As we approach Labor Day, law firm managing partners should re-evaluate the connection between compensation structure and firm culture. This is a good time to review financial data, identify patterns, and, if appropriate, negotiate a new compensation plan to implement for next year. Perhaps there’s not much cross-marketing going on at your firm. Perhaps partners are hoarding work and not pushing it down to associates. These behaviors are often a direct result of the incentives set up by the firm’s compensation model. The first step to updating your compensation plan should be to identify what you most want law firm partners to do.
At many firms, there is a lack of consensus about how much weight should be given to partners who have the client relationship but don’t do the legal work. Different firms answer this question in different ways. The extent to which partners are incentivized to bring in work that they don’t personally do, or which may be outside their competencies to do, plays a major role in determining a firm’s culture.
How information about compensation is shared and the level of flexibility in the compensation structure can also impact culture. Partners specifically need to address the following questions:
- How transparent do you want your compensation structure to be? To what extent is compensation information shared among partners? To junior lawyers?
- How discretionary will compensation be? Does the firm want to use a strict formula across the board? What will factor into that formula? And what will warrant deviations from it?
Too many managing partners rely on precedent and are slow to address their compensation systems, even when they clearly aren’t incentivizing the desired behaviors. As consultants, we have seen many law firm leaders hesitate to address compensation because they know it will be a divisive issue. There is no avoiding the reality that emotions are more likely to flare when discussing money, power, and status. But avoiding difficult discussions now is likely to force even more difficult decisions in the future. Compensation and its connection to culture are frequently the reasons a firm is not growing as quickly as its partners would like, and now is the moment to start changing that for next year.