Many law firms use "black box" systems for partner compensation because they want to avoid internal disputes among partners.
A recently-filed case against Jones Day points out how these systems often can make things worse.
The American Bar Association reported on 20 June 2018 that a former partner of Jones Day has sued that firm for gender discrimination, citing the firm's "black box" partner compensation system as a factor in "hiding" discrimination against women. Quoting from the article:
The suit alleges that Jones Day undervalues female lawyers as a result of a “black box” compensation system in which a small group of influential partners sets associate compensation without sufficient controls, transparency and oversight. Partner pay is even more subjective because it is set by managing partner Steve Brogan, with input from small groups of partners, the suit says.
The suit claims there was “an enforced code of silence” regarding associate pay and productivity, and a requirement that partners maintain confidentiality about compensation. As a result, female lawyers were unable to discover and try to equalize their pay. Over the past few months, Jones Day changed its guidelines so that associates are discouraged—but not forbidden—to discuss pay, according to the suit.
What is "black box" compensation?
In a "black box" compensation system, a partner's compensation is determined in secret by a small group of partners or, in some cases, by a managing partner alone. A partner in such a firm usually has an opportunity to provide input, but not always. In most such systems, the decisions about individual compensation are made without published standards, guidelines, or formulas. Partners are not officially notified about what other partners are paid; and, in many instances, a partner does not receive any explanation for his or her compensation except by reference to usually vague concepts such as "teamwork" or "hard work."
Advocates of "black box" systems frequently defend them as promoting trust within the partnership. In fact, our firm's observations of "black box" systems in law firms suggest that the opposite result is more frequent. Genuine trust in a business organization, as well as in personal life, requires a communication of information. This is not to say that a "black box" system undermines trust by itself, but it usually is big part in a constellation of unproductive or counterproductive management practices and toxic cultural values in a law firm partnership that, taken together, inevitably weaken the efforts of the partners, individually and collectively, to achieve their full potential.
looking into the "black box"
Over the past 20 years during which I have been advising law firms about partner compensation structures, I have observe a very high correlation between the use of a "black box" to set partner compensation and six characteristics of the firm's professional culture and management style. In rough order of frequency, they are:
- The partners have never defined the individual performance expectations that they have of each other, other than in terms of general platitudes such as "collegiality" and "trust."
- The partners, as a group, are very reluctant -- almost to the point of fear -- to discuss individual performance issues, and they resist strongly any suggestion that they should do so.
- The firm's traditional management and decision-making styles are authoritarian and autocratic, with little tolerance for criticism or debate.
- Cross-marketing and inter-departmental collaboration are more the result of opportunistic improvisation than systematic planning.
- There is significant, although usually unspoken, distrust of management decisions and the motives behind them.
- Partners are highly susceptible to lateral recruiting by other law firms or by offers to move to an in-house counsel position.
preserving the worst of a law firm
Partners who favor "black box" compensation frequently tell me that it preserves "the best of our law firm's culture." They are mistaken. The opposite is usually true.
As the case against Jones Day points out, because it is a largely secret process, the "black box" is more likely -- intentionally or unconsciously -- to hide, protect, and even foster the worst aspects of a law firm culture, such as gender bias, intolerance against intellectual diversity, complacency, and stubborn resistance to innovation. Indeed, the very presence of a "black box" in a compensation system, coupled with an inability to offer a factually-based rationale for its decisions, can be damning evidence in support of the claims by partners and former partners whom the "black box" has silently and unjustly harmed.
This is not to say that a "black box" system can never work well in a law firm (although in more than 20 years we have never recommended such a structure to one of our clients). Although a simple concept, "black box" compensation can pull a law firm into a "black hole" of tangled risks, challenges, and counterproductive consequences -- difficult to avoid and even harder from which to escape.
Is your firm's partner compensation system a strategic asset or liability? Walker Clark can help you find out. Click here to learn more about our Partner Compensation Review.