The stakes of compensation for equity partners are high. As the true owners of the firm, equity partners put their capital at risk: because they bear the brunt of lower compensation in lean years, that risk is balanced with a higher allocation of profits in good years.
A firm’s compensation design will have major impacts on partner behavior, productivity, retention and overall workplace culture. But when you look at the most popular methods (especially for small and midsized firms), you’ll see that their main advantage is that they make it mathematically clear what each partner must do to increase their paycheck. A straightforward approach to compensation can allay partners’ fears because it seems to put everything above board; when in reality, these three popular methods tend to stoke competition, discourage collaboration and ultimately limit the firm’s long-term growth.
Here’s why you should be skeptical of these popular approaches to equity partner compensation:
“Eat what you kill” or silo-based compensation plans: Attorneys keep score of the revenue from their individual clients and share overhead with the firm.
Common with small firms in their earliest stages, “eat what you kill” makes a lot of sense from a pure monetary perspective. Each partner has control over their destiny. They know exactly how their efforts will lead to an increase in their income.
This focus on individual productivity comes with downsides. When you reward people for business generation in a silo, attorneys tend to compete against each other. When only client revenue and billable hours translate to income, activities like professional development are not rewarded, at the expense of firm culture.
Then, when a partner walks out the door, “eat what you kill” puts the firm at financial risk: since the client’s only connection to the firm is through the relationship with the partner who “hunted” them, they’re likely going to follow.
All for one and one for all (equal partnership) compensation plans: Revenue and expenses are shared equally.
Also popular in smaller firms, the equal partnership method removes individual performance from the equation and, instead, focuses on overall firm profitability. Since expenses are also shared, everyone is incentivized to be mindful of what gets charged to the company card.
Beyond that, however, the equal partnership method does not get high marks in my book: No one is rewarded for going above and beyond, and no one is penalized for taking their foot off the gas. Whether you’re coasting or killing it, your compensation moves in lockstep with your partners.
So, in this scenario, even if you aren’t in direct competition with your partners for a bigger slice, there’s still a sense of suspicion that can arise when you suspect that someone isn’t baking their fair share of pie. It’s rare for a firm to last long in this method–usually they change their model or close their doors.
Hale & Dorr (incentive system): Revenue is allocated according to a set percentage for each of three roles–with a discretionary bonus pool.
Revolutionary when it was developed in the 1940s, Hale & Dorr breaks attorneys into three categories: a finder or a rainmaker, a minder who manages workflow and product and a grinder who does the work. The firm chooses what percentage of client revenue to allocate to each, with a discretionary pool left over to reward extraordinary efforts.
The major upside is that this approach recognizes that partners have different strengths. Some people hate making conversation, others forget to dot their i's, others can only think big picture. Rather than forcing everyone to be a salesperson, a project manager and a technician, the firm can cultivate complementary partners. At the same time, the discretionary pool can incentivize everyone to go the extra mile.
Once the formula is in place, each partner will know what to do to increase their compensation, offering that element of control and more of a collaborative mindset. The minders and grinders depend on the finders to bring clients in, and the finders depend on them to keep their clients happy. When these three types of attorneys work together and stay in their lane, they provide better client service.
In this model, every client interacts with multiple partners, which creates a stickier relationship to the firm than in the silo-based model: If one member leaves, the likelihood the client will follow is greatly decreased. Another major upside is that it’s adjustable: as the firms’ goals change, a compensation committee can tweak the allocated percentages to help realign outcomes. To take advantage of this flexibility, however, you must have a healthy firm culture; otherwise, any sign of change will kick up dust, until people get a clear sense of their personal bottom line.
Hale & Dorr moves you in a positive direction when it comes to flexibility, collaboration and stickiness. However, there are similar problems to “eat what you kill.” The incentive system still rewards charge time, which can lead to hoarding. A grinder is more incentivized to keep their hours rather than push lower-level tasks down to a newer attorney. That keeps a firm stagnant: the younger attorney doesn’t get a chance to learn, and the partner performs work below their skill set.
The only way for a firm to reach its full potential is if everyone is being used for their highest and best use, and that means partners need to leverage other partners, junior attorneys and the rest of their staff.
The State of the Profession
Most of the profession (especially smaller and midsized firms) is using one of these outdated systems. There are certainly advantages to these time-tested approaches. They seem foolproof, and maybe the math is easy to calculate. But that cut-and-dry calculation ends up leading to other problems for the firm that wants to grow into maturity.
If you want to have a vibrant firm, where people have a chance of being satisfied with their compensation, you should move to a goals-based system. Here’s why.
A goals-based system is a firm-first mentality: partners set individual goals in alignment with the firm, allowing them to play to their strengths and contribute to overall well-being.
Every year, each partner should set five or six goals, aligned with the firm’s overarching vision. Then when it comes time for compensation to be allocated, a compensation committee will evaluate how they did on each–both in terms of achievement and effort.
You can still have finders, minders and grinders, but they aren’t rewarded directly according to revenue. The traditional finder would have goals like, “develop X number of new clients,” but they could also have goals like “develop an outreach strategy” or “improve my communication skills.”
The minders can be rewarded for nonbillable efforts, for example, training young attorneys. The grinders, who have their boots on the ground, can be rewarded for improvements to the workflow, developing efficiencies through technology and better leveraging of junior attorneys. All these activities point back toward generating more revenue, immediately or down the line. In this scenario, a rising tide floats all boats, because the harder everyone works toward achieving their goals, the higher the revenue and the higher the salary ranges.
The only “drawback” is that its success rests on how well it is designed, managed and communicated. That means having clear ideas about firm goals, the role each partner plays in achieving them and how to translate those more qualitative outcomes into dollars and cents. It takes a strong working partnership and extensive financial know-how to develop this kind of system, and it takes a healthy firm culture to get everyone on board––at least until the benefits become clear. Partners may worry they don’t know exactly what to do to increase their compensation, which is why you need to replace the cut-and-dry math with a well-articulated description of how the compensation committee will be determining salary.
Migration to a Closed, Goals-Based Compensation Model for Growth
A managing partner on the management committee of a law firm is a bit like the general manager (GM) of a professional sports team. Think of the firm’s net income as the salary cap to which the GMs must adhere and the equity partners as the players, each filling vital positions. Equity partner compensation needs to be allocated in a manner that encourages partners to play to their strengths. Of course, the rainmaker (quarterback) is going to make more than the technical client service partner (offensive lineman) however both are necessary to compete and win the championship.
That’s why you should close the system: people tend to be happy until they find out the partner next to them is making 20 percent more, leading to bad thoughts and bad behavior. The smaller the firm, the more likely the compensation system is open (since so many partners are involved in it). If, however, a firm has 80 partners, there's no reason that everyone should know what everybody's making if each individual partner has a clear sense of how they are being graded.
Compensation is a controversial topic. People get comfortable with what they know, especially if it seems to be working.
It’s easy to get buy-in if you introduce the change in a record-breaking year: Everyone’s compensation goes up, and everyone is thrilled. But if you’re looking to make a change in a normal or weaker year, I recommend putting parameters on increase and decrease, so that one partner doesn’t get a windfall, and another sees their compensation crater. Full trust likely only comes after a few years when people see it working. In competitive professions, there can be trepidation when you move away from numbers and calculations.
Getting past this point is crucial for growth. What worked for a three-person firm in its infancy likely won’t be healthy for a midsize, adolescent firm. When you’re trying to make that leap from midsize to mature, the only way you’ll get there is by having a methodology that aligns individual goals with firm goals.
There’s no perfect method for allocating compensation. When you’re dealing with money, somebody will always want more. But if we align partner goals with firm goals and we reward partner behavior that works toward those goals then, over time, all compensation will increase.