Introductory economics courses teach about the "Four Factors of Production"-land, labor, capital and management. "Land" refers to the physical plant and physical assets, "labor" refers to the efforts of those who produce products or deliver services, and "capital" is the money needed to buy physical assets and hire workers. "Management" is the all-important skill of organizing the other three factors to produce a product or service at an optimum profit.
Law firms generally “get” the idea that they have to pay for physical assets and for the efforts of associates, partners and support staff. They also understand that they need capital to support the business. But they generally do not get that they have to pay for management or, alternatively, they have a hard time figuring out how to do it right. Why? In the legal services environment, most believe that the highest value use of a lawyer’s time is serving clients, charging hours and producing revenue. Very often, as a result, “management” is viewed as a sideline, with consequent confusion about how—or even if—to compensate partners for their management time. To help right the situation, let’s considerways in which many law firms now pay their managing partners—and then let’s explore a methodology that has been shown to work in well-run firms.
Current Practices: Ad Hoc Survey Results
Early in 2008, Smock• Sterling conducted an informal survey of law firms on its “clients and friends” list, asking about how they compensated their managing partners. Twenty-eight firms responded, ranging in size from 75 to more than 1,250 lawyers. The median firm size was 160 lawyers. For insights into how firms approach their managing partners’ pay, here’s a summary of the results.
Full-time vs. Part-Time.
Of the responding firms, 46 percent indicated that their managing partner positions are full-time roles. Most of those positions also are viewed as “career-path positions,” in that it’s expected that the managing partner will probably never return to the fulltime practice of law. The remaining firms’ managing partners all continue to practice law to some degree.
The compensation-setting process.
In the vast majority of cases, the same body that sets compensation for all other partners also sets the MP’s compensation, although the larger firms have a slightly more complex membership for their compensation committees. Regardless of the committee’s structure, however, about half of all respondents reported they do not have any formal process for setting MP compensation, other than the normal process they follow for setting all other partners’ compensation. The committee may do some interviewing of other partners and may interview the MP as well. Feedback, if any, usually follows whatever sketchy practices the firm uses with all other partners.
The managing partner’s compensation structure generally tracks the compensation structure for all other partners. Thus, for example, if all other partners in the firm are on a points system, so is the MP. In firms that have a bonus component to partner compensation, the MP also is eligible for a bonus, but usually based on different criteria than those applied to the other partners.
It appears that firms with full-time managing partners value management about the same as those with part-timers at the helm. On the average, the full-time MPs are paid about double what the median partner makes and about 80 percent of what the highest partner makes. The standard rule seems to be that very effective rainmakers get paid more. These ratios hold up when one looks at part-time MPs, too.
The overall conclusion drawn from the survey is that many firms have more or less punted on the question of MP compensation. Some give “credits” for management time, but this practice only recognizes input and not results. The question of whether the MP is doing a good job is typically left to a committee that deliberates without guidelines or criteria. That is hardly an approach that ensures a firm really has effective management and leadership.
So then, if the conclusion is that many firms do a poor job of setting MP compensation, how can they rectify their course? Fortunately, the survey also revealed some “best practices” that firms might adopt to improve their processes. Let’s look at those next.
Best Practices: Defining Responsibilities and Developing Skills
Although there’s a general belief that compensation should reflect performance in carrying out job duties, most firms have not defined the managerial responsibilities or the skills required of their managing partners. The survey results identified the following responsibilities, which should serve as good guidelines:
In determining compensation, the best approach is to rate how the managing partner does in carrying out each of these internal and external responsibilities and how well he or she does in improving these necessary skills. An important thing to remember, of course, is that these factors measure the individual’s performance in carrying out the job, not the performance of the overall firm.
Special Considerations for Part-Time MPs: Combining Management and Practice Responsibilities
The sticky issue comes in determining how to compensate a managing partner who has one foot in firm management and the other still in law practice. This is especially true, as one might expect, in firms that value business development above all else. In that case, part-time MPs can be expected to focus most of their energies on practice development, rather than on effective management and leadership. Many firms struggle with this problem.
Among the ineffective approaches to this issue, some firms pay nothing for the management side of the partner’s time—and often they get nothing in return. Other firms allow the MP to treat “management time” as though it were billable time—essentially treating the firm as a client. This practice, however, measures input or effort, not results—meaning the MP can spend a lot of time not doing the job well.
Another commonly encountered tactic is simply to pay MPs a flat stipend, over and above what they might have earned based on the fruits of their law practice. But this is not reflective of results or achievement. Instead, it’s merely a recognition that management must be worth something, so the firm had better pay something for it.
Those firms that do the best job of setting compensation for managing partners who are also part-time lawyers have a two-stage process:
The Top Practices: How to Manage the Process Well
In the midst of hundreds of different variations in the compensation process, a few firms really excel at evaluating and rewarding their managing partners for achieving results. Their key to success is a well-defined process that takes its cue from corporate- style performance-based systems by incorporating the notions of accountability and communication.
In these law firms, the MPs are required to formulate a periodic (annual or biennial) agenda of what they hope to accomplish by way of profit targets, growth and significant projects or improvements. That’s the accountability piece.
In addition, the MPs are required to share their agenda with the partnership, management committee, board of directors or the like and obtain consensus approval for the agenda, so that everyone understands and buys in to the game plan. That’s the communication piece.
Then each year, the MP’s performance in carrying out the agenda is evaluated by the same committee of partners that is charged with setting the MP’s compensation. As part of this process, the MP is required to prepare a self-assessment report on his or her performance.
Ultimately, some of the information for the committee’s evaluation is objective, based on statistical and anecdotal evidence. Were goals achieved, targets met, projects completed on time and the like? Were there unanticipated successes or failures? How did the MP deal with any crises?
A large part of the evaluation is subjective, however, and considers the quality of leadership, planning, implementation, communication and so forth.
At the end of the day, the committee considers all these factors in arriving at a number that reflects how well the MP performed his or her management job (as opposed to how the partner performed as a practicing lawyer). In the final analysis, the most powerful elements of this process are goal setting, self-evaluation, accountability and two-way communication.
The Best Result of All
In the end, the role that managing partners might play, the scope of their authority and the firm’s expectations will all vary with the qualities, skills and character of the individual elected to fill the job and with the culture of the firm. The balance between external and internal focus, whether or not the individual practices law, his or her role in rainmaking and so forth really depend on the person and the firm’s expectations.
The main thing is to make sure that the person and the firm are in agreement as to those expectations—and that the expectations are woven into the process for evaluating performance and setting compensation. This will help protect an “activist” MP from being shot by friendly fire. It will also provide a “burr under the saddle” to keep the MP focused on the task of leading the firm.
n excellent way to achieve this, for firms of all sizes, is through a corporate-style performance-based system for compensating management time—a system based on the notions of accountability and communication. It just takes time and thought to develop the criteria that are right for the given firm—but it will be worth it, because it paves a two-way street that produces results, and that is the important thing.
Peter Giuliani is a partner in Smock• Sterling, a strategic management boutique. He has been involved in law firm management for 36 years, including 7 years as Executive Director of a well-known East Coast law firm.