Is there any more contentious issue at law firms then compensation systems? At most of the firms I have worked with there is dissatisfaction with the current system but nobody wants to take on the challenge of developing something new.
In late 2005, I attended a seminar held by David Maister in Seattle. When he opened the floor up for questions a lawyer immediately brought up the issue of compensation systems and a long and fiery conversation ensued. The merits and drawbacks of performance-based compensation systems vs. lock-step systems were debated at length.
Maister advocates for a compensation system that emphasises a firm’s active management of performance. I recommend his blog post of April 3, 2006 for a valuable review of the two systems. Here’s an excerpt:
The disadvantage of pay-for-performance compensation systems is that they provide a wonderful excuse not to manage. If someone’s performance is down, instead of management seeing that there is an obligation to go help that person, they have a wonderful cop-out. They say – “We cut his pay. We’ve done our job. The rest is up to him or her.”
Contrast this with what happens in a system where everyone gets a relatively fixed salary or share of profits, which changes as you get more seniority – if you survive.
In such a system (often called a lockstep system because people move in lockstep up the pay scale), if someone underperforms, you have only two choices. You either (a) work with that person and help them improve to deserve the same income as their peers or (b) if you cannot restore them to full share, you have to ask them to leave. Notice that having lockstep without the guts to deal with performance issues is clearly a disaster! A fixed-share or fixed salary system FORCES YOU to manage, ie to be intolerant of underperformance.
In other words, by not paying for performance, you end up with higher performance by tackling performance issues. By paying for performance, you get less performance because the system allows you to accommodate underperformance.
I have always been a fan of lock-step compensation systems. I began my legal career with an international law firm based in London. When the firm opened their New York office one of the attractions they offered their lateral hires was lock-step partnership. At the time, the New York office Managing Partner conducted many interviews with the US legal press on the advantages of the lock-step system. The system gave the international firm a great deal of flexibility in deploying their lawyers strategically around the globe. The New York office Managing Partner was a top-class securities lawyer from London. Because of the lock-step system he was able to move from London to the New York office to support the expansion even though it meant his billings were significantly reduced for a number of years.
Now many years later in Vancouver, one of the complaints I hear from many partners is that firms do not adequately encourage nor support them in managing practice groups, nor in engaging in business development activities. When I have spoken with these partners about the problem I have learned that for some the issue is a lack of flexibility in the compensation system for billable hour targets when a fee earner is undertaking additional managerial responsibilities.
In Vancouver we have yet to see anything approaching a lock-step system. I did though recently learn that a local law firm has taken the bold step of implementing a blended form of compensation which rewards the performance of the team rather than the individual.
Over lunch in late December, Simon Taylor from Catalyst Consulting told me about some very interesting work he had been doing with a Vancouver mid-sized firm. Working with the Managing Partner, he has helped the firm design and implement a compensation system that rewards the work of the practice group. Individual partner’s compensation is tied to the performance of the practice groups they are involved in. One of the measures of performance is client satisfaction. The firm has implemented a client satisfaction survey. Lawyers are only compensated when they reach a level of client satisfaction of 94% or higher. The goal of the system is to reward teamwork in the practice group, and promote an emphasis on client service.
This compensation system is basically saying “we will reward you for achieving this set goal”. That works fine for the lawyers who naturally work in this manner. But for the others, how is the firm going to help them to learn the new behaviors required to succeed? Incentives alone are not enough. They don’t get around the essential work of managing the people and supporting their efforts to adapt to the new system.
What I wonder is, what is the firm doing to support the lawyers in effectively managing their practice groups? How is the firm helping the lawyers to deliver this outstanding service? How is the firm setting up these lawyers to succeed?
I spoke with Simon this morning and he will be adding a comment today that elaborates on the above. Thanks Simon!
This entry was posted on Thursday, January 4th, 2007 at 12:25 pm and is filed under Business Development, Compensation. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.2 Responses to “Vancouver law firm revamps compensation system”
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January 4th, 2007 at 4:22 pm
Allison, you have captured the gist of our conversation pretty well. To add in some detail:
The firm, as an entity, has a revenue target, a profit target and a client satisfaction target for the forthcoming financial year. The firm-wide revenue target contains 2 figures; a relatively low one which amounts to breakeven plus partners’ “salary”, and a high one which reflects what the firm should do if each practice groups performs in the way expected.
The “global” high revenue, profit and satisfaction targets are broken down into targets for each practice groups. Partners’ compensation was arranged as follows:
Each partner receives a set “salary” (in fact, monthly drawings) to pay mortgage, school fees etc. This amounts to approx 40% of their expected annual income, and is based on the firm always achieving, as a minimum, the breakeven target.
Compensation above the set “salary” is based on the performance of each practice group. This is not merely a revenue target, but also includes profitability and client satisfaction. To earn a quarterly bonus, the practice group must achieve its targets in all three areas. If the firm has a spectacular year, so that the firm wide stretch target is exceeded, the excess revenue is split between those practice groups which over achieved, by the proportion they overachieved.
The basis of this scheme is to bring partners’ compensation into alignment with the firm’s strategic objectives. It is all very well to talk about being collegiate and teamwork, but if the compensation system does not reward this type of behaviour, then the concept will remain just fine words.
The compensation system needs to be simple, transparent, and applied evenly across the board. No special pleading for exceptional circumstances. I should add that the above scheme is lifted from the scheme used in a major UK law firm, which moved to it from strict lockstep.
You mention one benefit of lockstep is that peer pressure forces the managing partner to deal with under-performing partners. This is absolutely true. However, lockstep has a further issue to deal with. How do you reward young high fliers? People who go all out, and succeed. They are unlikely to be satisfied with being told that in a few years time, when they are at the top of the lockstep, they will reap the financial benefits of their hard work.
The problems with the above system are twofold (assuming, of course, the partners agree to amend in this way).
1. Do the Practice Group Leaders know how to manage professionals? Many are excellent at managing their own files, and at managing money, but managing people is a different animal. Some form of coaching is usually advisable at Group Leader level.
2. Once a Practice Group earns its bonus, how is that applied to all group members? In my experience, this tends to be the most contentious of the problems. Should there be uniformity across the firm, or is it better for one group to reward in one way, and another in a different way? Who exactly shares in the bonus pool; just the partners, all fee earners, or every one including support staff? There is no obviously correct answer to this, and each firm needs to feel its own way. For myself, I would always suggest that the bulk of the bonus should go to the partners, as they carry all the risk, and it is they also who have the ability to drive the scheme forward, or let it lie.
January 4th, 2007 at 4:51 pm
Simon, thanks for sharing this detailed description of the compensation system. I’d like to respond to one point:
“However, lockstep has a further issue to deal with. How do you reward young high fliers? People who go all out, and succeed. They are unlikely to be satisfied with being told that in a few years time, when they are at the top of the lockstep, they will reap the financial benefits of their hard work.”
The point you raise is an important one. One answer is to implement an innovative bonus system, that responds promptly to the success of the high flier, with a gift - say a trip for two for the associate and his/her spouse/partner to some lovely resort destination, and the time off to go there! This kind of bonus, which can be delivered by the firm immediately following the success is relatively inexpensive but has a high-impact for the lawyer and his/her significant other. Triggers for such a bonus could include bringing in a big new client, having a significant win for a client, cross-selling an existing client, or doing an outstanding job of leading a practice group.
This idea originated with Fraser Milner Casgrain’s Adam Pekarsky - via a talk he gave for the Legal Marketing Association Vancouver in 2006, and was recently implemented by a local Vancouver firm.