Partner Remuneration in Law Firms

Transcription

1 Partner Remuneration in Law Firms hodgartassociates.com +44 (0)

2 The Danish law firm Bech-Bruun recently announced that it is changing its partner remuneration system to pure lock-step. It was reported that the announcement was received by a standing ovation from the Firm s 78 partners. But why would this be such a cause for celebration when many other law firms are considering moving away from a pure lock-step remuneration system? Partner remuneration has become a much discussed topic in recent years, primarily due to the continuing competitive pressure on firms and the consequent pressure on partners to achieve ever higher levels of performance. This pressure on partner performance has led, inevitably in most cases, to some wide variations in partner performance. Not all partners in a firm are capable of achieving the same level of performance; some consciously choose to not push themselves as hard as others (albeit while still achieving a reasonable level of performance). The same is true in any competitive activity, be it sport or business: some people will outperform others even when all are doing their best. There are others who are not prepared to push themselves to produce a top-level performance even if they could, but are content with a lower level. Tension, or retention? A consequence of this has been a concern that the remuneration systems for partners in many firms are inequitable, as they do not fairly reward high performance relative to lower level performance. In some cases tensions have arisen between groups of partners as the higher performers feel that the lower performers are over-rewarded given their achievements. (Or, conversely, that the higherlevel performers are under-rewarded relative to the lower performing partners.) There is a partner retention issue here: higher performing partners are more easily tempted to leave if they believe that they are under-rewarded and that another firm will better reward their efforts. This is not necessarily pure greed (as some seem to suggest) but more about partners seeking to be valued for the contribution they are making to the firm and their remuneration is an indication of that value. Lockstep, or merit? This issue has arisen in firms with all types of remuneration systems. Historically, North American firms have tended to base compensation on merit systems, loosely transposed as performancebased, while UK firms and many European firms have tended towards lockstep systems. (The latter being where partners move through a number of steps automatically, regardless of performance, each step providing a higher level of remuneration than the previous one, until they reach a plateau level where all are rewarded equally.) The merit system as used by North American firms has largely become discredited because of the way in which performance has been defined or interpreted, as well as the way in which decisions about performance have been made. In many firms, performance was based almost entirely on the personal billable hours recorded by a partner, ignoring other important factors such as: the profitability of those hours; the profit a partner generated through managing a team and referring work to others; for carrying out business development activities effectively; and other activities valuable to a firm. in any competitive activity, be it sport or business: some people will outperform others Partner Remuneration in Law Firms Page 1

3 In many firms, the assessment of performance was invisible and conducted by management through an opaque process. While management often claimed to have taken all these factors into account, the lack of clarity about what was meant by performance led partners to assume that it was all about personal billable hours. (Interestingly though, some of our work shows that many partners recording high personal billable hours also do well on some of the other factors, but their fellow partners may often be unaware of this, and just focused on the billable hours.) The invisible lockstep Another issue with the North American approach to merit system has been that there is often an invisible lockstep at work. Partners whose performance declines significantly usually do not face a proportionate drop in income in the next year, the view being that it could place a hardship on a partner who likely has a level of financial commitment to maintain. There is also the view that performance might recover in the following year, so a cut in income that reflects an initial performance drop would need to be reinstated in the following year. Hence, management has tended to adopt a smoothing of income relative to performance. Of course this has a consequence for the highest level performers, as there can be less profit available to reward their levels of performance, and they can become dissatisfied. Problems have also emerged in the purer UK and European lockstep system. At its purest, lockstep recognises only seniority, and performance is not a factor in the income a partner receives. The one exception to this is where persistent underperformance results in a partner leaving the equity partnership, either to become a non-equity fee-earner in the firm or to leave the firm entirely. Under the lockstep system, a partner s income cannot be adjusted, so de-equitisation is the only solution in preventing the dilutive impact of underperformance on the profit pool. where persistent underperformance results de-equitisation is the only solution in preventing the dilutive impact of underperformance on the profit pool In many firms, the assessment of performance was opaque Again, management will often delay these decisions (sometimes for good reason) with the result that higher performing partners see other partners earning the same income as them but adding less value to the firm. (This is exacerbated if underperformers appear to be making less effort than higher performers: underperforming partners coming in late and leaving early are often cited as particular irritants to the high performers.) Partner Remuneration in Law Firms Page 2

4 Hybrid systems As a consequence, across the UK and increasingly in Europe there has been a move away from pure lockstep with the introduction of performance as a factor in the promotion decision. What has become known as a managed lockstep is now common among the top 50 UK firms and many other smaller firms. There are a number of versions of the managed lockstep system but, in essence, these allow a partner to progress up the lockstep ladder as she becomes more senior, but subject to her performance meeting targets that match the relative level on the lockstep. A partner can also move down the lockstep if her performance falls, although many firms set a minimum level below which a partner cannot go before being retired from the equity partnership. In other words, each lockstep level has a defined set of targets, the targets at each level being higher than the level below, with the aim that partners are placed on the lockstep at a level that broadly matches their performance. Furthermore, in some models there are gates, being specific levels on the lockstep where a partner s performance is analysed carefully before she progresses, with only a light assessment of performance being made at other levels. As with the North American version of the merit system, there is still a considerable amount of uneasiness and unhappiness surrounding performance assessments unless the assessments are clearly defined and transparent. Increasingly therefore, firms on both sides of the Atlantic (and elsewhere such as Australia) are developing performance management systems that specify the activities that constitute performance along with targets that partners are expected to achieve. Experience has shown that having fewer categories of performance can be more effective than having a long list, the latter often being confusing. The contributions evaluated include hard data such as revenue and profit generated, as well as less easily quantifiable ( softer ) data such as management of people and collaborative behaviour. As a consequence there has also been a need to develop data collection processes so that the assessments can be carried out. Some firms have very formal assessment processes; others more informal. The softer data is usually obtained via interviews and feedback while the hard data usually comes from the firm s records. Some firms require partners to keep their own records on business development and work referred to others, while the firm mainly provides revenue and profitability data. Regardless of the preferred system, the key issue is that the performance management process must be aligned with the firm s strategy and strategic goals, and with its culture. While there are some methodological points that most processes need to follow (both remuneration and performance management), no one model fits every firm: even on the methodological points we have seen some processes that break every rule and yet still work well. It requires substantial investment of management time to design a remuneration and performance management system that motivates people to perform well, where the firm provides support and training so that people can perform to the best of their ability, and where people see the processes as fair. In the long term though (rather than simply duplicating the processes of another firm, which may be much cheaper), the results of this investment are likely to be far better. there is still a considerable amount of uneasiness and unhappiness surrounding performance assessments Partner Remuneration in Law Firms Page 3

5 Making it work While Bech-Bruun s decision to revert to pure lockstep has been somewhat surprising to many outside the Firm, the change of remuneration system was clearly welcomed by partners of the Firm. Perhaps less headline-grabbing is the fact that partners will be assessed twice a year on a range of softer measures around cooperation and management, developing client relationships and protecting the Firm s reputation. Regular assessment of partners performance and the focus on softer measures is to be commended. performance management must be aligned with the firm s strategy and culture However, partners will no longer be assessed on how much revenue is generated either individually or as teams, which is highly unusual for any commercial law firm. Pure lock-step may work if all partners operate within a narrow performance band. However, tensions may arise within a partnership if large disparities exist between the business generation performance of partners or teams. Only time will tell if a pure lock-step is the most appropriate partner remuneration system for a firm in today s competitive world. Partner Remuneration in Law Firms Page 4