing the contributions of partners. The formal or informal weighting or value placed on each of the below factors is usually a function of the firm’s immediate and long-term needs and priorities.
(1) Business developers, client retention and proliferation of work from existing clients.
(3) Rising “young stars.”
(4) Lawyer managers, legal and administrative.
(5) Entrepreneurial enterprise.
(6) Quality performance.
(7) Production, hours worked.
(8) Collection of fees.
(9) Profitability of performance.
(10) Training of young lawyers.
(11) Overall contribution to the firm.
(12) Seniority, loyalty.
(13) Enhancement of the firm’s reputation.
(14) Replacement value.
The author has recommended evaluation processes to mid-size and larger law firms that involve an advance plan prepared by each partner and approved by their department chair, practice group leader, office head or their designee.
A standard form for this evaluation process is distributed to each partner. At the end of each evaluation period, each partner provides to the committee a written self evaluation of his or her fulfillment of their individual advance plan and describes their total contribution to the firm during the current period.
Emphasis is given to the particular needs and priorities of the firm at any given time, as well as to the interests and abilities and the track record of each partner.
Of great importance to most mid-size and larger firms is the production of new business and the retention of business from existing clients and the attraction of business from potential clients.
The importance of attracting new quality and profitable clients are obvious. Client retention/expansion/management is the activity of cementing relationships with existing clients by the effective and timely delivery of legal services.
More of the mid-size and larger law firms are allocating to partners, “origination” or other credit, which recognizes their contributions for generating business from new clients and for proliferating new matters from the clients that have been originated by other partners.
Administering the Plan
The allocation of salaries/points for next year and bonuses for this year may be determined prospectively or retrospectively. Most firms allocate salaries/points prospectively and bonuses to recognize performance for the current year, retrospectively.
Salaries/points determined prospectively may be for one year or two years at a time. To extend the compensation period beyond two years, is simply not practical. To minimize wide swings in a partner’s salary/points, some firms use a rolling two or three year average of the partner’s salary/points and their projected salary/points for next year.
Also, to protect a partner from any dramatic compensation swing downward in any given year, some firms have set a percentage figure beyond which a partner’s salary/points may not be reduced, absent some significant event, which calls for special review by the committee or all of the partners.
Some firms employ a profit center approach to allocate income and expenses to each partner to determine their profitability/costliness on a cash received basis. The resultant data may be interpreted subjectively and judgment may be utilized to factor into the equation the qualitative contributions of each attorney, or the data may be interpreted objectively, in compliance with a strict mathematical formula.
As law firms continue to evolve, time brings changes among the partners, their values and goals. What pleased the founding partners, may not necessarily be welcomed by the new order. This development should be approached as a natural and inevitable course of events.
The firm that succeeds in establishing a sound compensation system is one in which partners view the decision making process as a dynamic procedure and understand that it is not etched in stone.
©1999-2015 Joel A. Rose & Associates