Valuing Managers: The Art of Paying Partners Who Manage the Firm
Certain management functions must be performed to make any business succeed. If two lawyers start a firm, it is logical that they initially perform these functions themselves. As the firm grows, it may become prudent to hire staff to handle administrative matters. But the core leadership functions of planning, motivating and directing remain with the owners. If the firm gets so large that its diversity and geographic dispersion make it impossible for one or two partners to lead effectively, the firm may delegate some of the leadership functions along logical organization lines, such as by practice group.
In most law firms, large pools of partners are not vying for these management positions. The title of practice group leader may be bestowed on the partner with the largest portfolio of business. Or it may be given to the partner with the lowest billable hours on the theory that if the lawyer can’t find anything more worthwhile to do, he or she may as well manage. Most often, though, the position goes to the partner who is willing to step forward and take the job.
A Place for Volunteers?
There are two strikes against the volunteer manager model. The first is a lack of accountability. If a partner performs management functions poorly or, more likely, fails to perform them in more than a cursory manner, little can be done because, in the firm’s view, the person is “just a volunteer.” And, more likely than not, there is no one waiting in the wings to take the ineffective manager’s place.
Second, the volunteer manager is neither held accountable nor part of any line of authority. For management to work, the lawyers and staff in the group must recognize the manager’s authority. Some exceptional managers can engender this authority through charisma or respect for their accomplishments. But, typically, a manager’s authority will only be recognized if those who are managed believe there is a formal means to enforce authority through influencing compensation or positively or negatively affecting their work life. By the same token, the manager can’t be held accountable if the manager’s boss has no formal authority. Consider, for example the practice group leader who reports to the managing partner or the management committee but whose compensation is set by an entirely different committee.
To break this circle, managers must have the authority to function—and be willing to use that authority. But that will not happen as long as managers are viewed by the other partners and themselves as “volunteers.” As long as they are not being paid to manage, they are, by definition, volunteers.
You Pay for What You Get
It appears that in many law firms the partnership is unwilling to pay for management. What the partners are unwilling to pay for is, in fact, the lack of management. If the only management model they have experienced is “volunteer management” and it has been largely ineffective, the partners’ rational reaction is, “Why pay for what I now get for free?”
But what if partners were presented with a different model in which their economic interests were enhanced by paying for management? Indeed, if partners were guaranteed that their compensation would increase through management’s efforts, there would be little question about paying for it.
Convincing the partners to pay for management may be easier than convincing the partner-managers that they are being paid to manage. The reasons that law firm partner-managers are willing to provide their time and talents in a volunteer capacity are as varied as their individual motivational constructs. But we know that there is one big core constraint on people’s willingness to serve in these capacities — financial insecurity. There are three responses to this constraint:
1. Managers should not have to jeopardize compensation they would otherwise receive if they continued to devote 100 percent of their work time to practicing.
2. Managers should be offered a path for increased compensation — a path that rivals the money they could expect if they continued practicing full time.
3. Managers should have protection when they leave management and return to full time practice.
If managers believe they are primarily paid to practice law under the firm’s normal compensation system, they will only perform management tasks to the extent that they do not interfere with their practice activities. Yes, they will approve paperwork and attend meetings. But given the choice of performing a self-initiated task like coaching a member of their group or taking a deposition, they will opt for the revenue-producing activity. They must believe their management tasks are valued at least equally to their practice activities.
Sending the Right Message
The basic compensation of a partner-manager should clearly reflect the value the firm places on the partner’s management. However, most firms base compensation on the individual’s traditional level of performance—with a few units added for performing a management function. This sends a confusing message.
For example, suppose that Barbara, who has a multimillion-dollar practice and has been one of the firm’s highest paid partners, agrees to lead the firm’s real estate practice group. Jeff, who has been more of a service partner with a much smaller practice and is paid half as much as Barbara, agrees to take over the corporate practice group. Both are tasked with aggressive growth goals for their groups and asked to devote significant time to their management efforts. So, what is the message we send to these managers? If Barbara cuts back her practice activities and, through her efforts, the real estate practice group grows and prospers, will she get more or less compensation? What about Jeff? Can he ever achieve Barbara’s level by virtue of his management activities? Or would this require him to devote more effort to his practice?
The answer to this conundrum lies in the structure of the compensation system we build for our managers. It must integrate both the practice and management sides of the partner’s responsibilities and be reasonably individualized to the specifics of each manager’s situation. To accomplish this, firms need to manage the activities of each manager by laying out specific expectations. This means, by way of example, saying the following to Jeff:
We believe the effective management of the corporate practice group should require about two thuds of your time. To justify your current compensation, you need to have x minimum dollars in billing and working performance (presumably reduced from his current level). If you do this, your compensation will remain the same. If you maintain your personal statistics and your group exceeds its goals, an increase in compensation may be considered. If you meet the minimum expectations for the group and exceed your personal practice performance requirements, you may be eligible for increased compensation but not as large an increase as had the group exceeded its goals. But if you want to continue as a manager, failing to meet your group goals by devoting your efforts to your practice is not an acceptable option.
For Barbara, it may be necessary to tell her she is too valuable at her current performance level and compensation to perform a management function. This is not to undervalue the importance of management. Everyone has their highest and best use. For some partners, success as a working and billing lawyer may simply price them out of a fair value for management.
Philosophical Questions
The goals that a firm sets for its managers raise philosophical questions: Does the firm want to pay for actions or results? Assume, for example, that a practice group leader is responsible for a list of 10 things (such as conducting a number of client seminars, recruiting a lateral partner in some specialized area, and holding joint meetings with another practice group). Suppose the leader performs all 10 admirably, but the financial performance of the group deteriorates. How will the performance be viewed? Conversely, what if the practice group leader does nothing and through sheer happenstance the group prospers?
The only way group goals can be used to measure the performance of its leader is by a combination of the predetermined plan’s execution and the results that occur. That is, a practice group leader should —at least in the short term—be neither penalized nor rewarded if the leader faithfully executes the plan and nothing happens. By the same token, the manager should not be rewarded if there is failure to fulfill the requirements of the plan and through luck the group prospers. The message to the manager is if you execute on what you say you are going to do and results occur, you will get credit for those results.
Providing an Out: Protecting Partners Who Manage
If we expect successful partners to aspire to management, and in the process give up a portion of their practice, there must be a graceful way of easing them back into their practice if they leave management. In essence, we need to provide them with a predetermined parachute. There are three reasons for setting up such protection.
• First, without protection, we create one more disincentive for our brightest and best to contribute their efforts to the firm’s betterment
• Second, it is the fair thing to do and, in most firms, would probably occur even if there was not an established protection.
• Most importantly, holding business unit managers accountable for their performance as managers means that they must be subject to removal if they fail to perform.
Uncertainty about their compensation would only serve to make such decisions more difficult to the detriment of the organization. In fairness, however, the firm does not want to make this protection too generous and thereby create less of an incentive to succeed.
One common way to provide protection is through a formula. For example, the compensation for a partner leaving management will not be decreased for a period of one year for each year spent in management, to a maximum of perhaps four years.
Well-Managed vs. Something Haphazard
It is inconceivable that a multimillion-dollar business would allow itself to be managed by shareholder volunteers who are not paid for the effort. It is hard to argue with the concept that something that is well managed will usually turn out better than something that is allowed to occur haphazardly.
If a law firm wants good management, and believes that it’s best to tap the management talents of its partners, then it must develop a parallel career track that rewards partners who are successful. The precise mechanics of how to compensate partner-managers will, of course, be unique to each law firm. What matters most is that the firm clearly states its expectations of managers, and then pays them for meeting or exceeding, those expectations.