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Carving up the partnership pie (1)

Carving up the partnership pie (1)

It's time to divide up the partnership profits, and as law firms debate the nuts and bolts of profit share, John Chisholm asks just what the perfect compensation model actua

It's time to divide up the partnership profits, and as law firms debate the nuts and bolts of profit share, John Chisholm asks just what the perfect compensation model actually is, and how it can be achieved.

A couple of weeks ago I heard of a client being rung up by a partner in a law firm and the client being asked by this partner whether he (the client) would "mind" sending him (the partner) an email confirming that it was him (the partner) that introduced him (the client) to the firm.

Now, what on earth would possess a partner of a law firm to do something like that?

In law firms around Australia for the next few weeks the priorities of many partners and firm leaders will not always be directed towards their clients, undertaking billable work or getting the firm through the economic recession we (arguably) do not have.

No. Much of their time, energy, discussion, debate, division, angst, contemplation, endless drafting and redrafting of submissions (and appeals) will be put into how to equitably, fairly - and sometimes politically - divide up the partnership profits. For some firms that may mean dividing up profits which are considerably less than a year or two ago.

Differential profit-sharing in legal partnerships is nothing new. While equal profit-sharing and lock step distribution is still the hallmark of several firms for the last 10 or more years, most medium-to-large firms have moved to some form of differential performance-based profit-sharing model. These range from complex, excessively engineered and rigidly formulaic right through to the simple back of an envelope/gut feel model.

I am yet to see two firms that have identical partner compensation models - even if the theory, wording and intent of the models may look the same, the practical application of the models can be vastly different in each firm.

Of all the tools available to management, the ability to reward (or, in some cases, penalise) a partner financially is one of the (if not the) most powerful management tools available.

Ideally, any firm's partnership compensation model should be aligned with the firm's vision, goals, strategies and values, be designed to motivate and inspire partners to achieve and strive for such goals, and fairly reward partners who exhibit the "right behaviours".

Whatever model the owners of a firm choose to apply, it should be discussed openly among all potential participants before it is introduced (or changed) because it is critical that participants not only fully understand, but have ownership and "buy in" of the very model that allocates their financial entitlements.

It goes without saying that any model should also encourage partners to make the pie bigger.

Regrettably in some firms the compensation model achieves the very opposite. Unfortunately, many partner compensation models are totally demotivational and uninspirational for partners. The firm's vision, goals, strategies and values are not even mentioned in some compensation models and, as such, how could the leaders of the firm possibly hope to encourage behaviours the firm says it wants to encourage?

Partners are not silly - they will exhibit those behaviours they believe will be rewarded financially.

In other firms I have found partner compensation models to have been either drafted and introduced solely "by management" or "purchased" off the shelf from a third party or "cut and pasted" from another firm's model. In such cases the model is practically a fait accompli by the time the partners get to see it and they not only have little if any input but the model and its criteria have little relevance to the firm.

With no ownership by the participants it is no wonder (especially if partner(s) are subsequently aggrieved by a decision) that this results in little or no trust in the process or in those required to make decisions - and a complete detachment by the participants from the model.

Many instances of compensation models I find are - in true lawyer drafting style - well meaning in an effort to capture "everything", but just so over-designed, over-complicated, inflexible and formulaic, and financially focussed on the top line, that they require enormous man hours just to prepare and read all the material, let alone the time to make and appropriately communicate any decision.

Furthermore, being the good lawyers that we are, most models contain an appeals process (lest there be breach of natural justice et al) which can further delay final determinations for several weeks or months even.

In short, for many firms the time, effort, cost, angst and emotion put into their compensation models has such a negative impact on the firm that it would be far better for the partners to put such energies in several other things.

What then is the perfect compensation model?

Answer: There isn't one and never will be. Each firm should adopt a model that best suits its culture, strategies, goals and aspirations at a particular time in the firm's evolution. What works well in one firm may be a disaster in another. Similarly, the model or the criteria for the model that worked two or three years ago may not work now.

Based on what I have experienced, however, I can suggest that the better compensation models appear to have the following traits:

They have guidelines (and they are guidelines only - not hard and fast rules) and criteria that are simple, easy and quick to understand and administer;

They have a "balanced scorecard" approach and, when looking at financial performance, do NOT look at revenue so much as profitability and financial hygiene;

They are less formulaic and rigid and involve a substantial degree of subjectivity and judgement on the part of those making the decisions;

They contain few or no surprises because the performance management of the firm is so regular and aligned that every participant pretty much knows how he or she is progressing throughout the year - not just at remuneration time;

- They are designed to encourage and reward the behaviours the firm is wanting to encourage;

Communication both prior to and subsequent to any decision between the decision-maker(s) and the participant is honest, open and done face to face (ie, not by memo or email).

Of course, if all this is too hard to implement and administer you might consider reverting to the new "old" model - whereby all the firm's owners are equal. They are treated as equals and rewarded financially as equals on the basis that each brings to the firm different but important and valuable skills.

If you are going to treat and reward all partners as equals then ensure they all believe in the firm's vision and aspirations (including financial aspirations), that they all play their required - albeit different - roles in achieving this and that they act and behave in accordance with the firm's agreed values.

It then goes without saying that a partner who does not adhere to all this, rather than facing reduced financial reward, should perhaps no longer be a partner.

Hmmm? Now that's a tough call. Most firms find it easier to pay them less!

John Chisholm is a consultant and the former chief executive of Middletons

Like this story? Read more:

QLS condemns actions of disgraced lawyer as ‘stain on the profession’

NSW proposes big justice reforms to target risk of reoffending

The legal budget breakdown 2017

Carving up the partnership pie (1)
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