Déjà vu All Over Again

Well, we’re about to do it again.  Virtually every law firm in the world is preparing for a compensation review to determine the distribution of next year’s profits.  Thousands of non-billable hours will be spent by committee members pouring over reams of computer reports, conducting countless partner interviews and debating the value of insignificant differences in performance.

Most firms will approach compensation from a clean slate – a zero base — so as not to be influenced by prior year’s decisions (even though the statistics used are typically diluted by averaging over several years to show trends).  At the same time, partners will be wasting an even greater number of hours writing “brag sheets” proclaiming the value of their contribution and defending their current share level.  Of course none of this counts the inevitable hallway gossiping about the “politics” of the compensation system.

All this effort is devoted to the search for the law firm holy grail — the perfect partner compensation schedule.  And like Bill Murray in Groundhog Day, next year the alarm will ring and we’ll go through the motions all over again with a virtually identical outcome.

I have long been an advocate of biannual partner compensation reviews.  Considering changes in profit participation other year make sense for a number of reasons:

1. For the vast majority of partners, there is insufficient year to year performance change in relation to their peers to justify a change in compensation.  If you review performance statistics over the past three years in comparison to the increase in the firm’s revenues per lawyer, you’ll most likely find that very few lawyers produced much of a change.  Some did a little better, some a little worse and in most cases these changes did not result in an increase or decrease in compensation under your annual system.  This is because, typically, firms take a wait and see attitude to anything but the most dramatically altered performance.
2. The instant gratification provided by an annual system neither spurs   performance nor stabilizes culture.  In fact, it frequently results in inappropriate share increases for partners with single year performance blips that future compensation committees will need several years to correct.  Partners who lack confidence in the consistency of their own future performance or are unwilling to view their relationship with the firm on a long term basis should not be rewarded with increases in ownership shares.
3. Instead, single year increases can be rewarded through a bonus pool.  Again, a review of performance change statistics over several years will show that, jumps in performance in excess of five or ten percent are very rare and usually return to normal in the following year.  So the bonus pool doesn’t have to be very large.
4. Finally, the time expended on the process in many firms approaches five percent of total billable hours.  Assuming that there is billable work to do, that’s revenue left on the table by your most valuable partners.  If, there isn’t enough work, that’s time that could be more valuably devoted to business development.

Unfortunately, for many law firms, the annual compensation process is required under their partnership agreement and changing it opens a whole new can of worms.  But if you are making other amendments to compensation or have other reasons to propose changes in the partnership agreement, going to a biannual system might make sense.  You may be surprised by the amount of support there is within your partnership once the issue is discussed