Is there any more contentious issue at law firms then compensation systems? At most of the firms I have worked with there is dissatisfaction with the current system but nobody wants to take on the challenge of developing something new.
In late 2005, I attended a seminar held by David Maister in Seattle. When he opened the floor up for questions a lawyer immediately brought up the issue of compensation systems and a long and fiery conversation ensued. The merits and drawbacks of performance-based compensation systems vs. lock-step systems were debated at length.
Maister advocates for a compensation system that emphasises a firm’s active management of performance. I recommend his blog post of April 3, 2006 for a valuable review of the two systems. Here’s an excerpt:
The disadvantage of pay-for-performance compensation systems is that they provide a wonderful excuse not to manage. If someone’s performance is down, instead of management seeing that there is an obligation to go help that person, they have a wonderful cop-out. They say, We cut his pay. We’ve done our job. The rest is up to him or her.
Contrast this with what happens in a system where everyone gets a relatively fixed salary or share of profits, which changes as you get more seniority, if you survive.
In such a system (often called a lockstep system because people move in lockstep up the pay scale), if someone underperforms, you have only two choices. You either (a) work with that person and help them improve to deserve the same income as their peers or (b) if you cannot restore them to full share, you have to ask them to leave. Notice that having lockstep without the guts to deal with performance issues is clearly a disaster! A fixed-share or fixed salary system FORCES YOU to manage, ie to be intolerant of underperformance.
In other words, by not paying for performance, you end up with higher performance by tackling performance issues. By paying for performance, you get less performance because the system allows you to accommodate underperformance.
I have always been a fan of lock-step compensation systems. I began my legal career with an international law firm based in London. When the firm opened their New York office one of the attractions they offered their lateral hires was lock-step partnership. At the time, the New York office Managing Partner conducted many interviews with the US legal press on the advantages of the lock-step system. The system gave the international firm a great deal of flexibility in deploying their lawyers strategically around the globe. The New York office Managing Partner was a top-class securities lawyer from London. Because of the lock-step system he was able to move from London to the New York office to support the expansion even though it meant his billings were significantly reduced for a number of years.
Now many years later in Vancouver, one of the complaints I hear from many partners is that firms do not adequately encourage nor support them in managing practice groups, nor in engaging in business development activities. When I have spoken with these partners about the problem I have learned that for some the issue is a lack of flexibility in the compensation system for billable hour targets when a fee earner is undertaking additional managerial responsibilities.
In Vancouver we have yet to see anything approaching a lock-step system. I did though recently learn that a local law firm has taken the bold step of implementing a blended form of compensation which rewards the performance of the team rather than the individual.
Over lunch in late December, Simon Taylor from Catalyst Consulting told me about some very interesting work he had been doing with a Vancouver mid-sized firm. Working with the Managing Partner, he has helped the firm design and implement a compensation system that rewards the work of the practice group. Individual partner’s compensation is tied to the performance of the practice groups they are involved in. One of the measures of performance is client satisfaction. The firm has implemented a client satisfaction survey. Lawyers are only compensated when they reach a level of client satisfaction of 94% or higher. The goal of the system is to reward teamwork in the practice group, and promote an emphasis on client service.
This compensation system is basically saying “we will reward you for achieving this set goal”. That works fine for the lawyers who naturally work in this manner. But for the others, how is the firm going to help them to learn the new behaviors required to succeed? Incentives alone are not enough. They don’t get around the essential work of managing the people and supporting their efforts to adapt to the new system.
What I wonder is, what is the firm doing to support the lawyers in effectively managing their practice groups? How is the firm helping the lawyers to deliver this outstanding service? How is the firm setting up these lawyers to succeed?
I spoke with Simon this morning and he will be adding a comment today that elaborates on the above. Thanks Simon!