Partner Compensation: Start Making Sense – A Riposte

Jordan Furlong just posted another thoughtful and perceptive Law21 blog post on law firm compensation that is worth your attention: Partner Compensation: Start Making Sense. Jordan is one of the profession’s deepest thinkers and most accurate futurists, and writes what is consistently one of the top 100 legal blogs and my personal favorite. I suggest you read it first, then come back here for my counterpoint. He and I most often agree on the principles, but not always on the details.

Jordan’s observation is dead on that compensation is the “third rail” and one of the fundamental reason why law firms are failing, splintering, and going through hugely disruptive times. They are failing because of inordinate and warped compensation structures, splintering because younger partners are increasingly unwilling to finance massive payouts to retiring partners, and experiencing huge disruptions as the more progressive of them attempt to right the boat and survive.

Here are my comments on Jordan’s three points –along with a general agreement on both his approach and philosophy.

1. Stop overvaluing sales.

Yes – this “most highly valued” area of business generation is overvalued, for the reasons Jordan suggests.

His solutions, while in the right direction, contain somewhat of a fatal flaw, which is calculating “profit” on which to measure sales compensation. This introduces a wildcard factor that can destroy the original intent, because profit is a number easily manipulated and subverted.

Rather, I suggest a simpler version. First, I completely agree with his declining compensation concept. But second, a simpler structure – one which is more easily calculable – is in order here: 15% of first-year revenues, 10% of second-year, 5% of third year, and at the fourth-year the client becomes a “house” account with no origination paid. The firm should also delineate the qualified practice areas of all attorneys, and require that work outside the originating attorneys practice areas be moved to a supervising attorney with the appropriate skills, and out of the hands of the originating attorney. This serves the firm’s purposes in diversifying the firm’s contact with the client, and frankly, keeps the unqualified originating attorney from billing inappropriate hours for “supervision” of work outside their expertise.

Jordan cites frequent cases of inordinate sales focus resulting from declining client service after the sale. This, however, is not really a sales issue, but a management one. Frankly, the biggest obstacle to an attorney developing a larger book is their ability – let me restate that – their skills and willingness – to manage work effectively. Most lawyers are either good technicians or good salespeople, but rarely good managers. This problem is exacerbated by the general trend of law firms to decrease leverage, which drives work that should be done at lower levels up to the attorney, and thus decreases their capacity to handle more matters. And an attorney who is already overwhelmed is not keen to increase their marketing.

There is a larger issue here as well: how the overall firm is operated. The medieval “guild” foundations of the profession create a curious and dangerous dichotomy: my clients are my clients to manage as I wish, but I deserve a big share of the overall profits of the firm.

The fact is that, in most firms other than mega firms, the originating attorney “owns” the client, and has complete control over their management, from indifferent client service to allowing receivables to languish.

As Jordan recommends, the firm should be “taking the temperature” of clients regularly, and the very issue of continued partnership should rest on the attorney’s commitment to high level of client service and satisfaction. In this respect, firms should be actively and aggressively training attorneys to be strong team leaders and managers as well as good salespeople and technicians. And as a corollary to this, firm should be building strong support teams around their strong salespeople, which dramatically increases their capacity to oversee (and thus originate) work. This is a concept which goes against the grain of the current trend in law firm structures and is, in my opinion one of the most short-sighted issues in law firms today. But it points directly to most law firms’ inability to create good managers or good management structures.

And finally, the firm, not the attorney, should own the receivables and manage them appropriately, and the firm should be primarily responsible for making sure a high level of client service is delivered.

2. Start properly valuing everything else.

The issues Jordan enumerates for valuing other elements of the practice are certainly valid. But most of these issues are difficult to quantify other than subjectively, which often assures that no one feels treated fairly. And those that are quantifiable create a considerable overhead burden, as well as much room for argument and discussion.

Yes, firms should value client relations, as measured by client surveys, and project management, as measured by timelines and budgets. Again, these fall into my belief in us of more objective measurements.

Legal marketing, however, is compensated through results – that is, originations – and need not be additionally valued. However, firms should provide marketing budgets and better, more practical staff support. Too often, firms hire marketing people who focus on big issues of branding and image, while failing to support the practical, “boots on the ground” efforts of the individual attorneys which actually generates most of the business.

Leadership activity is already measured and compensated by stipends for service at various levels of management. In fact, firms that fail to do so are insuring that those roles will be marginally exercised, resented, and badly managed. Smart firms not only provide stipends for management responsibilities, but consequent offsets of billable hour requirements.

Recruitment efforts should generally be outside the normal purview of the working attorney, and vested in, for instance a recruitment partner, who is compensated for this management role. There could well be some space to provide some type of “finder fee” for an attorney who refers in a successful candidate. The issue of longevity of that hire as a factor for that compensation isn’t valid, since it is largely outside the control of the finder, and too dependent on political and financial decisions of firm leadership.

Community support and participation, while almost an ethical requirement of attorneys, is really of two types. The first is the contribution of services – pro bono work or work donated to charitable and community organizations – and the second is community participation and leadership. While the first is somewhat quantifiable, the second is a hybrid of personal commitments and marketing.

Permit me a tangent here. One of the biggest failings of most law firms is inadequate recognition that each attorney has certain strengths and weaknesses, and brings specific values to the firm. Most firms expect all attorneys to fall into a single pattern – good sales skills and good technical skills. And in fact, offers of partnership are most often tied directly to originations.

Often, good “sales” people are bad managers (and sometimes even not such great lawyers), and should be required to utilize a strong “client care” team to deliver services and legal work.

Conversely, every firm needs, and should appropriately value, those who are good technicians, and therefore support the good salespeople in delivering service, but who are not good salespeople themselves. The best firms have the appropriate mix of both and the right structures to make it work. Great teams behind great salespeople create a very large funnel of work, revenue, and profit.

3. Stop paying partners to bill hours.

Jordan’s observation on the baffling partnership structure is dead center. Back in the 1990s large firms were experiencing a disturbing trend: associates were leaving large firms at an alarming rate. While the theory was that partnership was a reward, associates saw partners under more pressure and stress, rather than less. A Wall Street Journal article quoted one associate as saying that the competition for partnership was “a pie eating contest, the reward for which is more pie.”

Why this still exists is a complex problem, but one that stems from the fact that most attorneys still see themselves as technicians, not managers, and insist on staying on as players, long past the point that they should have been moved to coaching.

There are virtually no successful companies where the owners and founders are still on the assembly line making widgets. In the business world, the successful entrepreneur moves from inventor to technician to manager to leader, and eventually to passive owner or shareholder.

The foundation of this problem is laid in law school, which typically teaches two principles. First, just do great work and the clients will come: and second, you’re a professional and not a business person. Consequently, lawyers have no desire to become managers, and indeed, see it as abandoning their profession, and thus their identities. In other words, their identity is tied up with the work itself, rather than the business that does that work. In many firms, the person elected managing partner is the person who was not present at the partner meeting to refuse.

Too many firms perpetuate this approach and this model by undercompensating their leaders and burdening them with onerous “technician” requirements for billable hours. Just four years ago, I encountered a managing partner of a 55-attorney office of one of the top 20 largest law firms who was paid $50,000 for the role, while still required to bill at least $600,000 – and given the support of half an assistant to support him in fulfilling both roles.

Final observation. The revolution that has already come to Britain and Australia and will shortly come to Canada (www.CBA futures.org – a must-read) will, sooner than anyone expects, come to the United States. And when venture capitalists, investors, and strong business leaders begin to transform the profession, much, if not all of this, will change. Big firms will fall and splinter and merge like never before. Smaller firms with onerous partnership and buyout terms will disintegrate, leaving those senior partners expecting big payoffs looking at empty firm checkbooks. And many attorneys will find their expected career paths vaporizing. My last tongue-in-cheek blog post, “Berkshire Hathaway Purchases Nebraska’s Largest Law Firm” isn’t fantasy, but simply a news article ahead of its time.