July 09, 2016

How “Open” Are Firms’ Compensation Systems—and Does It Matter?

By G.M. Filisko

The more firms disclose to lawyers about how they reach compensation decisions, the sooner women will achieve pay equity. Or maybe not.

Compensation is so much more than a number. Many female lawyers know their base salary and, perhaps, the range of bonuses within their reach. But very few have delved deeply into their firm’s compensation structure, particularly how “open” or “closed” it is.

“Unfortunately, most women don’t pay much attention to it,” notes Merle J. Vaughn, Los Angeles–based managing director and law firm diversity practice leader at recruiting firm MLA Global. “They pay more attention to the bottom line and how that’s reached. I think it is fair to say they’re not getting the big picture.”

That may be a costly mistake. Women may be taking home less money than they could because they don’t know enough about their firm’s compensation system.

“Making sure the profession’s compensation system is set up in a way that values all the different things women bring to the table is really important to me,” notes Deborah Froling, of counsel at Kutak Rock LLP in Washington, D.C., and 2013–2014 president of the National Association of Women Lawyers, based in Chicago. “It’s about having a system in place that works for everybody, and women really need to understand it.”

Open, Closed, and in Between

The vast majority of firms have a so-called open system, probably because of long-ago decisions or firm traditions.

“This is typically a structural system decision made at some point in a firm’s life cycle or trajectory,” reports Kristin Stark, a principal at Fairfax Associates in Irvine, California, which advises law firms on issues ranging from compensation to governance to mergers to leadership. “Sometimes it’s made when reviewing their compensation system. But more typically they’re operating as an open or closed firm because of their past. It’s quite hard to go from an open to a closed system. Few firms, once they move to become more open, go back to a closed system.”

Roughly three-quarters of law firms in the United States have an open system, says Stark. “That’s imperfect, but it’s the typical metric you see out there. They may not share all performance statistics, but they’re most likely sharing compensation data with partners. They might not reveal certain metrics they don’t believe partners should see, like individual profitability. Is that a closed system then? I’d say no. It’s just a metric the firm doesn’t believe partners should be focusing on.”

Beyond the broad generalization that open systems dominate the law firm landscape, however, are variations on the theme. “It’s easiest to think about it as a spectrum,” Stark notes. “In a fully open system, all information relating to compensation and lawyer performance, particularly for partners, is shared with partners. Their pay and performance are fully shared. As you start moving across the spectrum, firms can shift on what they share.”

In the middle are what Stark calls semi-closed systems. Maybe a firm will disclose to partners compensation data but not statistics on partner performance. In another firm, compensation information may be available but only in a one-on-one meeting with firm leadership or by looking at a hard copy kept in a firm leader’s office. “People could view the information,” Stark notes. “But most don’t.”

Vaughn says her anecdotal experience indicates that 90 to 95 percent of U.S. firms have some level of openness in their compensation system, with closed systems more likely to be embedded at boutique firms. “There are only a handful of firms that still have a closed system,” she says. “These tend to be smaller, and they do really, really well financially. They also have a lot of institutional clients, so the clients come to them. Therefore, there’s more money to go around, and there’s less pressure to generate your own business.”

When firms disclose compensation information, they typically reveal it only to partners, and sometimes only to equity partners. “In some places, nonequity partners may not know what others make,” Froling says. “The only avenue for them to find out is by building good relationships with equity partners so they can ask questions about compensation.”

Then there are closed systems. “At the end of the year, the firm says, ‘Here’s your compensation number,’” Froling notes. “That’s all the information you get. You don’t have any sense as to how that was calculated, what went into it, and anybody else’s compensation. I know of systems where there’s one person creating the system for everybody.”

If you’re an associate, of course, you may have no way of knowing much at all about your own or anyone else’s compensation, regardless of the compensation system in place. Stark notes it’s the rare firm that divulges compensation data to associates.

Is There a Clear Winner?

It seems intuitive that an open compensation structure would be more favorable to women than a closed plan. However, assuming transparency is always best may overlook nuances within both systems.

“I don’t think there’s any research on which is better,” notes Lauren Stiller Rikleen of the Rikleen Institute for Strategic Leadership in Wayland, Massachusetts. “Anything that anybody says will be anecdotal or at best based on conversations with people at other law firms. But given the work I do, I’ve given tremendous thought to this issue and talked to people in both types of systems.”

Rikleen’s conclusion so far is that it’s not clear that open systems win hands down. “I recognize that people who spend a lot of time on the pay-equity side feel very strongly that open compensation systems are critical to achieving gender equity,” Rikleen observes. “I’m not quite there yet because we don’t have gender equity, and we’ve had open compensation systems for a very long time. Clearly we know in and of themselves open systems aren’t solving the problem.”

Though not an advocate for either system, Rikleen says closed systems address different issues from open systems when it comes to the competitive culture surrounding money. “What people earn in any organization is a very sensitive issue,” she notes. “Somebody can feel inherently comfortable with what they’re making but uncomfortable with what they’re making relative to other people. That dynamic can really get in the way sometimes. That dynamic doesn’t exist in closed systems.”

Stark agrees. She says her firm is often hired to test for the correlation of certain variables—like performance, practice area, and gender—to partner compensation. “It’s rare that we see a correlation between compensation and gender,” she says. “I don’t subscribe to the view that women generally make less because they’re women because that’s not what the data show me. However, as a female consultant, I recognize my data might be somewhat skewed. The firms that hire me might be less likely to be biased against women. I recognize that could be a factor.”

That said, Stark says her research shows that closed systems in which there’s a high degree of trust in leadership tend to generate higher partner satisfaction. “If they have higher trust in leadership, having a closed system can allow partners to focus less on compensation, which reduces competition,” she says.

Rikleen adds that the challenge with a closed system, however, is that without a mechanism to account for equity issues or determine whether women are paid equally to comparable men, there’s no way to determine how women are doing. “My feeling is that open systems haven’t created equity, and closed systems create an added layer of complication for developing metrics,” she says. “But the idea that one or the other solves this problem I think is a diversion rather than something that works to give us an answer.”

Froling isn’t convinced women get a fair shake in either system. “You have to trust that the people who are making those decisions are being fair, and it’s hard to know,” she notes. “Some of it is on a hope and prayer and a wish and fairy dust. In a closed system, I think the level of trust has to be extremely high. Women can be very comfortable saying, ‘I’m making $100,000, and that’s what I’m worth.’ But maybe a guy doing the same work is making $125,000, and if that woman knew that, she’d be furious. In a closed system, you suspect you’re being screwed; you just don’t know it. In an open system, you know you’re getting screwed.”

Vaughn also isn’t in either camp, insisting the issue is more complicated than a black-or-white comparison. The best system depends on each lawyer’s needs. “I was on a panel for women lawyers in Los Angeles recently, and the topic was compensation,” she explains. “There was an accountant who deals with law firms, me, an in-house general counsel, and a female partner at a firm. Everybody had different things to say about compensation. It was interesting that both women still practicing admitted they hadn’t paid enough attention to a lot of financial factors before making various career moves, both in the law firm and in-house. That’s an example of why the issue is complicated.”

In fact, Vaughn notes, the panelist who’s now a law firm partner admitted that in the past, she hadn’t asked whether her firm’s compensation system was open or closed, nor had she asked for the firm’s financial information or its partnership agreement before accepting an offer. “Each time she moved, she learned more,” Vaughn says. “Experience is the best teacher unless you have a good recruiter. But it’s a very emotional situation. When you’re a lawyer, it’s a lot easier to advocate on somebody else’s behalf than on your own.”

While it’s true women can influence their compensation through their own advocacy, Rikleen bristles at the idea of placing the onus of achieving gender pay equity on women’s shoulders. “I’m not comfortable saying that this is about training women to behave differently,” she argues. “We’ve been training women for a long time across a variety of topics like negotiation and business development. At some point, it’s the institutions’ challenge to resolve. No matter how much you train people on a particular topic, if they’re repeatedly up against an organization whose policies inhibit their advancement, it just doesn’t matter if they have all this training because it still won’t be effective for their needs.”

Closed Firms Do Have Plusses

Vaughn contends that firms with closed compensation may actually benefit women. Because compensation is opaque, firms can take risks in hiring women without having to justify the hiring or compensation in the way leaders at a firm with an open system must.

“When you have a closed system, you can entice somebody who has a quality you like to join you by paying them well without rankling the other partners,” Vaughn notes. “Maybe you have a woman or minority who doesn’t have a lot of her own business because the firm she’s leaving just wasn’t the right environment for her to generate originations. But maybe she has a specialty—maybe she’s a great trial lawyer, has some kind of niche practice, or is very highly thought of. If the system is closed, the powers that be may have more flexibility to take risks on women.”

That may be true, Rikleen says, adding that firms with closed systems still need to ensure gender equity, even if they don’t release compensation data. “The only advantage for closed systems to exist is that it preserves a particular culture in which you’re removing one source of major friction among partners—compensation,” Rikleen contends. “However, at a time when we’re so concerned about a gender pay gap, it should be incumbent on those who want to preserve their closed system to put in place a process by which they can monitor the metrics and determine whether women and minority lawyers are paid comparably to their white male counterparts.”

Vaughn ultimately lands back on the point Rikleen raised: Women in closed systems may not know whether their pay is fair. But Vaughn contends that may not be the right issue on which to focus. “What sounds good to you and me may actually be a slap in the face,” Vaughn notes. “A salary of $400,000 may sound great, but if the base is $1 million, it’s a different story. But if you don’t know that and you’re happy, what’s the issue?”

The right focus, she insists, is that particular woman’s motivation for switching firms. “What is her pain?” Vaughn asks. “It may very well be compensation. But the pain may also be a lack of respect, and that could involve compensation or not. There may be a feeling she’s not supported in a way that allows her to build her practice and originate the kind of matters and revenue she needs to increase her compensation. You have to take into account the factors the law firm is considering when it decides compensation, and the partner has to feel she has a fair shot at realizing what she needs to move up in compensation.”