A hot topic lately in my work is partner compensation. While many firms have historically been committed to equal profit share, perceived variations in performance are creating tensions. Tensions that some clients feel can only be eased with differential compensation.

A cautious approach to change

Lawyers and law firms are cautious by nature, so any change to a compensation system is often achieved only after thorough analysis of the current system and its shortcomings, and careful review and modelling of the alternatives followed by an internal pitch to get everyone (or a majority) on board.

A firm’s history, culture, jurisdiction, size and maturity will all play a part in determining the right compensation system for the firm. It’s rare for all partners in a firm to be totally satisfied with the compensation system, however for any system to be successful you need alignment between the methodology for admitting partners, partner performance criteria and the profit sharing system. The profit sharing system is really the last piece in the puzzle.

Preparing for change

To be accepted, and ideally successful, any new compensation system should:

  • be fair
  • reward outstanding performance and contribution overall, not just financial performance.

It should not:

  • create internal competition
  • discourage partners from doing the activities that build the brand of the firm
  • discourage partners from doing work the firm has traditionally done (and wants to continue to do) that may not be as profitable as other types of work.

A two year sunset clause on any changes where there will be a thorough review before anything permanent is introduced is also a good idea.

Aligning systems and strategy

Any movement away from equal profit share will involve a degree of subjective assessment. It’s therefore necessary to revisit partner performance criteria to ensure it encourages partner behaviour that is consistent with the strategic direction of the firm.

You’ll need to take a close look at:

  • Baseline performance criteria – the minimum level of performance for an equity partner in the firm
  • Individual performance criteria – tailoring performance criteria for partners based on their practice group, client base and their specific requirements in terms of the firm’s strategic plan
  • Methodology for assessing partner performance
  • Mechanisms for dealing with outstanding contributions
  • The role of management – this will range from the reports provided to partners through to who will be responsible for sheep dogging partners to hit their targets through to the determination of profit shares.

Winners and losers

Any changes to a compensation system will potentially give rise to winners and losers. Designed well, though, all participants should be better off, or at the very least more fairly compensated, at the end of the day.

Where the wheels usually fall off is if the primary design of any change is aimed at creating short-term winners or ensuring someone else doesn’t win.

Is your firm ready to talk about partner compensation?

In the Australian and New Zealand market I expect that conversations around profit sharing will become more frequent as we see the transfer of equity pick up pace and both incoming and incumbent partners consider it an appropriate time to review all aspects of firm management.

Want to learn more?

I’ve also teamed up with Sue-Ella Prodonovich from Prodonovich Advisory to offer a one-day workshop that shows junior lawyers how to grow your practice and theirs. This workshop will take place in Auckland in June 2019 and in Perth in August 2019.

Sam Coupland is a director of FMRC and works predominantly with small partnerships. Sam is considered the foremost authority on law firm valuations and values more law firms than anyone else in Australia.