PERFORMANCE CRITERIA FOR PARTNER COMPENSATION
by Joel A. Rose
Today, most law firms cannot afford to have partners who are unable to "pay their own way" in one manner or another. More firms are expecting their partners to work harder and are evaluating partner performance carefully to determine differences in the amount and type of their compensation. To help make this assessment, many of these firms are establishing written standards against which partner performance may be compared and upon which compensation determinations shall be made. These written standards enable each partner to know what "counts" in the compensation process and allows partners to determine how they should direct their efforts to satisfy firm objectives. They also allow partners to assess relative contributions to the firm, theirs and others. An example of written compensation standards the author prepared for a mid-size law firm follows this article.
Relatively few firms have attempted to apply an arithmetic driven formula to analyze each objective and subjective contribution. The greater majority have opted for evaluation systems which enable members of the management or compensation committee, to interpret subjectively the objective data and other contributions of each partner. Although it may appear to be easier to assess objective data in terms of a partner's personal contribution to the bottom line than it is to value their non-quantifiable, subjective contributions, partners in firms having arithmetic formulas readily admit that weighted formula systems are not appropriate for every firm due to the diversity in the "mix" which is utilized to assess partner performance. Most firms utilize a subjective evaluation process which requires those administering the system to be (1) flexible enough to recognize and accommodate conflicting objectives between the firm and individual partners; (2) logical, objective and fair; (3) capable of weighing the multitude of subjective factors; (4) able to recognize the changing needs and contributions of the partners as the firm evolves; and (5) being reasonably consistent when evaluating contributions of partners. As firms have become more top-heavy with partners, those firms which have been unwilling or unable to address their approach for evaluating partner performance have experienced compensation compression at the partner level.
Unless partners perceive themselves and their contributions to the firm in relation to other partners in an honest and realistic way, and that they are being compensated in proportion to their contributions, the stability and continuity of many established law firms may be at risk. The committee/partner who recommends partner compensation in many firms is being tested as they seek to address inequities which may be perceived to exist among partners. As an integral part of the structural changes in the methods of allocating profits, partners may assume different roles and have diverse responsibilities. Their compensation will vary according to these roles and responsibilities, performance and results achieved. They will continue to receive a variable draws or salaries commensurate with their actual and perceived value to the firm. Partner compensation serves as a "scorecard" which reflects each partner's total contribution. A partner's value is measured against those standards, and the performance of other partners, with minimal regard for the length of time a partner has been a partner.
Partners' compensation shall not increase automatically merely because the firm "had a good year." Individual partner's net earnings may remain at any one of the firm's compensation levels; they may go up or down; or partners may skip compensation levels upwards or downwards based upon their performance.
In today's highly competitive and fee sensitive environment, in combination with downsizing the associate complement, partners must contribute to the value of their clients by doing more work themselves rather than "overseeing" associates who bill on an hourly basis and have a strong incentive to record and bill more hours. Those partners capable of originating and retaining business from new and continuing clients shall be rewarded for doing so. Other partners who are unable or are not inclined to generate business are expected to devote more hours to producing legal work, training associates and/or managing the firm. In spelling out these objectives and assessing partner performance, lawyer management in most firms is placing the burden upon substantive department heads and individual partners to identify and implement plans to assist firms accomplish their objectives in an organized and efficient manner.
Accompanying these expectations are changes in the ratios of the net earnings of the highest paid and lowest paid partners. Traditionally, the ratio between the highest to lowest paid partners has ranged between 2.5 and 3.5 or more. However, to attract, retain and acknowledge the contributions of those partners who are "over-achievers", this compensation ratio shall increase to 4.0 or more, according to the overall contributions of the partners. The test about what should be an appropriate ratio and where particular partners are "slotted" on the compensation scale, as the result of these evaluations, is whether the compensation process properly assesses the contributions of each partner and whether the firm is better as the result of these compensation decisions.
Notwithstanding that more firms are impressing upon their partners that the progress of their individual compensation is be predicated upon the overall success of the firm, more firms are budgeting "bonus pots" to be available to reward individual or groups of lawyers only when their performance is perceived as being extraordinary. It is assumed that all partners work hard to be good lawyers. Therefore, eligibility for bonus payments include objective and subjective contributions that exceed being a good lawyer. Partner compensation reflects the assumptions about each partner's talents and their overall contributions to the firm. The real test of the compensation system is how effectively each partner's contribution is recognized. For firms to refuse to recognize the necessity of (1) articulating compensation criteria which are understood and agreed to by the great majority of the partners, (2) introducing a more structured process for assessing their total contributions and (3) allocating profits among partners accordingly, is to refuse to recognize the economic realities of practicing law in 2011. This refusal threatens the very "glue" that keeps a law firm viable.
A. Client Origination
Contribution to origination and development of new clients clearly need to be recognized by the partners.
Obtaining new business is critical to the firm's continued well-being and growth. This particularly is true in the highly competitive market. Consequently, the firm must recognize the obvious importance which attaches to this particular skill.
B. Client Retention
Additional business from existing clients, oftentimes the product of quality work satisfactorily performed by members other than the partner who originated a client account, is critical to the firm's continued well-being and growth. This particularly is true in today's highly competitive market. It, therefore, must be recognized as a valuable contribution to the firm.
This trait cannot be measured in objective terms only, since it is important in many cases to know exactly what/who was pivotal in expanding existing client business, i.e., minders, binders, etc.
Partners must recognize, therefore, the need also to "credit" those attorneys responsible for maintaining and continuing good and positive relations with existing clients. Performance of quality work and maintenance of solid relationships with clients go a long way in securing the reputation and influence of "rainmakers" within the firm.
C. Quality of Work Product/Timeliness
The need to recognize general efficiency, effort diligence, competence, dependability and timeliness in handling work, either of a chargeable, firm management or business development nature needs to be recognized. "Quality" includes knowledge of applicable law, imagination, creativity and innovation, ability to write clearly and persuasively, ability to analyze quickly and accurately; good judgment; ability to plan and implement legal strategies; oral communication skills, the ability to handle the unexpected; the ability to negotiate; and the ability to handle complex matters.
A partner must be willing to delegate work horizontally or vertically to the appropriate expertise or level of competence to ensure that work is done when it is promised to the client and or course, within deadlines provided by law.
D. Partner Productivity
The partners need to recognize that defining the productivity of an attorney is more complex than simply looking at computer numbers. Productivity is an aggregation generated by the hours the partner works, by the efficiency with which the work is handled, the number of matters handled, the effort generated through working with other lawyers in the firm, etc.
This includes the value of time worked, and/or delegated to others, the condition of the partner's accounts receivable and work-in-process inventory, the extent to which he/she properly utilizes other attorneys and other firm resources, etc.
The notion of "rough justice," therefore, also plays a part in the "productivity" inquiry. It goes beyond "billable hours."
The partner must recognize the importance and value of tenure and/or seniority within the firm. A lawyer's value to the firm over the years and his/her contribution to firm growth and success cannot be overlooked.
Seniority is not age alone, nor is it only the number of years a lawyer has been with a firm, however. Rather, it means the number of years the partner has spent developing and maintaining clients, building and enhancing the firm's reputation and participating in the training and development of a cadre of lawyers who produce for the benefit of all the partner in the firm.
F. Firm Management and Leadership
Contribution to firm management, including efficiency and effectiveness in handling management assignments, is critical to the firm's future and must be recognized. These are major responsibilities and our long-range success depends upon the skill and success of those people involved. The responsibilities of management require large amounts of time be devoted to the task. Management responsibility in the firm, however, also includes practice management, recruiting, marketing, as well as the handling of "mega" pieces of work. A partner involved in firm management responsibilities must treat that work with the same importance he/she would treat client work.
While the partners must recognize these factors, the extent that certain of these management responsibilities are tangibly recognized by the firm, these duties should be given some weight in determining the compensation. This factor should be limited to the managing partner and in special circumstances, to those partners designated by the partners.
G. Compliance with Firm Policies
Partners must recognize willingness to abide by the policies of the firm. This includes:
The partners are expected to take specific note of partners' noncompliance with firm policies.
H. Personal Relationships and Teamwork
Practicing a team concept, including participation in, and cooperation on, firm committees, etc. is expected, client sharing, client introductions, and overall promotion of harmony and goodwill among firm members is critical and absolutely expected. These include:
I. Partner Participation in Firm Activities/Functions
Partners are obligated to attend firm social and professional meetings, participation in those management decisions and activities which appropriately fall upon partners and participating fully in the "drudgery" side of the business.
J. Lawyer Development and Delegation of Work
Time and effort in working with younger lawyers to increase their professional skills must be rewarded. This includes the training and development of associates and paralegals.
K. Professional and Community Activities
Contributions that enhance the firm's image and prestige through maintaining good relations with other lawyers, speaking at CLE programs, publishing, participating in bar activities, and assuming bar and community leadership positions must also be recognized.
Partners acknowledge the importance of being visible in civic and/or charitable matters in the community and within the bar, because it's the right thing to do, it assists in developing new work, and assists in fostering leadership training for young lawyers. However, these activities should be performed with the knowledge and "approval" of partners, according to a budgeted schedule, as required.
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