I was recently asked about my views on open or closed partner compensation programs.  Here is my response.

 Law firms predominantly have open programs; about 80% to 85% are open; 3% to 5% semi-closed (either management compensation is disclosed or certain statistics reflecting the decisions are published, but not individual decisions) and the balance closed.  Traditional professional partnership values support an open program as consistent with partners entitled to see the books and records and their desire for a transparent partnership.  It also greatly aids the ability of partners to determine the degree to which they believe that the program is a fair meritocracy.  This is critical to ensure the overall success of a compensation program that is dependent upon it being widely accepted as a fair meritocracy.  Internal comparisons are the prime evidence in such an evaluation.  And as a practical matter, in most firms the decision makers change leadership roles over time so the closed nature of the program deteriorates over time.
 
Firms that embrace a closed program generally advocate the practice as a means to focus each partner solely on his/her performance and pay.  And accordingly reduce the intra-partner bickering and competition that can result in an open program.  A number of compensation committees in closed firms have indicated that it gives them more freedom to make the decisions they believe are in the best interests of the firm — a dangerous slope to be on when the judgment is limited to a select few. 
 
Others have stated that it makes it easier to bring laterals into the firm.  Our assessment is that firms have frequently overpaid laterals as an enticement to make the deal and then in many cases those same laterals did not quickly produce the business and benefits that were the stated basis of their compensation.  Admittedly it is not an easy task, even for the lateral, to really know how much of his/her practice is portable or how quickly it can or will transition to the new firm.  That scenario also indicates firms are likely paying more for lateral talent then they would pay their own partners.  That can breed resentment and disrupt a collegial/collaborative environment.
 
For a closed program to work the firm must have a very high degree of trust, especially for leadership.  It also must develop other means to ensure that the partners feel that the program is fair and a meritocracy.  The best closed programs have been firms with a strong benevolent founder who had unassailable credibility and who remained in control for many, many years.
 
Transitioning either way is a major change and will likely alter the firm’s culture and intra-partner dynamics.  Even if the decisions were well done in a closed program it will likely be unsettling when partners are first exposed to the reality.  We have found it difficult to close an open program without a major catalyst such as a merger of equals or some traumatic “life-changing” event.

While not as bad as the 4th quarter of 2008 and the 1st quarter of 2009, credit markets continue to be less friendly.  Credit limits are often lower as banks modify their ratios.  Loan covenants are more onerous and banks are more strictly enforcing them.  Those friendly waivers are harder and more expensive to obtain.

The latest trend appears to be line of credit facilities are commonly being written with variable rates tied to some benchmark rate plus a rate floor (”at no time will the rate be less than…….).

This article is a good summary of how the recession affected the accounting firms.  It may all sound a bit unsettling as I found myself easily substituting “law firm” for “accounting firm” and finding it spot on the money.

 A couple of quotes deserve special attention.  This first quote is about getting closer to your clients and getting work.  Gary Boomer said, “The clients out there need you more than ever.  You just need to go talk to them and ask them what’s keeping them up at night and listen.  Not go out on a sales call, but go out and find out what’s making them tick.  If you talk to a client and sit there and listen for a while, you can find a lot of new work.”  This is so perfectly stated, but often not as well executed.

 The second quote is more about the perils of not making tough decisions when they should be made.  Addressing the cutbacks that were made during the recession, Gary Shamis said, “If we had done what we needed to do when we should have done it, we would have released them into a better environment.  I think the recession was good.  It forced us to be more proactive and look at workflow.”  Unfortunately, this is a lesson that is taught during each economic downturn.

 I was also quite interested in the changing dynamic in partner compensation as described by Allan Koltin at the end of the article.  Allan said, “The “new school” train of thought instead asks, ‘Who did you recruit to the firm last year?’  ‘On the upward evaluation, how many identified you as the reason they are with the firm?’ and ‘How many current and future partners would identify you as their sponsor?’”