Partner Compensation – Not Always Black and White

How do you determine partner compensation at your law firm? You certainly look at each partner’s originations, working attorney receipts and billable hours. But what about his or her excellent client service, strong leadership, successful staff development efforts and keen technical skills?

Objective financial factors are easy to measure – but they should not be the only considerations in determining partner compensation. If you want to encourage your partners to lead by example and add value to the firm beyond their contributions to the bottom line, you need to incorporate subjective criteria into your partner compensation structure.

The Usual Suspects: Finders, Minders, Grinders

The 2012 Partnership Compensation Survey found that originations continue to drive compensation decisions, and its importance is growing. The survey was sponsored and developed by legal search consultants Major, Lindsey & Africa in association with ALM Legal Intelligence, a research arm of ALM Media, and included responses from more than 2,200 law firm partners.

Three-quarters of survey respondents said originations were a “very important” factor in determining compensation and more than half of all respondents (55%) think originations are becoming even more important in the compensation process. This is a significant increase from the 2010 Partnership Compensation Survey in which only 24% of respondents cited originations as growing in importance.

The danger with the familiar finder, minder and grinder system of compensation is that it tends to overly favor the finder, or originating partner, and not give enough recognition to the minders who manage the account and the grinders who actually perform the work. It also does not allow much room for rewarding other positive behaviors, such as mentoring and participating in firm initiatives.

“The very simple fact is that substantially over-rewarding and over-compensating finders can be fatal,” said Jerome Kowalski of legal consulting firm Kowalski & Associates. “Such a system creates and fosters the free agency model … it does not advance the interests of the law firm as an institution.”

“Yes, those (the finders) who have a singular talent for bringing in business should be rewarded,” he said. “But, those who cultivate the client relationships (the minders and grinders) must be adequately rewarded as well.”

If a talented grinder (working partner) is not rewarded, he will leave, and clients who have developed a trust in the quality of his work and confidence in his ability to handle the case may follow him out the door.

Think Non-Billable Hours Aren’t Important? Think Again

In the 2012 survey, working attorney receipts and billable hours were the next highest-ranked factors in terms of importance in determining partner compensation, with 59% of respondents rating receipts as “very important” and 40% rating billable hours as such. Not surprisingly, of the nine factors that the survey looked at, non-billable hours was rated least important.

But let’s take a closer look at non-billable hours, which is often used as a catch-all for staff development, team leadership, marketing, managing, community involvement, and other often-underrated activities. There are arguably many important things that fall into the “least important” category.

For example, consider the following scenario:

Your law firm has a strong core of partners who consistently generate new business and form strategic referral relationships for the firm. Revenue has been growing steadily over the past few years and the firm has above average realization rates. You are confident that the strategic plan that you’ve created with your management committee includes the necessary steps to reach the firm’s short-term and long-term goals.

But you have noticed a few issues. Many of the newer attorneys and staff members seem to be struggling to get up to speed. You know there are many talented partners who would be good mentors or who could teach training classes, but they all appear to be too busy with client work or focused on bringing in new clients. You’ve also noticed that several partners log a substantial amount of billable hours and always meet deadlines, but they do not work proactively with clients to anticipate their needs or make an effort to nurture existing relationships by taking clients to lunch or inviting them to events. They would rather spend available time networking with prospects in an effort to build their own book of business than trying to identify cross-selling opportunities that benefit the firm at large.

In addition, you’re concerned that your partners don’t seem to be facilitating marketing efforts. Your firm works with a top-rated PR firm to secure media opportunities, but your marketing director often has to turn down opportunities because your partners aren’t willing to make the time to be interviewed or write articles for local, national or industry publications. Your firm has a blog but lacks willing contributors. And when there’s an opportunity to teach an external seminar, it is a Herculean feat to persuade a partner to commit.

So how do you get your partners to address these issues? There is a simple solution: Create incentives.

“While compensation committees are getting much better at using pay schemes to recognize hard work and client generation, there remains great difficulty with appropriately recognizing, evaluating and paying for indirect contributions such as leadership,” writes James D. Cotterman of legal consulting firm Altman Weil in an article titled “Paying and Transitioning Leaders.”

Determine which behaviors you would like to see your partners adopt, and find a way to incorporate those behaviors into your compensation structure. For example, is it important for your partners to participate on committees to help the firm advance in specific practice areas or firm-wide initiatives, such as IT? Do you want them to assist with strategic client development efforts like participating in bar activities or joining non-profit boards?

In “The 7 Habits of Highly Effective Partners,” Eric Seeger of Altman Weil suggests seven behaviors that law firm equity partners should demonstrate to maximize their value to their firms. The article includes a checklist for evaluating partners in your firm – or yourself. Three of the behaviors – pay for yourself, pay for someone else, and cross-sell – involve business development. The other four factors are more subjective:

•  Make a conscious effort to develop associates and staff
•  Play nice by abiding by the firm’s core values and being a team player
•  Do your part to help manage the firm
•  Represent the firm in the community

No one would argue that these behaviors don’t positively affect the firm. But these subjective criteria are much harder to quantify and attribute a value to. Consider this hypothetical scenario: