Components of Effective Partner Compensation: Long-Term Focus

Editor’s Note: This article ties into a series by author, who is the former chair of a large U.S. law firm, on management principles.

By Donald Mrozek, Former Chairman, Hinshaw & Culbertson LLP

Earlier this year, I published an article titled Enduring Principles of an Effective Partner Compensation System, where I set forth certain governing principles for effective partner compensation systems. In this article, I offer fuller analysis of one of those enumerated principles: long-term focus.

Successful firms are operated with the goal and expectation of achieving multi-generational longevity. These firms recognize implicitly if not always expressly that its partners strive for a career that spans many decades. Partners in these firms understand that in some years their services will be in higher demand than in others and correspondingly, that their “productivity” will vary from year to year. Significantly, the partners understand that the results which their clients achieve with their assistance will differ from year to year. These partners personally assess their performance over an extended period of time, with some years more satisfying than others. Simply stated, the most successful partners in successful firms take a long-term view of their careers.

The best partner compensation systems align with the long-term aspirations of the firm’s partners. This means that the partner compensation system should reflect a long-term rather than short-term analysis of each partner’s contributions to the firm.

Partner compensation systems focused on long-term assessment use the prior year’s compensation schedule as the starting point for the current year’s compensation analysis. This inevitably creates a bias in favor of monetary reward to those who have made long-term contributions to the firm’s success. Adjustments in compensation are derived from this long-term focused beginning point. Suggested adjustments based on notions of zero-based budgeting are anathema to long-range focus and discarded.

The most effective partner compensation system involves a subjective evaluation of each partner’s contribution based substantially, but by no means exclusively, on certain objective measurements of performance. Those objective measures always include a statistical review of the partners’ client relationships or “book of business,” described in terms such as “originations” or “billing attorney credit.” Most compensation systems also look at each partner’s individual productivity – i.e., dollars brought in as a result of the partner’s own labors – as another important objective measurement criteria. Effective systems maintain their long-term focus by adopting multi-year looks at these objective criteria, rather than considering only a single year’s performance. In my view, a three year look is the gold standard with two years in the acceptable range. Such a perspective is sufficient to smooth out year-to-year variations yet not so long as to have the system begin to resemble a lock-step, or seniority dominated landscape.

The year look should also be applied to softer elements of the compensation system such as mentoring or training of less experienced attorneys; leadership positions within the firm; actions in furtherance of various firm initiatives such as increasing diversity; efforts at firm reputational building, etc. The compensation arbitrator(s) should also adopt a three year review of these activities, grading the performance of each activity in each year. This is mandated by the fact that true value in these areas results from sustained commitment, not one-year performance.

In addition, the level of compensation adjustment for each partner in any given year should be consistent with a long-term evaluation and not drastically increase or decrease a partner’s compensation. Here, I favor a maximum annual increase or decrease of between 20 percent and 25 percent depending on the culture of the firm. Increases or decreases in that range are more than adequate to reward the current band of high performers and reduce those partners where practice is not up to historic levels. At 25 percent per year, a partner will nearly double his/her compensation in only three years.  Truly extraordinary situations, with “extraordinary” defined and published, should be addressed by a bonus on the upside and a change in status on the downside.

Finally, focusing compensation on long-term performance will aid the firm’s risk management program. When a partner’s performance is seen through a wide-angle lens, that partner is more likely to engage in those behaviors which the best compensation systems seek to incentivize – expanding client relationships to other firm members with expertise different than the originators; ensuring the relationship provides optimum levels of depth and scope; engaging in training and supervision of associates and less experienced partners; and, most importantly, applying laser-like concentration on rendering superior client service.

Compensation systems based primarily on short-term performance metrics encourage the opposite behaviors. These would include so-called “dabbling” where partners perform services and supervision in unfamiliar practice areas to enhance their personal productivity and billing numbers to the detriment of the quality of representation. Another undesirable behavior is “hoarding,” the evil twin of dabbling, where the partner fails to delegate less sophisticated work to attorneys at the appropriate experience structure but rather hoards the work to inflate his/her productivity numbers. In more serious cases, hoarding results in shortcuts and necessary work left undone, at the expense of the quality of the firm’s representation. In addition, it goes without saying that when the compensation system focus is on short-term origination/billing and productivity performance all but the most altruistic partners will give short shrift, or no attention at all, to training and mentoring their less experienced colleagues. This also inures to the detriment of high quality client service. It is axiomatic that when quality suffers, mistakes and its consequences follow.

Most law firm partners, and especially law firm leaders, are painfully aware of the financial pressures confronting the profession as a result of static demand and oversupply of attorneys. Yet, based on all available reports such as those compiled and published by The American Lawyer, lawyers continue to earn very lucrative compensation doing what they do best – providing quality representation to their clients. Most successful attorneys seek and achieve long-term rewarding careers. They do not seek short-term gratification. Firm leaders must step up and keep their compensation systems focused on the long-term which aligns with the aspirations and achievements of their partners. Those who do will see their firms prosper during their tenures and for generations to come.