As I advise law firms on their partner compensation systems, I occasionally encounter a partnership that uses a “black box” system to make compensation decisions.
In such a system:
- A partner’s compensation is determined in secret by a managing partner or compensation committee.
- A partner frequently has no input, other than what is derived from the firm’s financial records.
- Decisions are not explained.
- There is no appeal.
- Distributions to partners are aggregated in financial reports, so that no partner knows what other partners are paid.
I dislike the “black box.” Although some partners claim that it prevents near civil war in their partnerships at the end of the year, it is also fair, I believe, to characterize the “black box” as an abdication of partner responsibility and as the product of short-sighted thinking.
Even if a “black box” appears to solve one problem — the risk of overly disruptive compensation decisions — it can make other bad problems even worse. It inhibits the partners’ ability to resolve other disagreements.
Ironically, even though some partners believe that it “builds trust,” the system actually retards the development of genuine trust, which is so necessary for a partnership to function as a high-performance team. One of the basic requirements for trust is an exchange of information, not secrecy.
I have also observed a significant correlation between “black box” compensation systems and poor retention of young partners, especially those with approximately four to eight years of seniority.
If you and your partners feel that you must have a “black box” system to keep your firm from breaking apart, then be sure that there is actually something inside it. For example:
- What information is used to decide each partner’s compensation?
- What other general criteria are used?
- What guidelines exist to ensure that partner compensation is fair, even if it is not equal?
- How, and in how much detail, is the rationale for a compensation decision communicated to the partner affected by it?
Even if you feel compelled to make compensation decisions in secret, these simple modifications will mitigate some of the worst effects.