The trials and tribulations of partner remuneration

Tackling partner reward and performance management is a tough task at the best of times and most would wisely tackle each area separately for integration at a later date. But Paul Stothard, chief executive at Shoosmiths, was nothing if not brave, and faced the challenge of reforming the whole system in one courageous blow. The process was beset with challenges but, if all goes to plan, the future looks bright for a firm that will have clarity of purpose and a proven commitment to change.

This case study describes how in Shoosmiths we have addressed the issue of partner reward and motivation. I will cover the background to the changes, what we aimed to achieve, how we set about the task and, inevitably, the lessons learnt along the way. I am not an expert on reward systems or partner motivation, I just happen to have first-hand experience of the challenge of implementing change in these areas.

First, some background. Shoosmiths is a very successful law firm with a history of significant growth. In May 2002, it embarked on a revised strategy that called for considerable change. The partners had already embraced some changes, with the implementation of a new management structure, the retirement of a long-standing and much respected managing partner, and my election as the firm’s first, non-lawyer chief executive.

My immediate challenge, having established buy-in to the new strategy and associated changes, was to convert this buy-in into action that would take the firm forward. How could I move the partners outside of their comfort zone to embrace new approaches to service delivery, client care and development, and the nurturing and growth of our talent?

I had already experienced the familiar roller coaster of excitement gained from the memorable partners’ meeting where smiling faces, nodding heads and upraised hands had signified buy-in to the strategy and all that it entailed. However, I was only to be crushed by the cold dawn of reality: that agreement to change was not a personal commitment from each partner. In many cases, a partner was actually agreeing that everybody else needed to change provided that he/she were left alone to carry on doing what they always had done.

In a nutshell, the revisions to the structure of partner reward and the implementation of a performance-management process had to be achieved to convert the buy-in into action that would deliver the strategic objectives of the firm. We needed to align reward with performance and behaviour standards that reinforced the firm’s direction and goals.

In addition to this fundamental reason, there were three other key drivers for reform, the first of which was the changing structure of the equity partnership.

The firm had appointed 12 new equity partners in the two years to April 2003. In a management system characterised by tolerance and consensus, these new, initially highly motivated partners were fast becoming demotivated and their previously high levels of performance were not always being sustained.

At the extremes, not only was performance becoming an issue, but we had to face up to the fact that the retention of the better performers was becoming a concern.

A further driver for change, linked to the strategy, was the need to be able to attract and retain top-calibre partners to deliver the profile and performance demanded of our strategy. It was a bit of a ‘Catch 22’ in that we needed these individuals to deliver the improved profits, but our current performance under the existing, lock-step-based, remuneration scheme could not provide sufficient profits to attract these individuals.

Finally, the existing system of reward was failing to deliver sustained, improved performance. The system that existed in Shoosmiths prior to the strategic review was dominated by lockstep with a very small merit element.

The merit pot was allocated by a committee of wise and trusted partners. Partners who wished to have a piece of the cake had to make a written submission setting out the reasons why this should be the case.

The system failed to be transparent in that it lacked objective criteria for how the pot was allocated. It also failed to encourage exceptional performance because, frankly, any partner who applied for an award generally received something (having said that, very good performers did receive a much greater share). Clearly, such a system could not be used to engender change in the organisation.

So, here I was, a newly appointed CEO with one of my key tasks being to implement, quickly, a new system of partner reward and partner-performance management. However, the crucial question was what were we trying to achieve?

The ultimate objective was to have a system in place that encouraged continuous improvement and rewarded excellence. By doing so, we would attract, motivate and retain high-calibre partners. From the background, you can see that we also needed to ensure that the system:

Encouraged excellent performance;
Was transparent to everybody in the firm;
Provided sufficient flexibility to allow Shoosmiths to compete in the recruitment market;
Linked reward with performance.

It was a daunting prospect, but essential if we were to move forward. The process I adopted was highly consultative and took up a considerable amount of my time. Thankfully, however, two broad principles had already been established as part of the strategic review:

There should be a greater element of merit in the reward system;
Performance management should be introduced for all partners.

In an ideal world, we would have introduced a performance-management system, ironed out the wrinkles and gained trust and support before including it as part of a comprehensive partner-reward and development structure. However, the partners backed the idea of the link between performance and reward, were willing to make it work, and have been true to this commitment.

The primary purpose of this paper is to discuss reward, but as our system is closely linked to performance, it is important that I describe some of the features of our performance-management system, and the problems that we faced.

An important feature of our performance-management system, indeed it is also part of the promotion criteria, is that we seek a rounded contribution from partners. That is not to say that billing is unimportant, far from it. We acknowledge billing as the lifeblood of the firm and recognise the importance of personal and, more importantly, team billing. But this is not the end of the story and we reinforce the need for a rounded contribution through an assessment process that reviews four areas:

Core responsibilities of a partner (billing, team billing, marketing, talent developments and values);
Role responsibilities (office head, department head);
Personal objectives – ideally no more than four;
Other contribution to the strategic priorities of the firm.

The biggest challenge I faced in the entire process was getting objectives agreed for all partners. Some of these problems were the inevitable consequences of the simultaneous implementation of a performance-management and reward system.

We became very bogged down in discussions about what level of performance for each objective was needed to place a partner in which category for performance. This was perfectly understandable with the link to reward and our desire to establish expectations at the beginning of the review period.

The process also suffered from a lack of consistency that could be readily attributed to one of two factors: training and commitment. It was a mistake to offer training to those partners who felt that they needed it. I am not a fan of ‘sheep-dip’ training but, on this occasion, this is precisely what we should have done to clearly establish understood basic principles.

However, the real fun began when I got a bit carried away on the transparency front. To be fair, I was under pressure to demonstrate that all partners had equal ‘stretch’ in their objectives. “Simple,” said I, “I will give all partners access to every partner’s objectives.” A system designed to ensure that a partner concentrates on his performance against agreed personal objectives suddenly became a system for criticising the quality of other partner’s objectives. Of course, what I should have done was to rely on the management structure to ensure that objectives were appropriate and delivered a consistent level of challenge across the partnership.

The actual allocation of reward, largely fed from the performance-management system is then quite straightforward. The 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 key change is that the balance of profits, after fixed salary and lockstep, is placed in a pot that is allocated on merit.

The debate on how to allocate the merit pot was, as I am sure you can image, lengthy. The partners had at some time in the past experienced league tables and the experience was not good. The focus had become one’s position on the league table and the fact that you were 12th and one place below someone who you felt was no better than you. It caused problems out of all proportion to the impact on profit share.

Balanced against this aversion to league tables was the desire to be transparent in how the merit award for each partner was calculated. The partners needed to clearly understand the criteria used and accept that they had been applied both fairly and objectively.

The original proposal was to place partners into one of four performance categories with each category attracting a merit-award amount, increasing as you move up the scale. All partners in any one category would receive the same amount of merit award.

One of the liveliest debates in the whole process surrounded the number of categories and the differential in reward between each category. It was inevitable that each partner was second-guessing where they might land in the performance scale and that this would colour the debate. This was demonstrated very clearly to me when I took the partners through a worked example and they asked me who were the two partners in the ‘unacceptable’ category?

I had very good reasons for trying to maintain a significant differential between excellent performance and the next category down. First, I want to make the reward sufficiently attractive for partners to take a risk and strive to do something different. The second reason was my desire to have as much flexibility as possible to reward partners who would be recruited into the partnership from outside the firm.

The difficulty that the existing partners faced was picturing what this ‘excellent’ performance looked like. There was a view that we had never seen such a performance and that the category was, therefore, unachievable. To cut a long debate short, we introduced a further category so that we now have five with merit points as follows:

Excellent - 10
Very Good - 7
Good - 5
Expected - 3
Unacceptable - 0

Does it work? Well, the simple answer is that I don’t know. The system was introduced half way through our 2003 financial year, which had the benefit of only affecting 50 per cent of the reward in the year of introduction. This, coupled with the poor performance of the firm in 2003 meant that we did not have a merit pot to allocate.

What is clear is that in 2004, a much better year, partners are very focused on performance and have a clearer understanding as to what needs to be done to achieve a share of the merit pot.

In summary, I facilitated a successful transition to a new performance and reward system within Shoosmiths and I feel that our system has strength as it was introduced as part of a clearly understood strategy to move the firm forward. Too often changes are made to reward systems in response to lower profits, key partner pressure, poor management etc., that is, responding to the symptoms of the problem rather than dealing with the problem itself.

I have made some mistakes along the way. I certainly think that I should have resisted the understandable pressure to implement the new reward system with the new performance-management system in one hit. I have lost count of the number of articles I have read that stress the need to separate performance management from reward. Further, the very thought of implementing the two at the same time, with a link between performance and reward, is sufficient to turn most HR directors into babbling wrecks! In my view, we only got away with it because the change was introduced mid-way through the year, reducing the immediate impact of an untried and distrusted new process. At the same time, the firm had a poor year in terms of profits and we did not have a significant sum in the merit pot. The other lessons I would highlight include the need to properly train partners in the performance-management process and, certainly in the early stages, police and support the implementation. Also, try to avoid having everything that a partner does enshrined within the objectives.

As to the actual allocation of reward, I still believe that I should have held out for only four categories and a major increase in reward for exceptional performance. However, only time will tell what we have got right and wrong and at least we have a system in place.

The biggest lesson has been the strength of having a strategy that is embraced by the partners with whatever changes you are trying to implement being clearly identified as a key component of that strategy. I know that I have relayed some of the inevitable and understandable problems that I faced in making the changes, but I have to say that the partners in Shoosmiths have been fantastic in their overall commitment to change. They have pulled together to make changes that will move the firm forward and this is being seen in improvements throughout the business.

Finally, clarity of purpose, a strong cohesive culture and strong, consistent management are essential if you are to retain and motivate key people to deliver high performance. And, of course, the reward helps.

Paul Stothard is chief executive of Shoosmiths. He can be contacted at: paul.stothard@shoosmiths.co.uk.