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Partner productivity and compensation are among the most vexing issues law firm leaders face today. At a roundtable discussion hosted by Smock-Sterling Strategic Management Consultants last fall, more than a dozen leaders from firms ranging in size from 115 to 500-plus lawyers offered their insights on how to handle underproductive partners and partner compensation. There was universal agreement that law firms have to directly confront unproductive partners and help them leave the law firm if it is evident that the lack of productivity is not the result of a temporary market lull. Firms must recognize that — in the vast majority of cases — unproductive partners are not “bad” people and they have not usually done “bad” things. Several firm managers noted that it’s not always obvious to unproductive people that they are unproductive. “Human beings have a remarkable ability to rationalize that what they are doing is acceptable,” noted one firm manager. The more difficult issue is determining who really is “clogging the system” (i.e., cannot turn their productivity around) and should be asked to leave and who the firm should work with to retool. Most agreed that there are limits to what a firm can achieve using compensation to respond to varying levels of productivity. Reducing compensation is only a short-term solution — ultimately the person is demoralized. It is effective only when a partner can overhaul his or her performance and demonstrate that the falloff in productivity was temporary. Several law firm leaders added that if a firm’s compensation system is not open — that is, compensation is not known across the partnership — other partners can and do assume that a lack of productivity is acceptable. Participants discussed the common categories of those individuals who need to be counseled and possibly helped to leave the firm including: • People who are continually negative and naysayers. • Outliers who will not comply with group organization and intake procedures. One firm leader noted that “they are the high risks for malpractice” because they push the envelope on conflicts of interest, take overly aggressive positions on business issues, and otherwise put the firm in ethically awkward positions. • People who just do not attract work in otherwise busy areas. • Service partners or grinders — those who work on other partners’ projects and matters. At best, they need to top out at some tier. Finally, some roundtable participants noted that productivity should be viewed in the context of the natural ebb of a partner’s life cycle. Good partners moving toward retirement can take several years to wind down and transition their practice. Compensation can naturally decline during those years, making it less a productivity issue than a career stage issue. SYSTEMS ANALYSIS A survey conducted by Smock-Sterling prior to the roundtable found that two-thirds of the firms surveyed rated their current compensation system as “effective or very effective.” Nearly all the remaining responding firm officers said their systems were “adequate, decent, reasonably effective” or were otherwise working, albeit with some weakness that needed to be corrected. Yet law firm leaders at the roundtable identified a number of challenges and effective practices related to partner compensation. A key concern continues to be the time and energy required of firm leaders to manage the partner compensation process and the fallout stemming from borderline decisions — namely, counseling those who are unhappy with the results of the compensation-setting process. Crucial to any successful compensation system is the involvement of offices, practices, and departments to ensure that the system is — and, importantly, is viewed as — fair. There was also a high level of consensus among the roundtable participants that practice group leaders need to have a visible role in partner compensation. “Practice group leaders have a much better handle on who is making poor use of firm resources,” noted one participating firm manager, such as associate management and excess write-downs, or reducing a bill before it goes to a client. Some firm managers reported setting time aside, formally and informally, to talk directly with the practice group managers regarding the people issues in their groups. A few participants said that they require every practice group manager to provide an evaluation of all people in the practice group. One firm is adopting a variation on management by objectives (MBO) that includes group goals and group bonuses — that is, directly tying a portion of compensation to the performance of the practice group against its predefined objectives. Tying compensation more closely to group outcomes strongly encourages cooperation and teamwork — and sends the message that the firm is more than a collection of “lone rangers.” Participants also noted that every merger or large lateral acquisition puts pressure on the partner compensation system. Mergers require significant work to put disparate systems together and to align expectations across the partnership. It is important to include partners from a recently merged firm in the decision process to ensure fairness. One chief operating officer noted, “We added a partner from a large lateral group to the compensation committee to make sure they felt comfortable with how the system works — and to make sure the committee had an understanding of what that group contributes.” Most of the firms present at the roundtable give bonuses to a portion of their partners in any given year. In most cases, bonuses are used for short-term successes such as high billable-hour years or big, one-time originations, and to reward unique, firm-building, qualitative efforts. Firms have also adopted bonuses as a tool to ensure fairness in their systems. Some use bonuses to provide tier equalization, particularly for younger partners who are moving up the tier structure. Some advocate holding back a designated percentage of distributable cash every year as a bonus pool, even if it is not all paid out as bonuses. Several firm managers emphasized the importance of individual one-on-one meetings with partners. Such meetings are especially important for people with problems or issues, so the managing partner can personally convey the compensation decision, the reasons for it, and the relationship that the dollar figure has to past and expected performance. All roundtable participants include some formal communication mechanism in their compensation system to convey why compensation was set where it was. ORIGINATION CREDIT Also, all of the firms at the roundtable track and reward origination. For most participants, tracking of origination has not been a significant problem relative to behavior or cooperation. Some firms simply split origination credit for joint client development efforts, while others reported that the culture at their firms naturally discouraged overt internal competition among partners for origination credit. There is a clear desire (and in some firms, a need) to “sunset” origination credit — preferably via formal sunsets, as opposed to informal “discounting” of old origination by a compensation committee. As the COO of a 500-plus lawyer firm noted, “After serving a client across multiple practices for a decade or more, it is unreasonable to attribute all the credit for that relationship to one partner.” Ultimately, clients have to be considered “firm clients” and no one should carry the origination credit forward. One CEO noted that his firm had opened up origination credit to allow splits and other team-based tracking. This, in turn, led to pockets in the firm with lots of folks claiming credit for the same origination. While this reportedly did cause some hurt feelings and some ambiguity in tracking credit, it ultimately caused the firm to be more diligent at the point of intake — ensuring that origination credit splits were agreed upon upfront. Most of the participants were strong advocates of tracking responsibility credit as well. This includes tracking who is responsible for minding, expanding, and overseeing work for particular clients — particularly important when business originators do not manage the work performed for their clients on a day-to-day basis. The general view was that responsibility credit should follow the specific matter (i.e., who is managing the transaction or the case). That practice has to be balanced against giving responsibility credit to the person who is managing the relationship as a whole and who generally has origination credit. The roundtable discussions enabled participants to tap into the experiences and practices of noncompeting firms in a wide variety of ways. Since most participants reported that people management and compensation issues are among the most time-consuming aspects for senior law firm managers, shared insights and ideas were among the most highly valued by roundtable participants. And because the issues continue to evolve, participants noted that they expect the topic to resurface again at the next roundtable in November 2004. John Sterling is a partner at Smock-Sterling Strategic Management Consultants, a management consulting firm based in Lake Forest, Ill. He can be reached at (847) 615-8833 or at [email protected].

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