Rethinking reward

Karen MacKay, a partner and consultant at Edge International surveyed law-firm associates and partners around the world during 2004. This article, the third in a series published in Managing Partner, explores the issues of monetary and non-monetary rewards that associates value in their firms.

As part of a global survey of the legal profession, we asked associates and partners from over 63 firms worldwide whether they thought their present compensation/bonus system adequately reflects the behaviours their firms claim to value. Almost 60 per cent of the associates said ‘no’. Perhaps the associates just don’t really understand the compensation system? After all, only 40 per cent of the partners answered the same question negatively. Typical comments, however, included:

“The firm claims to care about community, but recently removed all pro-bono hours as counting towards billable-hour goals.”
“The firm claims to care about signature clients and doing more valuable work. The current compensation system rewards hours. There is no reward for building client relationships or for attracting better, more valuable work.”
“The firm claims to value quality but the compensation plan rewards mediocrity. A good hour has the same value as a bad hour and those who work slowly or who don’t utilise technology reap the rewards.”

Firms reward hours because it is easy. Rewarding the depth of client relationships, innovation, creativity and quality is difficult. Non-monetary rewards are equally important. They are also difficult to deliver because they require behavioural changes. These are tough issues with no easy answers.

What do laterals consider?

Whether they go through this list explicitly or implicitly, laterals will determine the things on this list that are deal breakers, those that are nice to have and those they’re prepared to trade off to get what they want. Everybody is different. Finding the right fit has a lot to do with alignment between the individual and the firm. You need to assess how your firm, however, deals with the following areas:

Working in a team;
Contribution to society;
Pay/income;
Equity ownership/partnership;
Mentoring and training;
Leadership of the firm;
Future earning potential;
Geographic location;
Strategic direction of the firm;
Influence and power;
Intrinsic nature of the work;
Time (for family friends and leisure);
Prestige and status;
Personal growth;
Professional growth;
Security;
Alignment of firm with lateral’s practice;
Firm culture.

Pay

Professional-service firms compete for two things: talent and clients. One is inseparable from the other, particularly in law firms because unlike some other professions, clients often hire lawyers not firms.

From the most junior graduates to lateral partners, lawyers are attracted to firms for many reasons. These reasons are closely linked to the firm’s strategic decisions. Indeed the lawyers I work with consider about eighteen different things when they consider a new opportunity.

When asked to identify their deal breakers from this list, pay is seldom mentioned, although future earning potential might be.

Lawyers are attracted to firms that have a winning strategy. They may be attracted to a geographic location or to a firm that has a recognised leader in a particular practice area or industry. They may be attracted to firms that appear to have momentum in their market place (we all want to be on a winning team). Lawyers are not typically attracted purely to pay. Indeed, firms that pay at the top of their market are often maligned with other adjectives: sweat shops and 24/7 hours.

Lawyers want to be paid fairly for their market. Firms struggle with this as much as any compensation issue. As one partner in our survey said: “We are a multi-office, national firm and some of the firm-wide rules that are adopted are difficult to reconcile with the economic and competitive legal market in our city.” That partner went on to say that the firm is reluctant, as a whole, to raise the general compensation levels. Firms seem to struggle to adjust levels for the markets where they have offices. But there are potential alternatives, such as setting a base pay, plus market differential. This would cover market variation in rents, the cost of support staff and rates charged to clients.

Competition for talent varies by economic region. Firms faced with internal competitiveness and equity issues struggle with setting pay levels that are perceived as fair.

Many of us will remember the ‘Gunderson effect’ that characterised the year 2000. In January of that year, Gunderson Dettmer Stough Villeneuve Franklin & Hachigian boosted first-year associates’ wages by 45 per cent, a bold and auspicious strategy designed to bolster recruitment of new talent and retention of associates already on board. They did so in a market where the allure of Silicon Valley dotcoms had precipitated significant brain-drain on law firms. The move sent reverberations around the US that have had a lasting impact on scores of law firms as they were compelled to respond to a compensation strategy that was at best market specific and at worst unproven as an effective recruitment and retention tool. The initiative created a tidal wave across the US, but many of the country’s top firms have not touched first-year salaries for the past three years and are holding again in 2005¹.

Incentives

In the research project that culminated with Jim Collins’s book Good to Great, the team said: “The amount and structure of compensation must play a key role in going from good to great... We were dead wrong… The good-to-great companies understood a simple truth: the right people will do the right things and deliver the best results they’re capable of, regardless of the incentive plan².”

Collins’s team got to the most important point about compensation. “Spending time and energy trying to ‘motivate’ people is a waste of effort. If you have the right people, they will be self-motivated. The key is to not de-motivate them³.”

In our survey, the de-motivating power of a poor compensation and bonus plan arose time and again. Respondents said that the current system promotes:

Mediocrity;
Creates uncertainty and lessens associate morale;
Rewards quantity (in terms of hours) not quality (in terms of client service and intellectual contribution).

Future partners and leaders in most firms stand out just as future hockey stars stand out at hockey schools. Getting those future leaders working on the right engagements, with the right people and in the right practice groups is a primary motivator. As Jim Collins says, this is “getting the right people in the right seats”.

We were told that incentive plans that reward hours alone “encourage you to stop billing once you hit the maximum target”. Even the brightest stars can be de-motivated by systems designed with the best of intentions.

Non-monetary recognition

Non-monetary recognition is important to associates worldwide but cultural differences are very interesting. In the US, for instance, 81 per cent of associates told us that recognition is important. That number jumps to 99 per cent in South America, 93 per cent in Asia and 85 per cent in the UK and Europe.

One partner indicated that his firm has lunches for associates who bill a certain amount during historically slow months. That’s interesting, but perhaps these firms should also consider rewarding associates who pull apart a few files during slow months to find a better way of doing the work when things get busy again.

Firm leaders should recognise and communicate success, and also the good tries.

One partner noted that “non-monetary recognition is tricky” because financial expectations are “hard on the heels of such recognition”. Accordingly, recognition is not always delivered to the extent possible. Associate responses included:

“A ‘thank you’ goes a long way”;
“When clients tell a partner they are happy with my work, the partner always shares it with me and with partners who may not have worked with me”;
“A great place to work makes all the difference”.

When asked if non-monetary rewards are important, we felt we had hit a nerve. On the one hand, “recognition can be so much more valuable than money”. On the other hand:

“With all the loans I have, financial rewards are better”;
“A free lunch? A handshake? A bouquet of flowers? No, these things don’t mean anything to me”;
“Recognition is very important but I’d also like the good stuff to appear on my review – which other partners see”;
“Recognition is extremely important.
I know I do a good job but I also need to know it is recognised”.

The type of recognition and the value placed on it varies by personality type. Some people value a quiet sincere acknowledgement of a job well done, while others prefer a public forum and are frankly not even that concerned about how sincere it is, as long as they are recognised. We now know that culture also impacts the need for recognition. The challenge for partners, group leaders and managing partners is to get to know the people with whom they work and to understand what each individual values in terms of non-monetary recognition.

The complicated challenge of rewarding partners

When we asked if the present compensation system adequately compensates the behaviours the firm claims to value, 60 per cent of partners said ‘yes’ compared to only 40 per cent of associates.

From the perspective of associates, partner compensation is difficult to understand. Associates see partners who hoard work but who have high billing credits with a spring in their step at partner-compensation time. Associates also see partners who ‘eat their young’ get rewarded because they are big producers. Tracking hours and fees is definitely easy. Understanding the profitability of either of these behaviours is much more difficult to measure.

Rewarding the behaviours that the firm espouses takes courage on the part of firm leaders. No matter how confidential your process, people know, partners know and associates know exactly what gets rewarded. And what gets rewarded determines behaviour.

References:

The Salary Wars and their Aftermath, National Association of Law Placement (NALP)
Good to Great by Jim Collins, Harper Business, 2002
Good to Great, page 89

Karen MacKay, MBA, is a partner in Edge International. She can be contacted at mackay@edge.ai