IDENTIFYING AND DEFINING CRITERIA FOR DETERMINING PARTNER COMPENSATION

by Joel A. Rose

 

Partners in the great majority of firms have realized that "You Get What You Reward." Compensation systems in the more professionally and financially successful firms don't just "share the profits." Rather, compensation is used as a system for management. The most successful compensation systems place strong emphasis on merit and performance. Systems that promote partner stability and that reward fairly the total fee producing, business generation non-billable contributions of partners work best.

In today's highly competitive marketplace, the more successful compensation systems reward marketing and cross-selling of the firm's expertise; promote profitability, i.e., realization, leverage, productivity, timely billings and collections, etc.; serve the clients' best interests; promote the team approach to the practice of law; and offer incentives to all partners. It is commonplace, in many firms, for there to be incentives to encourage partners to perform those activities that address the firm's immediate and long-term priorities and objectives.

For the "good of the firm", Managing Partners, members of Management and Compensation Committees have to identify and define criteria for determining partner compensation against which partner performance will be measured. The factors to be rewarded and the amount of the incentives should be sufficient to provide the motivation for partners to devote their personal and working time and effort to perform those activities to enhance firm.

When identifying and defining these criteria, Managing Partners and members of the Management and Compensation Committees must bear in mind that the partners will advocate those criteria and compensation systems which favors their particular strong points as a partner.

For example, partners who do not generate much of their own business, but have high billable hours, promote a system based predominantly upon revenue from the production of billable hours. Conversely, partners who tend to bring in a great amount of new business and perform the work themselves and/or allow it to be performed by others generally would promote a compensation system based highly upon origination.

A firm seeking long-term success must recognize that all partners bring strengths and weaknesses to the process of creating revenue. Therefore, Managing Partners and members of Management and Compensation Committees must balance the various needed contributions of partners to create a compensation system that partners will perceive as being fair and equitable.

As the result of the recent changing economic environment and increasingly competitive markets in which most law firms practice, Managing Partners and members of Management and Compensation Committees in the more successful law firms have identified and re-defined those objective and subjective criteria that have been especially designed to motivate partners to attract new clients, proliferate work from existing clients, perform those fee producing and non-fee producing activities that are necessary to retain existing clients and recognize those partners who have been given responsibility for managing the performance of clients and client work that other members of the firm have originated.

When assessing the fee producing and non-fee-producing contributions of each partner in relation to the objective and subjective criteria for allocating compensation, many  law firms do not apply formal weighting of each criterion in pure arithmetical terms. Rather, most firms employ a purely subjective compensation system to assess the total contributions of the partners or a "hybrid" type system of assembling a great deal of objective data and a substantial amount of subjective information about each partner's performance over a three year period in order to arrive at an appropriate amount of compensation for each partner. The objective data assembled is used as a data base to support the firm's decisions about the objective criteria to be considered, along with the subjective contributions of each partner. Thus, the total contributions of partners are assessed in "rough justice" fashion by Managing Partners and members of the firm's Management and Compensation Committees who recommend compensation for each partner.

The real problem faced by Managing Partners and members of Management and Compensation Committees in many firms is the determination "what to do with the figures after they have been generated." Certain obvious considerations or adjustments must be appreciated. I recently completed a compensation assignment with a law firm in which the members of the Compensation Committee used their subjective impressions as the basis for their primary evaluation, followed by the use of numbers or statistical results as a check to avoid injustices that might arise from a purely subjective result.

In a great majority of firms, compensation reflects each partner's overall contribution, with minimal regard to the length of time that partner has been associated with the firm. The compensation models employed by these firms assume that partners will do their best to generate new business from potential and existing clients, provide quality services and work hard. The overall contributions of each partner include intangibles that go beyond being a "good lawyer" and a "hard worker." The following examples will illustrate this point:

  • With good lawyering and hard work being assumed, generating business from existing and potential clients that may be performed by the originating partner or any other lawyer will be a significant part of any assessment of overall contribution to the firm,
  • With good lawyering and hard work being assumed, lots of intangibles plus business origination is better than few intangibles plus business origination,
  • With good lawyering and hard work being assumed, lots of intangibles and some business generation is better than some intangibles and some business origination, which in turn is better than some intangibles and no business origination, which in turn is better than few intangibles and no business origination, etc.

Further, in the majority of firms that adhere to this compensation philosophy, it is generally understood by the partners, and reinforced through communications and actions taken by the Managing Partner and the firm's Management and Compensation Committee that these decision makers will consider the full panoply of the compensation criteria agreed to by the partners and assess each partner's performance against each criterion.

Partner Compensation Criteria

Origination Credit:

In today's competitive practice environment client origination is even larger in its significance to the success of a firm's future. Hence, strong incentives should be provided for "bringing new business from potential and existing clients through the door." Below are described several kinds of origination credit.

Client Origination:

One (or more partners) is responsible for bringing a new client through the door. Obtaining a new client is important enough that it should entitle the originating partner(s) to receive 100% of the Client Origination Credit of the dollar value of the revenue received from a new client, permanently or for a period of time.

Joint Credit for Originating a Client: Origination credit, the dollar value of the revenue received from a new client that comes to the firm as a result of multiple partners collaboratively bringing a new client through the door, will be shared among these partners. Such credit will be shared by agreement between the concerned partners. If these partners are unable to agree upon terms of sharing origination credit, the decision will be made by the Managing Partner, the Management Committee or the Compensation Committee.

Administering Origination Credit:

The entitlement for the Originating Partner(s) to receive 100% of the Origination Credit, permanently or for a period of time, is presumed though not automatic, since the  entitlement carries with it a responsibility to "mind" the client, at least to some degree, depending upon the circumstances, i.e., whether the client's work is within the area of expertise of the originating attorney.

It is important that the Originating Partner continue to receive Client Origination Credit for some time even if one or more other partners are significantly involved in managing and/or performing the work for that client. The firm will continue to benefit by having the Originating partner retain some type of a personal or working relationship with that client. Also, the firm does not want the Originating partner to believe that by assigning a client or client work to another partner, the latter partner may attempt to persuade the client to refer all future work assignments to themselves thereby eliminating the Originating partner from having a continuing relationship with that client.

Changing Origination Credits:

Changing the partner allocations of Origination Client Credit for a client are usually determined on a case-by-case basis, where appropriate, with credit sharing a reasonable option.  For example, where a client was brought in by Partner A 10 years prior, but has given no business to the firm for 7 years, and then was brought back to the firm through the efforts of Partner B, it may be appropriate to give all origination credit for that matter to B, or to share the credits, depending on the circumstances. Another circumstance under which origination credit for originating a "new" client may change is if Partner A brings in a client but after a period of years, Partner B, another Partner who has been managing that client and who is responsible for maintaining the relationship. If that happens and the Partners agree that a change in the Origination credit is appropriate, then it can be changed with the consent of the Managing Partner. A third circumstance where origination credit may change is if a client that was originated by Partner A leaves the firm and after several years of not doing any business for that client, Partner B brings that client back into the firm. Partner B will receive origination credit for that client. Without getting into detail on how that may come about, it will take the approval of the Managing Partner, members of the Management Committee or the Compensation Committee to approve this change in origination credit.

Obviously, the preferred means of resolving issues where more than one partner feels entitled to origination credits for a particular client, is for the partners in question to negotiate an agreed sharing. However, upon request, an issue as to relative entitlement to origination credits will be resolved by the Managing Partner, the Management Committee or the Compensation Committee.

Responsible Partner Credit for a Client or Matter for Minding of Clients 

This criterion is the dollar value of the amount of revenue received as the result of the work performed by a partner who has been designated as the Responsible Partner in charge of managing the work performed on a client matter (that was originated by another partner.)

Once the original Originating Partner no longer plays a principal role in retaining the client, i.e., the former delegates the client/matter to another partner and the original Originating Partner does not continue to either service the client or schmooze the client in a way that makes him or her the primary contact, then the original originator no longer qualifies for full origination credits for the client. To illustrate this point, following is one example of sharing Responsible Partner Credit I have recommended to other firms:

The original Origination who is no longer responsible for that client may remain eligible to receive 75% of the originating credit for the first  two or three years with a further reduction to 50%. In some firms, the 50% percent of the origination credit may will remain thereafter with the original originator for a designated number of years – for two or three years or as long as that client remains a client of the firm.

As the amount of the Origination Credit for the originating partner is reduced, Responsibility Credit will be transferred to the partner designated to serve as the  Responsible Partner by the Originating Partner. Questions regarding the allocation of Origination Credits and Responsible Partner Credits will be referred to the Managing Partner, the Management Committee or the Compensation Committee.

It should also be recognized that, the more important the client, the more it is in the Firm's interest to have multiple partners develop a significant client relationship.  The Managing Partner, members of the Management Committee and the Compensation Committee Executive Committee should continue to be mindful of the efforts of originating attorneys to foster the development of such relationships with important clients.

It is recommended that the Managing Partner and members of the Management and Compensation Committees define what a partner needs to do to qualify for this portion of the credit.  Otherwise, the policy may not be administered in a consistent manner, and those partners who do not receive Responsible attorney credit when others do will feel slighted. This will be especially important as the Managing Partner and members of the Management and Compensation Committees change. In other words, the present Managing Partner and members of the Management and Compensation Committees should set the parameters that will be used and interpreted by successor Committee members.

Matter Proliferation Credit:

Partners should have an incentive to "proliferate" new kinds of business from existing clients, regardless of who is the originating attorney for the client. 

Matter Proliferation Credit is the dollar value of the amount of revenue received as the result of a partner proliferating work for a particular matter from an existing client that was originated by another partner. [Since it is important in many cases to know exactly what/who was pivotal in expanding existing client business, if the concerned partners are unable to reach an agreement, the decision will be made by the Managing Partner and members of the Management and Compensation Committees.]

A partner who proliferates new business from an existing client (for whom the partner is not the originating attorney), should request to receive matter proliferation credit for the file created for the new matter (from the Originating Partner for that client).

To prevent a "disincentive", for the Originating Partner to keep client relationships to themselves, Matter Proliferation Credit should not be subtracted from Client Origination Credit.  (This presumes that the ability to proliferate the new business was somehow related to the existing client relationship.  Again, this type of issue should be resolved case-by-case by the partners concerned or the Managing Partner or members of the Management and Compensation Committees.)

Production Credit:

This is the dollar value of the amount of revenue received as the result of a Partner's personal production.  For example, if a Partner records $10,000 in time dollar value, which is billed and collected, he or she would receive Production Credit in the amount of $10,000. If a partner is designated by the Originating Partner to be the Responsible Partner for a client or matter, the former will receive Production Credit for all billable hours he or she devotes to working on that client matter (during the time he or she is managing the work on that client matter.)

Inherited Clients:

In many firms, a partner who inherits a client from the originating partner whether through the retirement of the latter partner or otherwise may receive Client Origination Credit for that client. In other firms, a partner who inherits a client from the originating partner will receive credits based on a Responsible Partner retention basis.  The second partner serving as the Originating Attorney would share Responsible Partner Credits, as appropriate, with other partners who have significant responsibility for managing the client or client matter, and would not have entitlement to Client Origination Credits for that client.

Discretionary Subjective Credit:

These credits represent the value allocated subjectively to a partner for his or her discretionary subjective contributions to the firm. These contributions may not have any direct dollar value that may be attributed to them. 

Tracking Client/Business Development Credit:

A tracking system needs to be established that tracks new clients and new business originated by each partner. This is usually accomplished by completing the information called for on the firm's New Client/Business Intake Form. Space should be provided to identify the name of the client, the title of the new matter, the name of the partner(s) who is claiming credit for originating the client, the name of the partner(s) who is claiming credit for originating the new matter,(if different  than the partner who originated the client), the name of the partner who will be responsible for managing the new client and matter (if different than the partner who originated the client and the names of the attorneys who will be working on the client matter.

To insure that every partner understands the system, the firm should set criteria as to what constitutes a new client and a new matter from an existing client regarding what constitutes a new client. To minimize conflicts between and among partners about claiming origination credit for a new client or matter, it is recommended that the firm publish information regarding new client files so that every partner may periodically review the list of clients for which origination credit is being given. Also, the tracking system should track all cross-selling and proliferation of work from an existing client.

It has been my experience that cross-selling and proliferation of work from existing clients may be one of the best sources of additional client business for the firm.  Therefore, I recommend to clients that in the long-run, it is beneficial for the firm to be generous in determining what is new business in order to keep interest in client and matter origination high among attorneys, but do not allow attorneys to "play games with the system."

Allocating Credit for New Clients and Matters

The methodology that will be used to place a value on the allocation of credits will depend upon whether employs a formulaic or a subjective compensation system and the nature of the firm's practice. In any of the above, the likelihood is that the firm will have to reach a compromise for weighting the value of the fee producing contributions performed by the client originators and the work producers.

If a formulaic system, the percentage should be sufficient to provide an incentive to develop new clients and new matters from existing clients, but not so much that there is no incentive for other partners to work on the files. If a subjective system, the firm must be sure the results of the allocation will give significant credit for client and matter origination.

Conclusion

The ultimate goal of every compensation system is to have the amount of compensation that any partner receives bear a reasonable relationship to amount of revenue that partner contributes to the firm. In order to determine the amount the amount of money a partner is contributing to revenue, the firm should consider all of the above criteria.

The essential fairness of the compensation system depends upon all partners being reasonably assertive in pursuing credits for the above compensation criteria that they consider themselves entitled to receive, with due respect to the merits or entitlements of other partners, and with recognition that the interests of the firm are best-served, particularly with the firm's key clients, where multiple attorneys from the firm are involved.

With all of these criteria appropriately valued, measured and considered by the Managing Partner, or members of the Management and Compensation Committees, fair minded partners should be able to agree upon the compensation of each partner.

©1999-2015 Joel A. Rose & Associates