Tag: Business

Trends in Partner Compensation Systems in Law Firms

An increasingly competitive legal environment is resulting in changes in how law firms pay their partners.

In my experience there are three main types of partner compensation systems:

1)      Equality/lockstep – Compensation is determined mainly by seniority. I’ve seen this system used by many small firms and some large US and UK firms.  The advantage is it encourages partners to work as a team, while the disadvantage partners may not feel it’s fair if other partners don’t pull their weight yet are paid the same as high performers.  This can lead to a lack of incentive for high performers, and creates a risk they may leave.

2)     “Eat what you kill” – Compensation is determined mainly by personal production. This system is used by small and midsize firms.  Objective systems like this usually focus on just the numbers, which makes it clear to all partners the expectations, and is fairly simple to determine compensation.  The downside is these objective systems also encourage partners to “game” the numbers to their own advantage.  This can lead to breakdowns in team-building, where partners act as “lone wolves” and talk about “my clients”, not firm clients.

3)     Subjective Merit – Compensation is determined by subjective analysis supported by objective factors. It usually involves a compensation committee of 3 or 4 partners, and is used mainly by midsize and large firms.  This system has the advantage of encouraging partners to operate at a higher level and get compensated accordingly.  The subjective merit system may have an objective component as a starting point, but subjective analysis reduces the potential for “gaming” the system in a purely objective formula system.

Depending on the culture of the firm, any of the above systems may work effectively.  However, my experience and research indicates the most effective system for increasing profits is the subjective merit compensation system.

Compensation System Trends

One of the major trends I see is towards more “pay for performance” in law firms, with an emphasis on rainmaking results.  Rainmakers are paid big bucks to switch firms, especially commercial lawyers able to command and move a large client base.

Compensation compression ratios (the $’s paid to the highest paid partners compared to the lowest paid partners) are increasing, as firms accommodate rainmakers at the top end of the pay scale.

Law firms are requiring an increasing minimum practice size to remain as an equity partner.

Non-equity partnerships are growing in popularity as firms attempt to maximize their leverage and equity partner compensation.

Large firm compensation systems are becoming more “corporate” in nature, as firms grow in size and scope internationally.  The larger the firm, the more corporate the model.  Managing partners and executive committees are wielding more power, and are providing more input to the compensation of individual partners, who are becoming more like employees in large firms.

Managing partners and practice group managers are being compensated more for their management accomplishments.  Some firms are compensating their managing partners using balanced scorecard techniques, for example.  Law firms are trying to run like real businesses, and are delegating more and more of the firm’s business functions to their management partners.

Many firms are requiring pre-retirement phase-downs in compensation and have established retirement policies at a set age eg. 65.  There is some controversy here, however, given challenges to the legality of forced retirement. Firms are continuing to try to enforce these retirement policies to maintain increasing equity partnership leverage and profitability objectives.

There is a trend for senior partners with portable practices to move from firms where they have spent their entire careers, after being forced out by the imposition of set retirement age policies.

Most firms have fairly “open” compensation systems, where partners know what other partners are being paid.  The trend is towards less compensation transparency in larger firms, however, with power and information centralized within a few management partners.  Compensation discussions can be too much of a time distraction for large firms.

More non-equity compensation arrangements are being used for hiring lateral partners and retaining good “up and comers” with long-term potential for building a practice.

Buy-in requirements are growing as firms grow and partner leverage increases.

More flexibility for balanced lifestyles and part-time partner arrangements are being demanded and received by the new generation of partners.

Compensation Criteria Trends

There is more emphasis on teamwork, and less emphasis on personal billable hours. This also ties in with growing recognition for the need to lever work, and the growth of alternative billing practices.

More firms are doing strategic plans in response to increasing competition, and this is leading to a need to recognize partners’ non-billable efforts in implementing strategic plans at the firm, practice group and individual partner levels. This also means more recognition of training, supervision, quality control, and various other non-billable tasks performed by partners.

More firms are recognizing client origination results, and firms are tracking client and matter origination more diligently.  Sales skills are being taught to partners and associates.

More peer evaluation is happening, especially in larger firms. There is also more emphasis on client feedback, realization and profitability of partners’ practices. More emphasis on cash in, and less on billings.

Compatibility with firm culture is becoming more important. Non-conformists with firm culture are punished, leaders are rewarded.

Summary

The key trend is toward more “corporate” compensation models, driven by competition and the corporate style of growth of large national and international firms.  Compensation is driven more by the strategic goals of the firm, and partners who contribute to firm goals are compensated at higher levels.  There is more emphasis on pay for performance as well.

Compensation compression ratios are widening, as firms attempt to accommodate and retain the rainmakers in their firms.  This has resulted in major dollars being spent to lure new rainmakers to the large firms.  Business development is more and more highly prized, and rainmakers’ compensation is increasing significantly.

The danger of a high compensation compression ratio is you could end up like Finley Kumble a few years ago.  They hired many rainmakers and paid them exorbitant dollars for their client originations without a sunset clause, and the whole firm came crashing down. Several factors were involved, but the extremely high compensation compression ratio was pointed to as a major factor in their demise.

Firms are also trying to encourage partners to lever more to others, and in the process institutionalize clients so it is more difficult to move clients when partners are offered more money by other firms to lure them away.  Buy-in requirements are rising as firms lever more and reduce the % of equity partners relative to non-equity partners and associates.

Large firms favor subjective merit systems, while smaller firms favor more objective systems. Large firms are increasingly profitable, and the gap is widening, so there may be some correlation/cause/effect with subjective merit systems which leads to increased profitability.

Related articles

Strategic Planning for Law Firms – Key Steps in the Process

So what’s all the mystery about strategic planning for law firms?  Why do so many firms fail to do strategic planning, and if they do try it, why do they fail to implement?

First I’ll address the mystery part.  Most law firms are run as democracies, which allow partners to do what they want with no real accountability.  Strategic planning assumes that you are thinking about your future as a firm, not as a group of solo practitioners.  This is the key to making a strategic plan work.

Here’s some key questions to address in getting the planning process going.

Where Are We Going?

Ideally, you should follow a standard strategic planning process, which involves creating a mission statement and long-term vision for the firm.  The strategic planning process will address the next 3 to 5 years, and should be revisited every 3 to 5 years as the environment changes.

Who Are We?

A core values statement is also essential, to guide all partners and staff on the firm’s expectations of its people.  This will decide who’s in the boat, and who isn’t.  The core values statement is normally created separately from the mission statement, but must support it.

What’s Stopping Us From Achieving Our Vision?

First you need to identify the key issues facing your firm at the moment.  This gives you a place to start turning issues into goals and strategies.  Every issue is a potential hurdle which is preventing you from achieving your firm’s goals.  The firm’s  key issues should be summarized and prioritized.  The top 5 issues should be discussed and ideas exchanged on how the issues are stopping the firm from achieving its mission statement and vision.

What Are The Steps Along the Way To Achieving Our Vision?

Once the mission statement and vision are determined, usually during a strategic planning session with all partners, then you can start eliciting goals from the mission statement. The firm’s goals are normally contained within the mission statement.  Focus on the top 5 goals.

Quantify Objectives

With the top 5 firm goals decided on, you can then quantify objectives which must be met in order to achieve the goals.

How Do We Get There?

Conduct a brainstorming process to consider various strategies to help achieve the goals.  Prioritize the strategies needed to achieve the goals.

Who Will Do What And By When?

This is the action planning stage.  Here we identify who will carry out the strategies and assign deadlines to complete the action plans.  This provides accountability and helps with follow-through.

How Do We Ensure It All Gets Done?

This is where most firms fall down and don’t implement their plans.  You need a management structure with accountability to make it happen.  The Managing Partner will be in charge of executing the firm plan and will ensure every partner does their part in implementing the plan.  The Managing Partner must also be able to impact partner compensation to make partners accountable for their role in the process.

Trends In Restructuring Law Firm Business Functions To Increase Profitability

I’ve often wondered why so many law firms insist on keeping business functions run inhouse by lawyers, when they’d be much better off delegating or outsourcing (levering) these functions to someone who knows more about business management than they do.  This behavior can range from the Managing Partner who insists on doing the financial statements himself to the numerous lawyer-run Committees you see operating in many firms.   Many firms would get much better and faster results by having an experienced Executive Director or Administrator perform these functions for them.

Some will say that lawyers won’t listen to someone who isn’t a lawyer regarding management issues.  However, many lawyers are now realizing that they need to streamline their operations further as clients push them on the rates side and squeeze their profit margins further.  I would suggest that more lawyers need to become aware of the option to outsource these functions as well,  given the increasing demands from clients to keep costs down and provide better and faster service.  It also recognizes the need for law firms to focus on their core competency of providing legal services.

One of the main reasons to consider levering business functions is to increase profitability.  This requires that you focus on how leverage of business functions can operate in your firm to release your fee earners from administrative tasks.  Your opportunity costs can be great if you have several partners involved in management and administration functions, when they could instead be doing more productive things with their time.  Things such as getting new, highly profitable work, working on high-end files or performing high level R & D to add value to the firm’s knowledge banks and improve firm profitability.  At $400 to $1,000 per hour opportunity cost, you’d be far better off levering those admin tasks to an experienced COO or Executive Director who could do the job more effectively and efficiently.  Your “real” bottom line will grow substantially after allowing for these recovered opportunity costs .

In a recent survey I conducted with COO’s and Executive Directors of midsize and large US and Canadian law firms, I found that more firms are also looking seriously at outsourcing facilities management, document production,  systems, human resources and marketing functions.  Whole administrative departments are not only being outsourced, but are also being shared with other midsize firms.  This tactic allows midsize firms to compete for much larger files than they’d normally have  a chance at and both firms can benefit from the arrangement.  It’s just another way for firms to extend their reach to be competitive without having to merge or add extra offices, and avoid all the costs and potential heartaches that an ill-thought out merger can entail.

Orrick is an example of a firm that successfully “outsourced” all of their administrative support functions such as HR, marketing, systems, facilities management and document production to a single support center office in West Virginia.  Their global network of offices can access the admin services they need from this Global Operations Center on a 24/7/365 basis.  Through this change, Orrick has reduced administrative costs while improving the quality of these support services.

CMS Cameron McKenna in the UK is the first major law firm to outsource its entire business support function to an outside party, including IT, HR, finance, business development, communications, knowledge management, facilities management and administration services.  This is a major development/experiment and is being watched with great interest by many other firms.

Another administrative service to consider for outsourcing is the search function, such as due diligence, title search, etc.  Why firms have their paralegals do these functions is curious to me.  Paralegals should be focused on higher end legal file functions, and searches should ideally be delegated to clerical staff or outsourced to a dedicated search firm.

Another option for small and midsize firms is to outsource all of their administrative functions to companies like MCG Management Counsel Group in Toronto or Cameron Management Services Group in Calgary (no relation).  These companies can handle all of your administrative and business functions so you can focus on practising law.  I’ve heard this option works very well for some small and midsize firms.

The latest option for outsourcing administrative functions is Face2Face Solicitors in the UK, which provides franchisee solicitor firms with centralized back-office systems – including accounts, IT and regulatory compliance – and central marketing and business development, to enable lawyers to focus on the legal work.  See here for more info.

Outsourcing can done at many levels in law firms and is being experimented with in different ways by forward-thinking firms.  You can theoretically outsource any business function.  One partner I knew once jokingly suggested that he’d like to see his firm’s entire Management Committee outsourced.  Okay, that’s pushing the outsourcing concept a bit, but considering the minutiae that many Management Committees get involved with, perhaps it’s not such a farfetched idea!

Related articles