Square Pegs in Round Holes: Compensating Administrative Partners

As one result of the cost-cutting that law firms pursued in response to the recession, many firms have filled a number of their managerial and administrative functions with partners discharging those functions on either a part- or full-time basis. If nothing else, it raises some interesting compensation issues for the equity partners who now serve in those non-practice related capacities.

There are basically three ways that firms tend to look at compensation in such situations.

Lockstep Model

The first is to take a lockstep approach in which the partner’s prior compensation (either as a practicing lawyer with the firm or in a previous corporate position) serves as a baseline and is tied to other lawyers of similar age and experience compensated at a similar level. The compensation of the lawyer involved in management then increases at a level equal to those partners.

In our experience, complaints about overly generous compensation for partners in purely administrative roles most often come from their closest peers, particularly if the administrative partner is paid at a higher level than his or her practicing colleagues. The biggest advantage of the lockstep is that it provides an image of fairness to both the lawyer involved in management and to the practicing lawyers who are similarly compensated.

Over time, of course, the peer comparisons fail as the performance of some practicing partners exceeds others. Periodic reconsiderations of compensation based on those comparisons must then be made.

Tier-ranking Model

The second is a defined tier-ranking for those (many) firms that operate based on a series of tiered compensation levels. In such situations, a management position can be fixed to a tier (e.g., the fourth tier from the top, two tiers from entry level, etc.), and the basic compensation levels don’t change from there.

In such systems, growth in compensation would be based on increases in total firm profitability, although there will often be bonus eligibility based on specific performance criteria. This system makes sense at firms that have a relatively low number of tiers as it can get awkward if there are more than six or eight tier levels.

The advantage in this approach is that the compensation is defined according to the responsibilities of the position and its contributive value to the firm rather than any perceived characteristics of the incumbent. A welcome sense of objectivity is created simply because the compensation level is established before the individual is offered or accepts the position.

The difficulty is that there is no career path for someone in an administrative role and a limited ability to reward exceptional performance.

Value Slots

The third system is based on comparable worth. Here, the compensation committee looks at the management position in comparison to the compensation of various practicing partners and decides where the person’s value specifically fits in.

I know one firm that uses a forced ranking system they call the “lifeboat drill.” The firm imagines itself as a ship in peril and then anticipates which partners would go in the first life boat, which in the second, and so forth based on their overall value in contributing to the survival of the partnership.

Each lifeboat is then assigned a level or range of compensation. Obviously, this system is extremely subjective and probably works best in a closed compensation environment. Some administrative partners whose compensation is based on comparable worth complain that they are can be too easily scapegoated. In bad years, they’re penalized disproportionately to the rewards they enjoy in good years.

Fundamental Question

All that said, the most interesting question may be whether placing partners in administrative positions makes sense in the first place. For one basic criterion, does the fact that the individual in the position is actually a partner bring additional benefit to the firm?

For example, at one firm, an equity partner serves in a full-time position as the Director of Development; in other words, the partner is essentially responsible for lateral partner recruitment. Because the lateral prospect can more collegially interact with an equity partner than with a non-partner, the firm’s managing partner and practice group heads save a lot of time on consuming detail.

Not surprisingly, the firm has found that it’s also a signal to the lateral of the importance the firm places on his or her recruitment – even as it allows for more consistency in the negotiation of performance standards and compensation.

On the other hand, several firms have named equity partners to essentially serve as marketing directors. In such situations, it is often questionable whether the equity partner status really brings any particular advantage to the function other than empathy. It can also result in a substantial overpayment for the capability and performance levels provided.

Yet the biggest difficulty about putting an equity partner in an administrative position is that it can create the appearance that an under-performing lawyer has been “parked” somewhere where he or she can find something productive to do.

When that’s the case, it doesn’t make a lot of sense no matter how shrewdly the firm determines compensation.