Compensating Partners: Will We Ever Get it Right?

If by "right" we mean that there is a correct compensation level for each individual; we can determine what that amount is; and we can convince each person of the wisdom and fairness of that amount, then the answer is no. But, if we mean that we can construct a compensation philosophy in which individuals strongly agree that those who are contributing the most long-term value to the organization are paid the most, then the answer is yes.

Two recent research studies on high performing organizations, Practice What You Preach by David Maister and Good to Great by Jim Collins, conclude that the method of compensation, as a causal factor for high and sustained performance, is largely irrelevant.

Maister states: "Notice that this does not suggest what the pay scheme should be. The determining factor is just whether the people think it rewards the right people." In Good to Great, Collins reports:

We found no systematic pattern linking executive compensation to the process of going from good to great. The evidence simply does not support the idea that the specific structure of executive compensation acts as a key lever in taking a company from good to great.

Both found that whatever system is in use, it simply must be rational and equitably managed.

The following principles should guide you as you consider your compensation system:

• Attract and retain high-calibre people.
• Motivate people to excel and to contribute to the organization's success with ample rewards.
• Keep the compensation system simple. Correlate the level of contribution with the level of pay.
• Strive to achieve a strong sense of fairness. This is a perception that must be strongly felt by at least 80 to 85 per cent of the partners.
• Stay flexible. Compensation systems may need to change over time to remain consistent with the firm's needs and with the market.
• Ensure that the compensation system reflects values that are consistent with client needs and include client input.

All staff should be focused on the same goals. To achieve that, the law firm's various compensation systems should be consistent. If the systems in use for different types of contributors (i.e., lawyers vs staff) reward the wrong behaviours or encourage inconsistent behaviours, you may have a problem.

There are three areas of contemporary thinking on compensation:

1. Orient the compensation system to influence behaviour and promote change throughout the organization, not just among firm partners.

   There are two groups of employees for whom compensation is not an effective management tool. The intrinsically motivated (6 to 16 per cent of partners perhaps) do not need compensation as an incentive. The struggling performers (another 6 to 16 per cent) will not react favourably to a compensation system that rewards positive behaviour. However, that leaves a rather large group (68 to 88 per cent) where compensation can be an effective management tool.

2. Focus rewards so that they are consistent with achieving the organization's goals and the client's needs.

   Clients have begun to realize the important role compensation systems play in the behaviour of personnel in their law firms. They have even begun asking law firms to describe their compensation systems so that proposed relationships will achieve promised results. As a result, some law firms have responded by integrating client feedback into compensation decisions.

3. Place money at risk and use incentives.

   Bonus decisions are difficult in any organization. They can become so routinized that they are perceived as deferred salary. Thus their provision becomes an expectation, and their removal a demoralizing event. They can be so small relative to the effort to earn them that the bonus award negatively affects individuals. What follows from such a system is a downward spiral of disincentive. Bonuses can also be so arbitrary that there is general confusion as to why they are given. Incentives should be clear so it is evident that compensation is a meritocracy.

Individuals must feel that their own performance will contribute to their compensation. However, they must also know that their compensation will rise or fall depending on how well the team performed. Both must occur. The team may be a department, a practice area, an office and certainly the entire organization. If the two are not blended together, an individual will give up or defer performance if the team is doing poorly and there is no possibility of recognition for individual performance.

Let's return briefly to the two research studies. They confirm what our experience has taught us. High sustained performance is largely the result of doing many things well and it all starts with having the right people.

The most striking finding is that the most financially successful offices did better at virtually everything.

Practice What You Preach

The purpose of a compensation system should not be to get the right behaviors from the wrong people, but to get the right people on the bus in the first place, and to keep them there.

Good to Great

Your compensation system should support that effort. Making decisions regarding individual compensation or changes to the system or process are going to be difficult in even a healthy and profitable environment. But then, who said that management was easy?