Is Your Partner Compensation System Working?

Ask a managing partner whether the compensation plan is working and you will usually get an answer about the last allocation meeting. It went fine. Nobody stormed out. A couple of partners grumbled and then signed. The plan must be working.

That is the wrong test, and it is the one almost everyone uses.

A peaceful partnership tells you the plan is predictable. It doesn’t tell you whether the plan is paying for what the firm needs to achieve its strategic goals. Partners who have worked out how their number gets set stop arguing about it and start playing to it. If the plan pays for personal billings and originations, that is what you will get. The peace you are enjoying in January is the sound of that arrangement running smoothly.

Here is a better test. Take the three or four things your strategic plan says the firm needs to do over the next two years. For each one, find the specific component of the compensation plan that makes a partner financially better off for having done it. The strategy asks for cross-selling and the plan pays for originations. The strategy asks for orderly succession and the plan lets a retiring partner hold client credit until the day he walks out. Partners follow the money every time, and they are right to.

The clearest version of this shows up in delegation. The proper use of leverage is the most commonly ignored profitability lever in law firms, and compensation is usually the reason it gets ignored. When a partner’s pay turns on personal billable hours, every file handed down to an associate is money out of that partner’s pocket, so the partner keeps the file. Your most expensive person does work a third-year could do. The associate does not develop. The matter gets billed at a rate your client is increasingly unwilling to pay. None of this comes up at the allocation meeting, and there is no line item for it anywhere in your financials. It shows up three years later, as a partner class you cannot promote.

And these days, AI adoption and implementation is likely listed as one of the most important strategic goals for most firms. However, many law firms’ compensation systems are not equipped to address this issue. If your firm has an “eat what you kill” system, how do you reward partners for dedicating non-billable time to helping build AI systems which benefit the whole firm?

The next place to look is the equity itself. Ask how many of your equity partners would be admitted to equity partnership today, based on their current performance. Firms cut associates and staff when times get tight and leave the partner ranks alone. That protects the current year and gives away the leverage that carries the next five.

That brings you to the plan’s underlying design. Generally speaking, firms with subjective compensation systems are more profitable than formula-based firms. Formulas are easier to administer and easier to defend, but they push partners toward personal production at the expense of everything the firm needs that a formula cannot see. An eat-what-you-kill approach can stunt the growth of an otherwise healthy firm. In my experience it produces conflict and resentment between partners who each believed they were behaving reasonably.

A subjective system asks more of your governance than a formula does. Someone has to decide, and the decision has to hold up in front of people who will dislike it. In my experience, top-down centralized management is the most efficient and effective way to manage, and compensation is where that view gets tested hardest. Give a small committee real authority and a written process it has to follow. Publish the criteria before the year starts, while partners can still respond to them. Then give every partner a written explanation of their own number. Having to write the reasoning down improves the reasoning, and that is often the larger benefit.

Partners will accept a number they dislike if they believe it was reached on the merits. They will not accept a number they cannot trace, however carefully you arrived at it. Trust in the process is worth more to a firm than how precisely the formula is calculated.

If you want a rough read on where your own plan sits, I have put together a short diagnostic below that walks through the areas where compensation tends to work against the firm. It takes about four minutes. It is a starting point, not a substitute for a proper compensation review.

TAKE THE PARTNER COMPENSATION SYSTEM DIAGNOSTIC

Contact me if you’d like to discuss.

Your Firm Is Profitable. Is It Going Anywhere?

Your firm can be busy and profitable and still have no strategy. The phones ring, revenue grows, everyone works hard, yet nobody can answer the basic question: what are we trying to become? I’ve seen this before in my practice. Activity hides drift, sometimes for years, until pricing pressure or a failed succession exposes it.

The pressures are stacking up. Clients want pricing certainty and are questioning whether routine work needs to be outsourced. AI is changing how legal work is produced, and early signals indicate the biggest changes will first affect associate and paralegal work. Add succession pressure and rising operating costs, and standing still keeps getting more expensive.

Why firms drift

Drift starts in the partnership. Ask five of your partners what the firm should become, and you’ll get five answers. One wants a new market, another wants to protect the firm’s client base and culture, and each sounds reasonable on its own. Funded from the same profit pool, they starve each other.

Without shared direction, the firm tries to accommodate everyone. This leads to many unranked goals and no agreement on what to forego. Hiring and technology become ad hoc, and marketing follows the loudest voice. Does that sound familiar?

A real plan breaks the pattern by focusing actions and decisions on the firm’s chosen direction. The key takeaway: a strategic plan empowers intentional decisions, not just more activity.

Strategy begins with what you will not do

Most plans list aspirations: improve profitability, attract talent, serve clients better, and strengthen culture. Every firm wants these, so they aren’t a strategy.

Strategy starts when partners choose where the firm will compete and, tougher still, what it will stop. Without exclusions, priorities just crowd an already full agenda.

The main takeaway: strategy drives resource allocation. Commitment to a focus, such as an industry, should be visible in how you hire, train, market, and choose clients. If resources and attention do not shift, the strategy is only words.

Put the economics inside the plan

This is where most plans fall apart, and where I spend most of my time with firms. Growth requires capacity, and capacity is expensive: on average, a firm doesn’t break even on a new associate until three to five years of call. New practice areas take years to mature. AI may cut production time while demanding new spending on software and workflow redesign. A plan that ignores these connections can deliver growth without an acceptable return to the partners.

Build a financial model to test ambitions. Link demand to lawyer capacity, pricing, realization, staffing, and capital needs. Focus on profit per partner; revenue growth means little without it. This analysis forces real conversations. Firms are often top-heavy and lack leverage below, limiting growth. Promising new services may lose money under current pricing. Sometimes, partners need to take home less to fund the future. Partnership decisions buried in the plan indicate a problem.

Alignment gets tested when it becomes personal

Partners easily agree on growth and quality. Things change when plans affect compensation, client ownership, autonomy, or resource allocation. A credible process accommodates these issues. Confidential interviews reveal what groups never do, and a well-facilitated retreat helps partners resolve and commit to decisions. An outside facilitator is valuable if the managing partner is also an advocate in the discussion.

Execution is where plans die

To clarify: Every priority must have an owner, milestones, a budget, and sufficient time. At quarterly reviews, leaders must make decisions, such as redistributing resources or stopping failing work. Consequences for missed commitments are essential. Without them, partners assume strategic work is optional under client pressure, and strategic efforts often lose out.

Start with an honest diagnosis

Before booking the retreat, figure out where your firm is weak. Some firms lack clarity about direction. Others know where they want to go but have never connected the ambition to their economics or built the discipline to execute. The process should fit your firm’s condition rather than a generic retreat agenda.

The Profits for Partners Law Firm Strategic Planning Diagnostic is a short assessment covering strategic clarity, market focus, economic alignment, leadership alignment, execution discipline, and future readiness. It shows where to focus first.

TAKE THE LAW FIRM STRATEGIC PLANNING DIAGNOSTIC

A strategic plan’s main purpose is to give partners confidence to choose and commit. Takeaway: If your plan doesn’t guide decisions and screen distractions, it needs improvement. Contact me if you want to discuss where your firm stands.

Session Recap: Bringing Ease to Managing a Legal Team

The average cost of losing an associate who joined as an articling student is somewhere between $300,000 and $500,000. They tend to leave right around year four or five, exactly when they start becoming profitable. A significant driver of that turnover is management behavior that many firms have not figured out how to measure or reward.

That was the thread running through the session Sandra Bekhor of Bekhor Management and I hosted on June 25. See the recording here. Sandra has spent more than 20 years coaching lawyers on leadership and team management, with a particular focus on delegation and feedback. I came at it from the profitability side. What kept coming back is how directly management habits shape firm economics, and how rarely firms treat the two as connected.

Why Managing a Legal Team Is So Hard

We started with what most managing partners already know but rarely name directly: lawyers are not trained to manage people. Law school trains the critical, analytical mind. It rewards the lawyer who finds the flaw in an argument and who assesses risk before anyone else in the room does. Those skills are essential for legal work. In a management conversation, the instinct to find the flaw is usually the thing that gets in the way.

Sandra made the point that good management requires a different part of the mind: empathy and the ability to listen without immediately judging. Lawyers have those capacities. They are just not the ones that get reinforced in legal training or firm culture.

So when lawyers move into senior roles, they are expected to lead and develop their people, without much preparation for either. And without strong role models in the firm to learn from, most are expected to figure it out on their own, which usually means they do not.

The Cost of Withheld Feedback

One of the patterns Sandra sees consistently: litigators who will argue fearlessly in court will not give a direct piece of critical feedback to an associate.

Her explanation made sense to me. In court, everything is rule-bound. The norms for how to behave are clear, and following them is not seen as aggressive. In a feedback conversation, there is no rulebook. The associate is someone you work beside every day. So the conversation gets deferred.

The cost compounds. An associate who makes a mistake in January and does not hear about it will repeat it in February, March, and April. By year-end review, the associate is hearing critical feedback for the first time, on twelve months of work. That is not just a development failure. It is a profitability problem. You have a person billing on your behalf all year at a fraction of what they could be producing.

One point Sandra raised that I do not think gets enough attention: your strongest performers want feedback just as much as anyone who is struggling, if not more. High performers are driven to grow. If your firm is not part of that growth, they will find one that is. They tend to leave right around year four or five. That is exactly when your investment in them starts to pay off.

Why Delegation Does Not Happen

This is where the financial case becomes very direct. Work that goes to a $350 associate should not be sitting with a partner billing at $800 or $900 an hour. The billing math here is clear, even if the behavior rarely reflects it.

Sandra identified fear of losing control as the primary obstacle. That fear is legitimate and takes different forms. Some partners worry about their reputation if a file goes wrong. Some fear client complaints. Some are simply convinced the work will come back needing to be redone anyway.

I added the structural piece. In many firms, partner compensation is tied primarily to billable hours. A partner who delegates aggressively is reducing her own hours. Her compensation reflects that. So she keeps the work. That is a rational response to the system in front of her, but it works directly against your firm’s long-term profitability.

Sandra’s reframe on this: partners who invest in training their team lose some billable hours in the short term. But if the team develops and stays, profitability rises over time. In my experience, the partners who invest in their people tend to build the more profitable practices.

What to Do About It

The practical suggestions we landed on were straightforward.

At the start of each year, each associate identifies two or three personal goals in conversation with the supervising partner. Specific goals tied to that person’s career trajectory, not pulled from a firm-wide checklist. Then a check-in every 90 days. This gives the partner a natural framework for feedback that does not feel adversarial, and it signals to the associate that someone is paying attention. That signal matters more than most firms realize.

Sandra and I both referenced the Balanced Scorecard as a structural tool worth considering. The idea is to measure partner performance beyond billing metrics. Financial results matter, but so does how well partners are developing their teams and building capacity for the long term. For a managing partner compensated partly against a balanced scorecard, the non-billable work of developing people gets counted. That changes behavior.

The harder question, which an audience member put directly, is how you make management changes stick when partners are still paid primarily on billable hours. The honest answer is that you probably cannot, not at scale and not over time. Some portion of partner compensation needs to reflect how well partners are managing and delegating. Even five or ten percent signals that the firm takes it seriously. Setting those goals at the start of the year and reviewing them at the 90-day mark gives it structure.

The AI Question

Near the end of the session, an audience member raised a specific question about AI and delegation: if junior work is being replaced by AI, what do you do with your junior associates and paralegals?

One view: you retrain them as validators. Have AI take the first pass. Have the junior associate review the output and produce a corrected version, then send that to a senior associate or partner for a final pass. The skills shift from producing the work to interrogating it. That is a legitimate developmental path, and some firms are already building it into how they count billable hours.

Sandra’s point: whatever structure you build around AI tools, the management principles for developing your people hold.

None of what Sandra and I described is complicated. What makes it hard is that many small and midsize firm partner compensation systems actively reward the opposite behavior. If you want to think through what changing that looks like in your firm, reach out.