Measuring performance

It takes a fine balance.

By Carol Neshevich
Published in the December 2011 issue of National Magazine

So your firm has decided it needs a new partner compensation system, and you’ve sat down and defined the firm’s core values and strategic goals. What’s the next step?

Determining exactly which behaviours you want to reward, and figuring out how to measure or evaluate them. According to U.K.-based consultant Nick Jarrett-Kerr of Edge International, the combinations of performance metrics could be endless.

“I’ve done some work on this, and so far I’ve uncovered something like 300 possible metrics,” he says, noting that there is a lot of work being done on figuring out ways to make the so-called “softer” areas — such as mentoring and teambuilding — more measurable these days. Finding the correct balance of qualitative and quantitative elements can be tricky, and it’s helpful to make the more qualitative criteria at least somewhat measurable so partners don’t feel they’re being arbitrarily rewarded or punished for no clear reason. Here are a few performance metrics that many firms commonly use:

OBJECTIVE, MORE QUANTITATIVE ELEMENTS:

Billable hours: A straightforward and traditional measurement of how much time a partner is putting into client work.

Realization rate: The percentage of billable hours actually collected as revenue from the clients. This is a good measurement to use for firms having trouble collecting their full fees, or firms that need to improve efficiency.

Seniority: More seniority means more money. This is the key factor in lockstep systems.

Origination: The amount of new business brought into the firm by a partner.

Firm ownership: Offering compensatory reward for the risks involved in having some financial ownership of the firm.

Leverage: Levering down work that can be done by more junior people. If higher-paid partners are spending time on work that associates could be doing, the firm won’t be as efficient and profitable as possible.

MORE QUALITATIVE OR “SOFTER” ELEMENTS:

Associate training and mentorship: Rewarding those who train and mentor associates. This isespecially important for firms with many partners close to retirement.

Presenting a good public image: Doing charity work, attending high-profile events, sitting on industry boards can promote the firm’s image in the public eye and can attract new business.

Professional expertise: A lawyer who is a known specialist or go-to person in an area of law may bring in more work for the firm.

Management tasks: An effectively managed firm runs more smoothly. If partners are not being compensated for firm management tasks, nobody will put effort into these areas.

Client relationship management: How well a partner takes care of and treats clients. This helps with the firm’s reputation, which in turn helps bring in business.

Marketing: Actively promoting the firm in an attempt to drum up more work.

Team development: Working together and leading teams, rather than competing against fellow partners.

Recruiting: Making specific efforts to recruit talented young associates to help strengthen the firm’s future.

Toward a harmonized compensation model? Traditionally, the U.K., Europe and Australia have favoured the lockstep system of compensation, while Canada and the U.S. have used more performance- related models. In a 2009 global survey by consultants Nick Jarrett-Kerr and Ed Wesemann, both currently with Edge Inter national, research showed approximately 70 per cent of U.S. and Canadian firms based their compensation on what the consultants called “subjective criteria,” which they defined as the overall contribution of the partner being taken into consideration to determine compensation (incorporating both quantitative and qualitative performance). Meanwhile, in the U.K., Europe and Australia, between 50 and 70 per cent of firms base partner compensation on a predetermined, seniority-driven lockstep schedule. That said, Jarrett-Kerr notes that many firms in those traditional lockstep countries have been steadily introducing more subjective elements into their systems to create a “combination” system, in which the seniority-based pay scales are still in place, but with new measures incorporated to also reward partner efforts and behaviours. (See graph) Indeed, among European firms there has been a steady decline of strictly lockstep systems, gradually being replaced by either completely merit-based pay systems or a combination of lockstep with pay-for-performance. So it seems that in an era when global mergers are becoming increasingly common, law firms around the world are coming closer to sharing similar partner compensation systems. “There has been much more of a harmonization of compensation methodologies throughout the world over the last few years,” says the U.K.-based Jarrett-Kerr.