October 6, 2005
Law Firm Compensation Plans
Last Friday, I joined 19 managing partners of non-competitive law firms as they discussed and compared compensation plan approaches. Some used purely objective methods based on origination, supervision and individual production. Others were in the subjective camp with guaranteed "salary like" monthly distributions and smaller year-end bonuses based on performance.
No one thought there was a perfect compensation system. In the end, there seemed to be general agreement that what works - works. So, if your compensation plan is working, leave it alone. I wish it was that simple. But depending on your current plan, it may not be. At least that is the case, if you view the law firm as a business with an expected life beyond the current partners.
Purely objective compensation plans, for example, do a great job of generating income and allocating that income among the partners. However, once a firm crosses the threshold from a personal service business that dies with its current owners, the view changes. Survival of the firm as an institution moves to the head of the list of compensation considerations. Thus, for mid-sized and larger firms, the purpose of the compensation system becomes two fold:
Generation of profits, and
Continuity of the firm
Continuity issues require the addition of a subjective component to the compensation plan addressing such items as account hand-off, mentoring, and knowledge sharing. The plan has to facilitate additions to the partner ranks and deal with the decline and eventual withdrawal of older partners.
Unfortunately, the introduction of subjective elements into the compensation system makes disputes over compensation more likely. Firms avoid those disputes only at the risk of sacrificing long-term survival of the law firm. Personal service companies have no life beyond the life of those involved. Long-term survival requires a metamorphose from an "eat-what-you-kill" personal service culture to an intuitional culture more like that of a corporation where the business has a life independent of its current owners and current employees.
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Filed under Compensation, Firm Culture, HR by Tom Collins