Money makes the firm go ‘round

Finding the right partner compensation system can be the key to helping a law firm reach its strategic objectives.

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

When it comes to a law firm’s partner compensation system, there’s no “one-size-fitsall” solution. Each firm’s compensation model should reflect its core values, culture and strategies, and those will certainly differ depending on the individual firm. But overall, Canadian law firms are increasingly turning to less quantifiable elements such as mentoring, teamwork and marketing when determining an appropriate partner compensation model.

“It seems to be a combination of the subjective and objective that most firms want these days,” says Michael Anderson, consultant with Richmond, B.C.-based Innovative Consulting Ltd. “They want some flexibility to reward — or in some cases punish — partners for effort. They don’t want to just live by the numbers.” Going solely by the numbers in an eat-what-you-kill system doesn’t offer incentive for partners to do any of that important but non-billable work such as sitting on committees, mentoring juniors or promoting the firm’s image to the outside world.

“In a lot of firms, if you work really hard and put in 2,000 billable hours, you will make more money than somebody who bills 1,400 hours but also supervises and manages 2,000 hours of associate time,” says Karen MacKay, founder of Phoenix Legal, Inc., a Toronto-based legal consultant group.

At the same time, a lockstep system — in which partners get an ever-increasing share of the profits with prescribed annual increases based on seniority, without reward for individual effort — often won’t provide the personal incentives that drive partners to work hard.

Same goes for an equal partnership system, in which all partners get an equal share of the profits (or equal within groups). Competitiveness can indeed be an important motivator: as Innovative Consulting’s Anderson jokes, “Most partners aren’t really that concerned about what they make, in terms of a dollar amount; they’re just concerned about getting a dollar more than the guy in the next office.”

So for these reasons, a combination objective-subjective partner compensation system can be a good solution for many Canadian firms. There have been a number of studies indicating that using at least some subjective criteria in partner compensation systems correlates with higher overall profitability, stresses Colin Cameron, president of Vancouver-based Profits for Partners, Manage - ment Consulting Inc.

Exactly which criteria to reward, and how heavily, depends on the firm’s goals. For example, if partners aren’t generating enough new clientele, the partner compensation model could place a heavy weighting on marketing and attracting new business. Or if a number of partners are close to retirement, it might be wise to heavily reward mentoring associates in order to ensure a strong future for the firm.

“Partner compensation is such an integral part of a firm and its strategic plan,” says Cameron. “If you don’t have the right compensation system to fit your strategic plan, you simply will not achieve that strategic plan.”