What is the Best Compensation System for Owners?
Compensation is one of the most interesting aspects in professional service firms. When I first started consulting with law firms, this is the area where I focused attention.
The three main factors in an objective system are the originator, manager, and producer of billable hours, otherwise known as the finder, minder, and grinder. Percentages are assigned to each factor, and they are used to determine the partner’s compensation percentage.
My biggest problem with an objective type system is it leads to short term decision making. Rather than look at the bigger picture of what is best for the firm, the attorney will consider what is best for their statistics, and work towards that goal. If you were short on billable hours, and you brought an engagement in that would produce some billable work for you, you would tend to do it, rather than refer it to someone within the firm who was possibly more qualified to perform the work. This does not best serve the client, or the firm. There are people who would do what was best in any circumstance, but I would argue it is human nature for most people to do what is in their best interest.
One of the most valuable things you can do is to develop associates to create leverage. Mentoring and training can help them grow and become profit centers for the firm. If there is no reward for doing this, it will probably not get the attention it deserves.
Leadership is a component to the success of any team endeavor. If you are not considering this as a compensation factor, you are probably not getting the type of leadership you need to be operating at an optimum level. Visionary leadership is even more subjective, how do you compensate someone who has ideas that lead to new business opportunities for the firm?
The lockstep method of compensation rewards people at a certain level usually by tenure. When I was in Chicago about five years ago David Maister, an expert on professional service firms, thought lockstep was the best compensation system. His theory was that this requires team members to work together to make the whole firm more profitable so everyone made more. I have always thought this might be true, but the problem with this is how to deal with underperformers. Maister would clean house, if you have heard him speak or read his books. He preaches high standards, and if someone is not meeting them, they politely get asked to leave. Most firms are more congenial than this.
A purely subjective system does not seem possible either. Most attorneys want a system that is stable and predictable, and the thought of a vague system would not work.
Compensation committees in larger firms can offer a blend of objective and subjective factors. Ultimately a system needs to blend a bit of both to be most successful. Firms will continue to use formulas and objective systems, once a compensation system ahs been adopted, it is difficult to change. Any change means there are winners and losers, because there is a fixed pot to work with, and the losers do not want to change.
So the question becomes, how has your compensation system shaped your firm?
