A fairer way to distribute profits

The way that you remunerate people in the workplace has a huge influence over their motivation and behaviour, both positive and negative. There is no better place to observe this dynamic than among the equity partners in a large law firm.

Lockstep

Historically, such partnerships operated on a lockstep remuneration system. New partners were admitted at the bottom of the equity and over the years they moved up the equity ladder in preordained steps dependent on the length of time served as a partner. Within a certain period, usually less than 10 years, a partner would reach a ‘plateau’ and would be at the top of the earning scale.

At each step of the remuneration system, partners would qualify for points with the plateau partners having the most points. At the end of the financial year, the amount of profit to be distributed to partners would be calculated and allocated pro rata to partners based on their points.

Such a system, where remuneration is dependent on seniority, only works if everyone pulls their weight and shares in the tasks expected from a partner which include winning work, completing this work, and managing the practice and its resources. Senior partners are expected to nurture the junior partners by showing them the ropes, facilitating useful contacts, and handing on client relationships. In a truly collegiate partnership where this happened, lockstep proved to be an effective remuneration system.

However, in those firms where senior partners were tempted to coast towards retirement and ease their foot off the gas leaving the junior partners to carry most of the burden, friction and resentment quickly built up among the less well-paid lower ranks. Also, as some firms, particularly the US entrants to the UK market, were using merit-based or ‘eat what you kill’ remuneration systems, younger star-performing partners were tempted to pastures new where their efforts would be better rewarded.

Eat what you kill

Under an ‘eat what you kill’ remuneration system, a partner is remunerated in line with their billings. It usually results in independent, maverick and egocentric behaviour among partners at the expense of a more collegiate culture.

Clients suffer as it does little to encourage a whole-firm approach which focuses on all a client’s needs. There is no incentive for one partner to introduce a colleague from another practice area when they receive no benefit from doing so. Practice management, including junior lawyer training, also suffers as there is no direct reward for this either.

Hybrid systems

Over the years, firms have evolved hybrid remuneration systems for their partners which combine elements of merit and lockstep-based systems, and everything in between. These systems are often overly complex and always lead to accusations of unfairness among those partners who believe the remuneration system disadvantages them.

It is still the case, that remuneration systems can be found where a partner gets credit for all the billings from a client just because they originated the client, often many years in the past. I have even heard of partners receiving this credit into their retirement. Under this system there is no incentive for other partners to develop contacts and work from the client because they will receive no credit for the billings which flow from this work. These partners then go off and try to generate new clients, a far harder task than developing work from the existing clients of the firm.

A fairer, client-centric remuneration system

Most law firms’ partner remuneration systems have evolved piece-meal over the years. Many are not fit for purpose as they are not fair, do not engender the behaviours crucial to the long term financial health of the firm, do not encourage client development, and lead to frustration among lawyers looking to get into the partnership or, if already there, move up the equity to become senior partners.

I believe that many law firms would benefit greatly from a root-and-branch review of their partner remuneration system. Ideally, the new system should focus on four areas of partner responsibility, namely:

  • Client relationship management;
  • Matter management;
  • Personal billings; and
  • Practice management.
Client relationship management

A partner should be rewarded for his/her efforts to develop one of the firm’s key clients. Having identified the firm’s key clients, partners are formally assigned client relationship partner (CRP) roles, objectives are set, and client service plans are formulated and implemented. Remuneration points are allocated to CRPs dependent on the importance of the client, say, based on total billings at the end of the financial year. To avoid an overly complex system, key clients are allocated to points bands.

It is in the CRP’s interest to develop the client, to increase billings and move the client up the points bands, and so increase their remuneration. The system must recognise that a failure to develop the client as planned or the identification of a more suitable CRP can result in a change of CRP.

Matter management

The remuneration system must recognise the contribution that a partner makes in taking the lead on a deal, project or case undertaken for a key client. Matter partners are allocated points based on, say, the size of the instruction. Again, points can be banded to reduce complexity.

This encourages partners to work on clients where they are not the CRP because they get credit for their work, and the CRP benefits because the overall billings from the client increase, for which they are rewarded as they are allocated more points.

Personal billings

The final element of the remuneration system which is based on work undertaken are the points allocated to a partner for their personal billings. Again, to avoid complexity, points can be allocated for hours billed based on bands.

So, the reward system recognises that partners operate at different levels of responsibility with some predominantly managing client relationships and transactions whilst others, especially the junior ones, are mainly involved in doing the work.

Practice management

The final element of the remuneration system recognises the important role partners play in managing the firm and its resources and developing talent. Again, a banded system of points can be devised which reflects the different roles and contributions made by partners in this area. For example, a managing partner will have little if any CRP responsibilities but his/her points allocation for managing the firm/a country/an office will be high to reflect the level of responsibility.

At the end of the year, all the allocated points are added up and the distributable profits shared among the equity partners based on their points tally.

Making the change

The way that the various points bands are calculated and the weightings given to the different activities across the four broad partner responsibility areas will depend very much on the characteristics of the firm. Various permutations can be modelled until a system is arrived at which is fair and equitable to all.

In most firms, it is likely to be the case that any new system based on the above will disadvantage the senior partners. It is no coincidence that those with the greatest power in firms tend to design remuneration systems from which they have most to gain. It therefore takes a lot of courage to push through such a change, but in the long run it will greatly benefit the firm if all partners feel that the new system is fairer. Clients will also be happier if the reward system for partners actively encourages them to work together for the benefit of clients.

Kevin Wheeler is a business consultant and coach who has worked in the legal sector for 23 years. If you would like to discuss how your firm’s partner remuneration system can be changed for the better, please contact him at kevin.wheeler@wheelerassociates.co.uk

Filed Under: Practice of Law

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