While setting up a partner remuneration scheme — or even reviewing a current scheme — can seem daunting, there is plenty of evidence to indicate which approaches work well and which approaches risk backfiring, writes Jonathan Blair, the former managing partner of Womble Bond Dickinson. (18 June 2024)
(Note: This article is based on the Law Firm of Tomorrow webinar ‘Effective partner reward and incentive options’ in March 2024, in which Jonathan Blair, Andy Harris and Glyn Morris were questioned by host Andy Poole.)
The lockstep approach to partner remuneration worked well in the past. The rules of the game were simple and predictable. You invested huge effort into your early career, to secure attractive rewards later on. Seniority, or years served, was the main KPI.
But times change. These days, law firms are in a battle to attract and retain their star performers. So any remuneration scheme needs to not only keep the existing partners (or directors) happy and motivated, it also has to be attractive to the employees who are the partners of the future.
The choices when designing a remuneration scheme are complex and conflicting. Do you reward the individual, or the team? Fee origination, or fee generation? Fees only, or overall contribution (eg management responsibilities, supervision or wider ESG contribution)? Just the previous 12 months, or a longer period?
“We know that the performance of different people will be different, so in principle there is nothing wrong with having unequal reward.”
Andy Poole, legal sector partner, Armstrong Watson
Six main types of scheme
Broadly speaking, one can categorise law firm remuneration schemes as follows.
1. Profit shared equally
This simple, predictable approach is intended to build a team that is ‘all in it together’. It promotes good behaviour (eg cross-selling), but it takes no account of the fact that some individuals may have performed better than others.
2. Traditional lockstep
This is another ‘all in it together’ approach, which rewards seniority and time served in the firm. It recognises that some years are better than others for each partner and flattens out this variance. The glaring drawbacks are that it does not motivate senior partners to continue to perform, and it can be difficult to motivate junior partners who can end up earning little more than a senior associate.
3. Modified lockstep
This approach allows one to add a bonus element for exceptional performance. It can also include reward for taking on key roles such as managing partner or COLP/COFA, or one can use a complete ‘balanced score card’ approach. Many firms will describe what they have as being a modified lockstep, but this one description covers a wide range of different systems.
4. Part performance, part equal
This is where a proportion of the profits are allocated based on performance/position criteria, often on a balanced scorecard basis creating points per partner, and the remainder of the profits are split equally. The proportions can vary. This approach provides an incentive for partners to perform while retaining protection for the ‘all in it together’ collegiality.
5. Performance bandings
This is where performance is assessed usually on a balanced scorecard basis, and partners move up and down the bandings (instead of points) one band at a time based on that performance. This protects partners from large annual changes in income, while still providing incentivisation. This banding approach can also be included alongside lockstep or equal profit sharing, for a proportion of the profits.
6. Pure performance
This is the ‘eat what you kill’ model and variations on this are also used by the platform firms such as Keystone. The self-employed fee-earners keep most of the fees that they individually bill, while the firm provides the compliance/finance/admin/marketing/IT elements. It allows solicitors to decide their own hours and to choose the clients and work to focus on. Many argue that it is inherently fair.
Smaller firms tend to share profits equally or to use a lockstep approach, gradually increasing the profit share over time.
Larger firms tend to include an element of reward for performance. These schemes can get extremely complex, with a multi-step profit allocation that reflects previous performance, anticipated future performance, and detail such as including both fees billed and fees collected, as well as other less easily measured performance KPIs such as effective leadership, training, and wider partner contribution such as being responsible for the firm's risk function.
The objectives of any scheme
The basic objective is to attract, retain and incentivise partners, while growing profitability and keeping the whole team "happy".
A scheme that aligns with the intrinsic motivations of the partners, which in turn align with the overall strategy and the culture of the firm, can drive performance strongly.
The remuneration schemes that work are fair, trusted, transparent, and easy to understand. Trust is the most essential element.
For example, there are ways to make lockstep more fair. Instead of it being automatic each year, make it a reward for specified performance. This could include clients wins, or good financial hygiene (lockup and residual balances).
Stability and predictability are important for partners’ personal finances, so any scheme should avoid wild fluctuations. If a particular team is experiencing a quiet year after a busy year, the best schemes will accommodate this. This gives people time to improve their performance. Using remuneration bandings, in which a person can only move up or down one band each year, is one way of flattening out such fluctuations.
Of course, remuneration on its own cannot change poor performance. Identifying and resolving such problems is a people and performance management issue.
Measuring performance
Measure performance using a balanced scorecard, to reflect the whole performance of each individual.
Base the scorecard on an agreed set of objectives that will help to achieve the goals that the firm has set itself. Ideally, the objectives should all be SMART (specific, measurable, achievable, relevant, and time-limited), but include elements that are more subjective and less measurable. For example, adherence to the firm’s culture and values (which must be spelt out).
Objectives could include elements such as:
- Fees billed, or preferably fees collected.
- Team profitability.
- Client wins and losses.
- Staff turnover within that person’s team.
- Performance of additional roles, such as COLP/COFA.
- Progress on a specific initiative(s), such as entering a new geography or building up a particular part of the practice.
- Lockup control and exposure to bad debts.
“What gets measured gets done”, so it is important to cover all of the performance issues.
Each partner then puts forward a tailored plan each year, addressing each point in the scorecard.
Their performance against the scorecard is the main evidence for why they should progress in the firm in terms of remuneration or responsibility, although consideration can also be given to an element of self-submission or ‘special pleading’.
Partners tend to think of themselves as consistent high performers. A well-designed scorecard can make it easier to identify and improve areas of weakness, or development areas.
There are a number of software solutions available to help law firms set objectives and track performance.
A 360 degrees appraisal can be an effective way of scoring issues such as teambuilding, mentoring and adherence to the culture. In the same way, client and colleague feedback questionnaires with scores for particular criteria can provide insights and measurability of that aspect of performance.
Scorecards can also be helpful for explaining non-fee-earning roles to others. For example, roles in finance, marketing and IT are often poorly understood and under-appreciated.
Avoid making any changes to scorecards during the year. If, at the year end, you do remove an item because a problem has gone away, you may risk the problem reoccurring. The leadership group should ensure that any changes are agreed and communicated in a clear and timely fashion.
Lastly, just because you measure individual performance does not mean you have to reward on the basis of personal performance. You can still base remuneration on more of a team basis.
“There is huge value in having a full discussion with the partnership about different remuneration schemes and their pros and cons. If you stick with what you already have, it will be because that is what you as a group have chosen and can get behind.”
Glyn Morris, partner and ex-finance director, Higgs LLP
The benefits of a bonus pool
A bonus pool can be an effective way to drive change. For example, if you need to enter a new geography or expand into a new area of law.
Bonuses tend to be modest, to keep overall remuneration predictable and stable.
Be clear on the process and the parameters of any bonus. Trust in the scheme is all-important, otherwise it can backfire. Bonuses can be very divisive, as they tend to have large elements of subjectivity.
When reporting on any bonus awards, report to everyone who was eligible. As with all aspects of remuneration, the process, clarity, timeliness, and trust in the decision-making body is critical. Remind partners what the bonus was designed to achieve and what was and was not measured. Then briefly explain where bonuses have been awarded.
Different metrics for different individuals
A partner running a family law department will be unlikely to achieve the same margins as a partner doing corporate work. Yet both departments may be equally important to the overall strategy and performance of the firm.
Similarly, insurance and public sector work may be relatively low margin, but if they provide a large volume of steady work, that in turn provides financial stability to the firm.
So there is no reason why the financial targets of different partners should be the same. Provided that their performance is good, the lower profitability partners should not be penalised if the firm has positively chosen to invest and maintain a presence in a particular area – provided always that the relevant partners are "keeping the bargain".
If you are trying to hire star performers who are being offered lucrative deals by other firms, it may be tempting to offer them a special deal. Be wary of doing this. Changing the goal posts in this way is likely to be perceived as being unfair by some, so it can destroy the trust in the scheme. If an individual needs special treatment in order to join, they may not fit in to the firm in any case. If they do join, any special provision for them (a prior appropriation of the profit pool before wider distribution) will inevitably be time-limited, so manage the transition phase carefully.
“The one element of a remuneration scheme that you cannot get wrong is trust. Without trust, your scheme will not succeed.”
Andy Harris, partner, Hazlewoods
The risk of unintended consequences
A poorly thought-out remuneration scheme can have unintended consequences. Unless you think through the ‘What if’ scenarios, you can get caught out by complications such as earn-outs.
Here are some examples of schemes that have backfired.
- A scheme that rewarded fees billed and paid did not take into account a significant growth in the amount of contingent work that was not captured in the P&L. So it did not reflect reality and resulted in partners receiving much less than they felt they deserved. This led to partners leaving the firm.
- A scheme using an overly complicated matrix was not properly understood by the partners. After all the work that had gone into it, the result of the scheme was confusion, frustration and dissatisfaction.
- A scheme design meant that it was impossible for one partner to achieve their targets. That partner left and set up a competing firm that used much simpler incentives.
Who makes the rules and decides the rewards?
The whole partner group needs to have agreed the rules which are to be applied, or at least buy into them as a result of joining the partnership.
The remuneration committee should be comprised of individuals who are experienced, emotionally intelligent, genuinely objective, and who understand all of the firm’s workings. Choose individuals with the best perspective about the overall contribution of partners.
One problem can be the domination of the committee by a single individual, such as the senior partner or managing partner. So choose the team with this issue in mind, although solving this problem can be difficult — especially in a small firm. Again, trust is the essential ingredient.
The remuneration committee needs to be accountable to the partnership body as a whole. So providing a written report will help to achieve this. It provides transparency and builds trust, as well as driving accountability.
A written report may seem bureaucratic in a small firm, but it is a key component of a successful process.
“One reason why firms don’t try to improve their remuneration schemes is that it creates winners and losers. So it can be difficult to reach agreement between all the partners, but there are ways to make that easier.”
Andy Poole, legal sector partner, Armstrong Watson
An appeal process
All partners should be working towards an agreed set of KPIs throughout the year. So provided that performance against these KPIs is regularly monitored, the outcomes from the remuneration scheme should not come as a surprise.
Nevertheless, it makes sense to consider having an appeal process, as no system is perfect. It helps to build trust in the system, while also making the remuneration committee more accountable.
The grounds for an appeal should be clearly set out in any Remuneration Rules. For example, appeals could be based on an error of fact. In a well-run scheme you might only expect an appeal rate of less than 5%, of which 50% may succeed.
The appeal should be handled by a trusted person who is not on the remuneration committee. Typically this might be someone like an ex senior partner.
The fact of any appeals (but not the identity of the person appealing, or the circumstances surrounding the appeal) should be included in your reporting, so everyone can see that the system is open to appropriate challenges.
How to make change happen
Many people find change uncomfortable. So, when designing and proposing a remuneration scheme, invest time into fully consulting with the partners.
Clearly articulate the objectives and benefits of the scheme. What problem(s) you are trying to solve, (for example growth, or profitability, or succession)? Many firms are being forced to change these days, simply to survive. A good remuneration scheme enables evolution, rather than sudden revolution.
By their nature, solicitors like to see evidence, so have it ready. What are your peer group firms doing? What is and is not working for them? What could work in your firm? Does the scheme support or hinder your firm's vision and strategy?
Whoever is tasked with proposing the scheme to the partners needs to spend time listening and then reporting back to the leadership team who will be responsible for proposing any new scheme. You need to understand each person’s motivations and concerns when designing the scheme.
Allow at least six months to get a scheme agreed and in place before the start of the next financial year. Plan the work around other busy periods such as the year-end, budgeting, and the existing appraisal and processes. Once the scheme is in place, maintain the dialogue with the partners, to ensure that there is transparency and to maintain the momentum of change.
Allow 18-24 months before the remuneration committee reports back to the partnership on the scheme, explaining what is and is not working. Be prepared to change, but aim for evolution rather than revolution. No scheme is perfect and law firms should expect their schemes to evolve to enable them to adapt to a changing environment.
“A law firm is the ultimate team sport, as you are all in it together. The focus is not on individual performance, it is all about the team.”
Andy Harris, partner, Hazlewoods
Why do law firms choose Hazlewoods and Armstrong Watson?
It’s because the specialist legal teams in these two accountancy firms have built outstanding reputations in the legal sector.
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