Feature

posted 31 Oct 2006 in Volume 9 Issue 6

Cover story: Just rewards

There are few bigger, more divisive issues for today’s law firms than partner remuneration. With frims demanding more than ever before from their partners, and partners demanding more in return, it is little wonder that finding a scheme to suit all can be challenging.

By Tina Lofthouse

Partner remuneration used to be simple – a lawyer shows their loyalty to a firm and they are suitably rewarded the longer they stay there. But this lack of a real incentive to do better brings with it the risk of apathy – why work harder when your remuneration will simply rise with your length of service? And for others in the partnership, there can be a good deal of finger-pointing as to who is or isn’t doing their fair share.

At the other end of the spectrum, there is the ‘eat what you kill’ policy, where the more work they can bag for themselves, the bigger the financial gain. However, it’s a mentality that doesn’t exactly lend itself to collegiality and has no emphasis on the development of the firm as a whole.

The problems caused by the two extremes have driven firms to look at whether there is any middle ground. Can you successfully combine elements of the two polarised schemes to achieve a system that incentivises partners, but doesn’t create an environment dominated by internal rivalry?

It is a simple premise – but one that is hard to implement in reality – and there are all kinds of options between the pure lockstep system and ‘eat what you kill’. What works for one firm, could be disastrous for another. Adding to this complexity is the fact that a firm may have to overhaul its remuneration strategy at different times in its lifecycle to meet changing business needs.

Cultural consideration

“You must always align your remuneration scheme with your objectives,” says Peter Scott, law firm consultant and former managing partner at Eversheds’ London and European offices. “Is your objective to achieve effective cross-selling across the firm, for example? You won’t achieve that without a culture of sharing so you need to ask whether your remuneration system will encourage that.”

Scott points to the example of one US firm that asks a question in its appraisal scheme that carries more weight than anything else – “which partner has passed on the most work to you in the last 12 months?” This builds a picture of who the rainmakers are and who is sharing the work around, and it rewards on that basis.

Other firms, however, have more of a silo culture where individual billings are everything. “You have to ask what kind of firm you actually are. Are we collegiate? Are we bottom-line driven? Then look where you want to get to in terms of strategy and build your remuneration scheme around that,” says Scott.

Taking cues from the business world

With growing competition in the legal sector, law firms are having to think and act more like businesses. The corporate world utilises a variety of skills, and it isn’t just the work of those performing the day-to-day business of a company that is valued. Firms are having to look at the bigger picture in terms of partner contributions and it is no longer simply about what a partner can bring in terms of individual billings, but about how they contribute to the overall success, or otherwise, of a firm.

“US firms have come into the London marketplace and brought in their underlying culture, which is much more performance-driven,” Scott says. “Management wasn’t valued ten years ago and there was a view that you weren’t really a good lawyer unless you had your head down doing client work. But that is all starting to change and firms are looking to reward skills such as leadership and management.”

Now the ‘finders, minders, grinders’ philosophy has come into play, which rewards not only the grinders who do the work, but also those who bring in new clients and those who manage the relationships. Skills such as team-building, communication and how you handle financial management are also all being taken into account.

The performance model and alternative incentives

Offshore firm Mourant du Feu & Jeune has a more corporate remuneration and appraisal model. Its partners get a salary, as well as two incentive plans made up of cash and shares. A short-term incentive plan relates to more individual achievements over a 12-month period. The second is a long-term plan which is aligned to business objectives in a three-year cycle. At both levels, a balanced scorecard is used to assess performance, with 40 per cent based on financial performance, and the remainder focusing on all other aspects, such as internal management and client relationships.

The performance aspect is heavily managed. There is an online 360-degree review system, which feeds into the balanced scorecard, and partners get feedback from clients, managers, and sometimes subordinates. Any development needs are then identified from that.

John Renz, director of human resources at Mourant, explains: “We incorporated three years ago and had to find a mechanism to reward people at market level or more. But the big shift for us was to move rapidly to this system of a performance model. It has been a long process to inculcate the culture of that – it is something that is quite counter-cultural for law firms – and we’re getting better at it each year.”

Balanced assessments

Mourant has used occupational psychologists to help develop its performance model. “We’ve been able to set down exactly what excellent performance looks like at Mourant,” says Renz. “You have to have the technical skills, but it is how you deliver against those in terms of things like management skills or developing client relationships.”

Like other firms implementing schemes where remuneration is linked heavily with performance, there are issues over how to ensure something that can be so subjective is fairly measured.

“You can actually put in place hard-edged measures around things like client satisfaction or attitude surveys,” says Renz. “But some areas can be controversial. One way we take the heat out of it is to agree up front with a person how we are going to measure it – the performance model sets out in a detailed way how excellent performance manifests itself and we get agreement on that.”

Being seen to be fair is everything no matter which system you operate. Cobbetts has a modified lockstep system. Allocation of profit is dealt with by a remuneration committee, comprising its managing partner, chairman and three elected members, and they see every equity partner to advise them of their allocation. It is a time-consuming process, but managing partner Michael Shaw says it has never resulted in an appeal. “Allowing sufficient time for the process has probably been the reason that it is viewed as fair – people trust those making the award and are fully informed as to the reasoning behind the awards,” he explains.

Cobbetts tries to balance the information they have so that even on the financials, it will look at measures that are key to a particular role. “Accordingly for a line partner we will look at how work is managed within their immediate team and what their fees are,” says Shaw. “But we will have particular regard to movement on the value of their client portfolio, cross sales, significant client wins and losses (as they might not be reflected in the financials) – and then try and balance this with 360-degree feedback.”

Lovells is working to ensure its appraisals system represents a balanced assessment of a partner’s contribution, both in financial and non-financial terms – in areas such as business development, marketing and contribution to cross-selling. “The difficulty is that the hard data tends to be about the financial contribution a partner makes so we’re looking at how to introduce harder evidence in the non-financial areas. And in terms of financial data, the emphasis is on profitability management rather than simply increased turnover,” says managing partner David Harris.

Appraisals must be balanced, rigorous – and, importantly, as free from bureaucracy as possible. With over 300 partners at Lovells, the appraisals process is a significant undertaking. The challenge is keeping it streamlined so you adhere to a sensible timeline, while also making it as balanced as possible across international offices.

One change Lovells has made is to increasingly devolve partner reviews to those responsible for managing the practice streams (in conjunction with the practice area partner or local managing partner) rather than it being done centrally as it was before, which offered consistency but at the expense of having qualitative knowledge of the work a partner does in their area.

But then, with different people carrying out the reviews, how do you ensure consistency? Harris says the consistency comes from how they acquire and share the data that forms the basis of the review. The firm also ensures that the need to deal with any underperformance is undertaken on a consistent basis.

Assessment of achievements – rewarding talent

Appraisal systems must be a two-way process if they are to be credible. Peter Scott argues they shouldn’t even be called appraisals as the term is too judgmental. ‘Performance-development reviews’ are more appropriate, he says. They should be used to review what has been achieved in the last year, but more importantly, they should set out clearly what will need to be achieved in the coming year and identify what resources will be needed.

Letting people know what is required of them is vital, and there also has to be a good relationship between the reviewer and partner – if the people on the remuneration committee aren’t trusted and respected throughout the firm, the system will frequently be challenged and partners will lose faith in it.

Of course they should also be able to address any issues of underperformance, and this is particularly vital in a lockstep system if partners are to be assured that everyone is doing their bit.

Many firms are sticking with the lockstep system because of the advantages it offers in terms of firm culture, but it can be problematic in terms of talent retention. Partners are moving firms more than before, they’re more aware of what their role is worth, and are prepared to jump ship if they don’t feel they’re getting what they deserve.

Peter Scott says this ‘war on talent’ is forcing many firms to look at their remuneration systems. “People want what they are worth and firms have to look at how to match reward to contribution fairly. It’s also a question of relative worth – what am I being paid compared to the person sitting next to me?”

Lovells, for instance, is looking at whether its lockstep system has sufficient flexibility, given the fact it operates across a large number of markets, to compete effectively for the best talent.

“Lockstep promotes cross-collaboration and the cultural elements that are important to us as a firm. Collaboration is vital in terms of generating business across offices and ensuring effective cross-selling,” says Harris.

“But when operating a single lockstep structure where different factors are at play it can produce some strains which can become relevant in terms of competing for and retaining the best talent. I believe we need flexibility while retaining the positive aspects of lockstep, so we’re looking at what level of flexibility is needed going forward.”

Work/life balance

Making your firm attractive is key to talent retention, and firms are increasingly looking at how to accommodate work/life balance issues to do that.

Our lawyers agree that “we’re in a business where you have to go the extra mile, but what we can’t do is run constantly,” says Mourant’s Renz. “Our approach is to make the firm attractive enough to make sure it can recruit and retain enough of the right kind of people to take on the work.

“We’re keen to get the balance right; however, there aren’t always enough people out there of the right quality so sometimes people will have to do more. We’ve worked hard to have greater transparency and more objective measures, which helps make the firm an attractive place to work.”

Cleary Gottlieb Steen & Hamilton LLP has a pure lockstep system. There is no performance-related salary, nor bonus, nor billable or non-billable targets. It works well at Cleary, says human resources manager Linda Vandevelde. “We do not have a lot of issues in terms of reward. We have no departments and no separation whatsoever, so we work as the ‘big team Cleary’ serving the client and I think the lockstep system works really well – there is no competitiveness amongst the lawyers.” Salaries are reviewed on a regular basis and market surveys carried out to check the competitiveness of its salary structure.

There is also a benefits package, which addresses such work/life balance issues as relocation services, flexibility on leave of absence, reduced schedule options and child-sitting, as well as access to a health club, and personal development such as language training.

Fine tuning

Whether it is to address talent-retention issues or making a scheme more performance-oriented, changing a remuneration or appraisal strategy can’t happen overnight.

In 2002, one of Paul Stothard’s first tasks as the new chief executive of Shoosmiths was to overhaul the firm’s remuneration and performance-management system to meet a new business strategy. The firm was caught in a Catch 22 in that it needed to attract and retain top-calibre partners to deliver the improved profits set out in the strategy, but its current performance under the existing lockstep scheme could not provide sufficient profits to attract these individuals. In addition, the small merit element failed to be transparent in that it lacked objective criteria and failed to encourage exceptional performance because, more often than not, a partner who applied for an award generally received something (although very good performers received a much greater share).

The firm’s reward system is now much more closely tied to performance – and a rounded contribution is encouraged from the partners. Partners receive a fixed salary that broadly equates to the gross equivalent of monthly drawings, and there is a reduced element of lockstep, based on a fixed amount per equity point. The balance of profits, after fixed salary and lockstep, is then placed in a pot that is allocated on merit, with partners placed in performance categories.

Any new scheme will need some fine tuning, even over a period of years. “We have had to make a couple of changes based on the practical application of the scheme,” explains Stothard. “The major one was to reduce the number of merit categories from five to four as it was proving difficult to differentiate between partners’ performance across the five categories. By moving to four, and increasing the differential in terms of reward, it has become easier to allocate partners and single out those whose performance showed ‘clear water’ from other partners.”

Getting partner buy-in for a new system needs to be considered carefully. “In our case, the scheme was part of a bigger plan to improve the performance of the firm and therefore overall take for the partners. Inevitably, if you change a scheme there will be winners and losers on a stand-still basis. They must see that overall the scheme will help achieve improvement in which they can all share,” says Stothard.

Renz adds that firms should not underestimate the level of change. “We’ve made significant strides in achieving greater clarity and becoming a more performance-driven organisation, but it is a process that takes a long time. With something so emotive as people’s remuneration you have to work hard to get that right. People don’t just work for the money but it is sometimes the only tangible thing that they have.”

The money should only be one aspect of the reward and appraisal system. “It is important people are told they are doing a good job, and where there are concerns, it is not used as a stick to beat people with. You have to be good to succeed in this business. It’s about getting good people to be great people. You need a developmental culture and people have to be comfortable they will be supported in the firm,” says Renz.

While there may be no right answer in terms of the perfect remuneration system, it is an area that cannot be ignored. The biggest asset a firm has is its people – and they need to feel valued. But a firm also has to achieve its business goals. A good reward system attracts the best people for the job. It makes the most of their abilities, it helps bring in new business, it manages existing relationships and it motivates – not only for the money, but also by making people actually want to take the firm forwards and deliver its strategies.