It sometimes seems as if there is an almost infinite range of structures and options for partner compensation systems in law firms. Choosing among them can be a challenge for anyone.
The biggest challenge for most law firms, however, is actually making the change, once they have decided what it will be.
A law firm's ability to implement a new partner compensation system, or even a slightly revised one, depends on one question that the partners must confront honestly and transparently:
Do we have the capability and the will to implement these changes?
Even if your answer is yes, you should nonetheless expect that some of your partners understandably will be apprehensive about a possible negative impact, at least short-term, that a changed compensation system might have on them individually. This is the case in almost every law firm partnership that our firm has advised on compensation issues over the past 15 years.
There is a natural tendency to say, "I will make more money, so this is a great system." or "My pay will go down. This is a very bad idea."
To manage these concerns, any significant changes to your current partner compensation system should be implemented over a reasonable period of time, during which partners and your firm's management will have the opportunity to adjust priorities and practice management approaches to ensure success under the improved system, both as a professional services business and as individuals. This is especially important when shifting from a seniority-based or equity-based system, such as "lockstep," to one that has a performance component, or when changing the factors that determine performance-based pay.
There are a variety of techniques that can mitigate the fears and facilitate the transition, such as "save pay" or a contingency reserve, depending on the unique circumstances and culture of each partnership. We also usually advise our clients to phase in major changes to a partner compensation system over one or two fiscal years, depending on the extent and complexity of the changes.
What is the worth of a partner?
Transitions from an old compensation formula to a new system can raise difficult questions. Sometimes, while most partners easily make the transition, one or two partners might make significantly less money under the new system, even though their overall performance has remained the same. This sometimes can be a sign of a minor flaw in the new system, which affects only a few partners and can be easily adjusted.
Equally often it raises the uncomfortable question of whether the old system has been overpaying a partner in relationship to his or her true value to the firm.
When these issues arise, the most effective response is to use an individual business planning process and the framing of individual performance goals to take advantage of specific opportunities for a partner to change his or her priorities in order to succeed under the new system. For example, some partners might need to begin to distribute more work within practice groups and according to practice group business plans. Others might need to reorganize their personal work habits and priorities to allow more time for business development. Changes like these can take time; and the transitional period gives a partner time to adjust his or her performance priorities to meet the changed expectations.
See also our WorldView article "Is your partnership compensation system a strategic liability?" for a discussion of the strategic importance and implications of partner compensation in law firms.