By Dr. John W. Olmstead
Our firm is often asked to help law firms evaluate, design, and overhaul partner compensation systems. Partners frequently advise us in confidential interviews that they are more dissatisfied with the method used to determine compensation than with the amount of compensation itself. How much and how partners are paid are probably the two most challenging management issues that law firms face. Many law firms are struggling with compensation systems that no longer meet the needs of the firm and the individual partners. Failure to explore alternatives to failing systems often result in partner dissatisfaction leading to partner defections and disintegration of the firm.
In many law firms compensation systems have been counter-cultural and failed to align compensation systems with business strategies. As more law firms move toward teams many are incorporating new ways to compensate partners in order to develop a more motivated and productive workforce. Team goals are being linked to business plans and compensation is linked to achieving team goals. Such systems reinforce a culture that significantly advances the firm’s strategic goals.
People tend to behave the way they’re measured and paid.
What gets measured and rewarded – is what gets done.
However, be advised that compensation does not drive behavior – it maintains status quo. Motivation requires leadership which can have a greater impact upon a firm than anything else.
Law firms don’t have to look far to find evidence of failure. Here are a few examples:
Firms experiencing these symptoms should consider evaluating and systematically redesigning their compensation system.
Objectives of a well designed system include:
Firms must ask themselves what kind of firm they want to be – team based or lone ranger (group of space sharers or partnership of individual firms) Eat-what-you-kill systems might be appropriate for lone ranger firms. However, such systems are not appropriate for law firms wanting to build and create a team-based practice since such systems typically reinforce “lone ranger” behavior resulting in a “me first vs. firm first” orientation.
Compensation systems should do more than simply allocate the pie – they should reinforce the behaviors and efforts that the firm seeks from its attorneys. Many firms are discovering that desired behaviors and results must go beyond short term fee production and must include contributions in areas such as marketing, mentoring, firm management, etc. to ensure the long term viability of the firm.
First the firm must design a system that is perceived as fair by partners in the firm. To determine if a system is fair, ask the following questions:
The system should be simple and understood by all.
The next step is to determine the criteria or the behaviors that the firm desires to reinforce.
Typically the following unranked compensation criteria is used as a general framework:
After compensation criteria has been determined a plan must be adopted, approved, and implemented.
Plan types include:
Subjective or combination plans are most appropriate for firms desiring to build and reinforce a team-based practice. They focus on the long as well as the short term and all contributions (compensation criteria) to the firm. They also require more work from firm management. While total formula plans are increasingly falling in disfavor they can be appropriate in lone ranger firms that only want to eat-what-they-kill –nothing more.
Avoid the temptation of making dramatic changes to an existing plan too quickly. Don’t blame other management problems on compensation and attempt to solve them by overhauling your system.
Change your system gradually. Consider bonus pools and other adjustments initially and gradually deploy other plan changes. Go slow It can take 3-4 years to completely change a compensation plan.
John W. Olmstead, Jr., MBA, Ph.D., CMC, is a Certified Management Consultant and the resident of Olmstead & Associates, Legal Management Consultants, based in St. Louis, Missouri. The firm provides practice management, marketing, and technology consulting services to law and other professional service firms to help change and reinvent their practices. The firm helps law firms implement client service improvement programs consisting of client satisfaction surveys, program development, and training and coaching programs. Their coaching program provides attorneys and staff with one-on-one coaching to help them get “unstuck” and move forward, reinventing both themselves and their law practice.
Founded in 1984, Olmstead & Associates serves clients across the United States ranging in size from 100 professionals to firms with solo practitioners. Dr. Olmstead is the Editor-in-Chief of The Lawyers Competitive Edge: The Journal of Law Office Economics and Management,” published by West Group. He also serves as a member of the Legal Marketing Association (LMA) Research Committee. Dr. Olmstead may be contacted via email at firstname.lastname@example.org. Additional articles and information is available at the firm’s web site: www.olmsteadassoc.com
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