Archive for the ‘Partner compensation’ Category

Paying Partners Under AFAs

February 25th, 2010 by Jim Cotterman

Partner compensation decisions are largely driven by a lawyer’s ability to generate work for him/herself and others.  And although personal productivity remains a key factor, it is not sufficient at the partner level.  Other contributions become more important as law firms look for competitive advantage in the market.  Accordingly public relations/marketing, professional development, client relationship management, business and fiscal management, collaboration and team leadership, and cultural fit carry more weight in the decision to promote and pay partners.  More recently firms have begun to evaluate the profitability of the work done and incorporate that knowledge into their pay programs.

Now, with the increasing demand from clients for non-hourly based pricing, law firms must again expand the performance benchmarks in their compensation program to include new types of contributions.  Under alternative fee arrangements in which bundles of work are priced at fixed fees, collaboration and service cost reductions become key elements to success.   And partners want to know how this new way of serving clients will factor into the pay program.  Here is where this all gets interesting.

Compensation decision makers will need new metrics to evaluate factors like labor utilization, service/process efficiency, matter/portfolio/client profitability, collaborative skills, ability to contribute as a team and team leadership.  Because the service delivery model is still labor intensive, it is unlikely that the old metrics will be abandoned.  However, they will need to give some ground — influence less of the pay decision — so that the new metrics influence pay decisions at a level commensurate with the importance the firm places on these initiatives. 

There will be challenges.  Traditional performance metrics are embedded in lawyers’ psyches - and they will not be given up easily.  The lateral market for equity partners - currently driven by client portability (origination) will need to be re-thought if ‘client ownership’ is weakened by collaborative teaming.  Independently minded practitioners will resist change.  Then there is the matter of the new metrics.  It will take some work to get these down right so that unintended consequences are avoided.   

My partner Tom Clay and I will discuss this topic in depth at our May 11th seminar on Partner Compensation in New York City.

Open or Closed Compensation Programs

August 31st, 2009 by Jim Cotterman

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.

Accounting Firms Cope with Recession Pressures

August 14th, 2009 by Jim Cotterman

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?’” 

Responsibility

July 16th, 2009 by Jim Cotterman

Interesting post on the Legal Watercooler yesterday that demonstrates the tension between making sharp business decisions and doing right by people.  We see this play out in a variety of ways from firm to firm.

Some Thoughts on Origination

July 10th, 2009 by Jim Cotterman

Measuring the source of new work for purposes of remuneration decisions continues to challenge law firms.  Clearly when a partner or team of partners bring a new client to the firm there is measurable origination.  And there is at least implied agreement that origination should be shared when multiple individuals hold meaningful relationships within a client organization and those relationships draw work to the firm.  I say ‘implied’ because there is very little sharing taking place — it appears that fewer then one-quarter of the clients in law firms are shared for origination purposes; with a sizable portion of firms not sharing at all (Compensation Systems in Private Law Firms, 2009).  Now one might say that only the largest clients at large law firms may present realistic opportunities for multiple relationships.  And we can see from surveys, larger firms, which have correspondingly larger clients, exhibit a greater degree of sharing.  Still this issue of getting lawyers to sell and service clients collectively challenges leadership.  It is a critical issue in succession programs, as well as for remuneration.  Even if clients are not large enough to support multiple relationship partners, some thought should be given to creating a team that will ensure relationship continuity over time. 

When tracked, small law firms are least likely to reallocate origination.  Large law firms, while more likely to reallocate origination credits, engage in individual partner negotiation as the primary method to determine when and how origination will be adjusted.  Large firms are also more likely to focus on the current client relationships when discussing origination reallocation.  Many firms do not track origination because of the fear that a corrosive internal competition will result.  This does not mean that those firms do not consider this contribution when making compensation decisions.  Origination reigns supreme as the most critical partner compensation factor.  This metric, more then any other, determines whether a lawyer becomes – and remains - an equity owner in a law firm.  And it may well be a determining factor in when and how lawyers exit the firm in their senior years.  So not tracking origination says more about culture and operating philosophy then it does about its importance.  

Unfortunately, tracking origination is very much like trying to maintain a mailing list.  You work hard to keep it updated only to find it is 30% wrong whenever you go to use it.  Such it is with the tracking methods for origination.  Going to matter level tracking aids is a more current and hopefully realistic tracking method.  If done well it can provide real-time assessments specific to each matter and should reflect evolving relationships over time.  The best origination records still require compensation decision makers to make inquiries of practice leaders and other partners so that informed adjustments can be made.  

Getting this wrong can cause all kinds of havoc.  Example, Partner Paula is not given recognition for origination of a $1.5 million portfolio of a $5 million client where she has worked hard to build a trusted advisor relationship with the business unit CEO.  She leaves her firm and takes $1 million of work with her.  Clearly she was off in her estimate of $1.5 million, but the firm was also off in not recognizing the possibility of the $1 million.  The new firm recognizes the $1 million as Paula’s origination.  This scenario plays out in firm after firm, year after year.  This is why leaders in many firms are constantly reinforcing organization and team values.  It is also why the compensation decision makers work hard to get behind the numbers to understand, as well as anyone can, how work gets to the firm.  

Alternative Fee Arrangements and Compensation

May 26th, 2009 by Jim Cotterman

Firms wrestling with alternative fee arrangements (AFAs) often raise the question about how these arrangements will affect compensation decisions.  They raise concerns about how to recognize performance if hours are no longer indicative of contribution.  But hours are not the primary consideration in most owner compensation programs in US law firms.  We know that fees collected as working and originating lawyer are the top two performance metrics for compensation purposes.  This is not likely to change in the short term. 

But in the context of AFAs, the affect of the initiative on profitability is as key a consideration as winning the engagement and generating the revenue.  Determining an effective means to assess profitability is critical.

AFAs are likely to involve risk, innovation and possibly some trial and error to ultimately bring a successful approach to market.  All three (risk, innovation and trial/error) are appropriate to consider in compensation decisions along with the profits and fees ultimately created. 

Thoughts on Leadership Compensation

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.

Innovation, Risk Taking and Compensation

April 8th, 2009 by Jim Cotterman

Just read an article in Business Week on innovation (See How P&G Plans To Clean Up).  The article and accompanying interview video clip are both worthwhile.  The video clip particularly offers insight into how P&G defines innovation, links it to strategy and integrates it with culture.  Challenges that law firms face as well.  The key message from A. G. Lafley, CEO at P&G where innovation is a major priority, “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.”

Innovation is not easy.  If you want people to innovate, they must take risks.  If they take risks, they must accept failure as a necessary cost to achieve significant breakthroughs.  This means that law firms seeking risk taking and innovation must be willing to reward failure.  The compensation piece for this is to reward those who take smart strategic risks and follow Lafley’s rule.

Another thought from Lafley that merits mention is that innovation is achieved only when creativity and invention are connected to the customer in a way that meaningfully changes their lives.  It places the customer in the center.  Another important element to successfully innovate.

Dealing with Recession

March 24th, 2009 by Jim Cotterman

Good compensation decisions are tough enough to make in good times.  Making them in times of severe economic challenges is another matter entirely.  Many firms are torn by competing interests of culture/values as opposed to a strict adherence to meritocracy.  There appears to be far more willingness to be generous with an under-productive individual or group or office when the rest of the firm is doing very well.  But, when the pattern reverses and it is a few who are doing well while many others struggle, something different emerges.  This is the reality that we find law firms in as this severe recession unfolds.

Aggravating these problems is an overlay of continued dysfunctional (or at least unaccommodating) credit markets brought about by the banking crisis.  Banks seek personal guarantees, stricter default provisions covering more metrics, quicker repayment terms, higher interest rates, and greater coverage (i.e. lower borrowing authority); if they are willing to lend at all.  And this is at a time when partners are hard pressed to inject capital due to the depressed value of their own assets.  Thus, cash to sustain and buffer the business until revenues return is limited.  Firms with strong balance sheets are thankful for the additional time such resources provide.  But that time is limited as even the strongest firms are only a few months from liquidation.

To manage the effects of the recession law firms have taken a multitude of steps to combat these forces including terminations, furloughs, reduced time commitments, pay reductions, and delayed/deferred start dates.  Other overhead can also be examined, but to meaningfully affect law firm finances one must attack payroll costs and include partners in the equation.

Assisting Lawyers In These Difficult Times

March 13th, 2009 by Jim Cotterman

Many law firms are reducing salaries and laying off associates and partners as they struggle with the economic recession.  Many of these laid-off lawyers may benefit from people experienced in dealing with traumatic events such as these.  We encourage them to refer those lawyers to the lawyer assistance program in their state or to the ABA for a referral to their state lawyer assistance program.  The majority of the programs provide free services (98%) and are handling crisis counseling, post traumatic stress, career transition, stress, depression, suicide prevention, anger management as well as addictions (and relapses).  The toll free number for referrals is 1-866-LAW-LAPS (or 312-988-5713 direct) or they can access their lawyer assistance programs through CoLAP’s website

This referral is a free service provided by the ABA in order to help all lawyers with health and well-being issues, especially those lawyers who may not have the tools to deal with sudden loss of employment, insurance, fear of how will I pay the bills, law school loans, feed my family, etc.  There are real risks to lives when people are placed in such a sudden crisis with this type of trauma.  Many LAPs are setting up support meetings for those in this type of situation and they are facilitated by an expert.  It is lawyers-helping lawyers.  For more information, contact:

Donna L. Spilis, Staff Director
ABA Commission on Lawyer Assistance Programs
321 N. Clark Street, 19th Floor
Chicago, IL 60654-7598
Ph: 312-988-5359 or 1-800-238-2667 Ext. 5359
Fax: 312-988-5785
spilisd@staff.abanet.org