May 1st, 2009 by Jim Cotterman
Leadership compensation is a topic we are getting questioned about. We thought a few comments might help get the discussions moving in the right direction.
1. If a firm wants good leaders (defined for now as managing partners, practice chairs and office managing partners), it will not create them through compensation incentives. It takes a talent, time and training to become an effective leader. Compensation’s job is to appropriately recognize and reward their contributions.
2. How to approach the compensation piece depends on the role. The full-time world-wide managing partner role is vastly different from the 1/3 time office managing partner. The scope and scale of the role must be considered. Some roles can be effectively rewarded within the existing partner compensation scheme, others may require a specially conceived program. And let’s not forget about life after leadership. Law firm leaders used to be older when they entered the position and could easily retire afterwards. Today leaders are younger and have many years before retirement when they move out of the role. Some consideration to transition in role and compensation is worth discussing when setting up the program.
3. Compensation programs should recognize both efforts and results. Too many programs today only consider one or the other. Historically the focus was on effort, measured in hours required or by a time budget allotted usually creating some sort of fictitious fee credit for compensation purposes. Other law firms defaulted to a simple stipend based on perceptions of effort required. Not satisfied with how this worked, firms embarked on a mission to pay for results only. The key to a results-based system is to understand what the objectives are and how they will be measured. Unfortunately, results don’t often fit nicely within the 12 month period that compensation programs measure. Many initiatives require extended time periods to bring about results and that can complicate the recognition and reward objectives of compensation.
4. A final consideration is whether and when to reward failure. The best businesses take risks — innovation and growth, responses to rapid market changes and the ability to discern longer term shifts all involve risks. P&G’s chairman (see post 4/8) stated “You learn more from failure than you do from success, but the key is fail early, fail cheaply, and don’t make the same mistake twice.” If law firms want to implement strategic objectives in a competitive and changing market; it will want to encourage smart strategic risk-taking and consider rewarding failure.