In a previous posting in this blog, we pointed out how an "eat what you kill" system of partner compensation can introduce toxic elements into a law firm, which frequently counteract any motivating effect on lawyer performance.
This short article outlines the features of an alternative to "eat what you kill" compensation in law firms. It works well in any size law firm, but is especially suited to small and midsize firms.
The principal defect in “eat what you kill” compensation is that it devalues, or ignores altogether, the actions by which partners support the long-term business performance of a law firm. Fees are convenient measurements of the level of business activity, but they are only short-term results. In some cases, reliance only on fee production can distort an evaluation of a partner’s performance. It is not unusual in some firms for the biggest fee producers also to be among the least profitable partners.
Determining partner compensation entirely or primarily as a percentage of fees collected is not the most accurate, complete, or reliable to define, promote, evaluate, and reward individual partner performance. The trend among law firms that want a more comprehensive view of partner performance is to incorporate individual performance goals into the partner compensation system, with goal achievement producing a defined financial reward. With significant variations to fit each firm’s business model, strategic objectives, and partnership culture, the performance-driven lockstep can be a very effective structure that rewards lawyers fairly for the whole scope of their contributions to the firm. When used to manage associate compensation, it can also provide a clear, flexible structure for professional development and career advancement.
This structure works especially well with firms that already use a lockstep structure. In a traditional lockstep system, partners “move up” in the partnership, earning larger shares of the profits, principally by seniority. As a very simple example, each year a partner earns 10 profit points or shares, and his or her profit distribution is determined by the overall percentage of points or shares that he or she holds at the end of the fiscal year.
The most common form of a performance-driven lockstep introduces other factors that can result in the award of additional profit points. These might include, for example, extraordinary performance in areas such as fee production, origination of a major new client, or completing a major project, such as opening a new branch office. To carry forward the example from the previous paragraph, a partner might earn 10 points for seniority plus another 2 points for exceptional performance.
In a performance-driven modified lockstep, the principal driver of upward movement is performance, not seniority. Although seniority might still be a factor, significantly more points are awarded for performance, often as high as a 5-to-1 or 6-to-1 ratio. In such a system, a partner with superior performance moves up the lockstep, and receives a larger profit distribution, faster than does a partner who earns only points for seniority. In some performance-driven lockstep compensation systems, a partner’s upward movement is determined entirely by his or her performance points, with no points being awarded for completing another year as a partner. Other firms might cap the number of points that a partner may accrue for seniority during his or her career.
Some firms allow a partner to retain and accumulate all of his or her annual performance points from year to year. Other firms carry forward only a percentage of the performance points earned each year. Either method creates a new concept of “seniority,” which is determined primarily, if not exclusively by long-term performance, not longevity.
This system also works very well for associates and non-equity partners to determine the thresholds for eligibility for promotion. For example, when an associate achieves 300 points – however long or short a period of time that might take -- he or she becomes eligible for consideration for promotion to non-equity partner. Linking sustained achievement of performance goals, especially those relating to developing and demonstrating business and professional skills, will help assure that when a lawyer is considered for promotion, he or she will have the skills and successful professional experience necessary to meet his or her responsibilities in the next highest level. By linking upward movement in the professional structure of the firm to performance, and not just to longevity, lawyers who demonstrate superior performance can advance more quickly than their contemporaries. This opportunity can help a firm retain its most productive lawyers, both at the associate and non-equity partner levels.
This article is excerpted from my chapter "Table Manners: Rewarding Performance without 'Eat What You Kill'," in Partner Remuneration in Law Firms, (Globe Law and Business, 2016). For information about ordering this book, click here.
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