One of the more interesting topics that we covered at this week’s audio conference for CCM on Partner Compensation systems are the trends occurring in the types of systems being used–globally, in the US in response to the current market pressures and in the course of an individual firm’s development.
The data on global developments is not well updated. A few years ago, a study done by Edge International found that US (at 86%) and Canadian firms (at 88%) strongly preferred subjective compensation systems, while UK firms overwhelming used lockstep systems (88%) and Australian firms were equally divided between the two. Also distinguished depending on geography were how frequently firms reconsidered compensation–with 3/4 of US and UK firms doing so every year, and Canadian (95%) and Australian firms (83%) even more consistently taking an annual look. The embrace of non-equity partnerships also differed depending on the country–with 58% of Canadian firms, 74% of US firms, 92% of UK firms and 100% of Australian firms having NEP tracks. This information is supplemented by our and other consultants’ experience in seeing local and recent changes.
In the US, the death of lockstep has been declared a number of times over the past few years of market turmoil and there has been a concerted effort to analyze those subjective components that can be evaluated and tied to efficiency and therefore profitability. Hence the "project management skills" craze. Clark said he was seeing more interest in lockstep, particularly in the UK and South America, in recent engagements in an attempt to promote collaboration and firm solidarity. While we often recommend for this climate a system that similarly promotes "team profitability," we continue to see firms look to develop metrics beyond lockstep tin order to mold behavior and increase profits.
A single firm can cycle through a number of comp systems. Smaller founder firms seem to often start out with a very subjective comp system that is essentially the founding partner telling each of the partners how s/he values their contribution. As firms develop past the founder stage, more formulaic systems often are put into place to try to make the comp determinations seem more objective. That system then often morphs into one that again considers more subjective factors, this time with sound reasons for promoting those factors.
Of course the primary concern that firms should be focusing on is what impact does their comp system have on the firm’s profitability. As pointed out in the call, money is not behavioral science’s preferred motivator. However, in the legal industry, there are few other metrics by which partners compare themselves.
If we look at what little industry-specific research that we have says about the effectiveness of comp systems in raising profitability, the results are interesting but mixed, with particular uncertainty as to cause and effect. Large law firms in the US with the highest profitability tend to base their compensation systems on more subjective factors (75% of firms with PPP higher than $700,000 described their systems as "subjective" while only 21% of firms with PPP of less than $300,000 did so), yet it may well be that rewarding subjective factors is simply a luxury that less profitable firms can’t afford. Yet again, rewarding those behaviors that are subjective may very well be the explanation for those firms’ rising profitability.
Several years ago David Maister conducted a study to determine what factors made firms profitable, which he refers to in his book Practice What You Preach. Of 74 factors analyzed, he found that 9 attitudes both predicted and drove profitability. They are:
- Client satisfaction is a top priority at our firm.
- Putting individual interests ahead of those of the clients or the office is not tolerated.
- Those who contribute the most to overall success are the most highly rewarded.
- Management gets the best work out of everybody in the office.
- Developing new skills is required, not just encouraged.
- We invest a significant amount of time in what will pay off in the future.
- We treat each other with respect.
- The quality of supervision on client projects is uniformly high.
- The quality of the professional is as high as can be expected.
The big caveat is that having any one lawyer or group of lawyers agree with and comply with these factors did not a profitable firm make. It was only those firms where ALL PERSONNEL–partners at all levels, associates and staff–endorsed these attitudes that profitability rose.
Let us help you determine your firm’s profile for profitability.