Defining the deal

Research suggests successful employee engagement and retention depends on much more than the pay packet. Firm-wide pay increases have a sizeable impact on profitability. One solution is to arrive at a ‘people and reward strategy’ that recognises individual contribution and rewards top performers accordingly.

By Joris Wonders, senior consultant, Towers Perrin

That lawyer. The one you have identified as being the very best of the intake of newly qualifieds from a few years’ back. She’s good. Partners say so; her colleagues say so; her clients probably say so too. She’s very good. In fact, she’s so good you are curious as to just how much extra value she adds to the business compared with the average lawyer in the firm. Considering the hours she bills, the relationships she manages and the new business she brings to the firm – not to mention the amount of support she gives to more junior lawyers around her – you think it might be three times more than the average lawyer. But if you also take into account that she personifies the firm’s newly-articulated values; sits on the project team that recently developed your approach to corporate social responsibility (CSR); and even finds time to do more pro bono work than anyone else in her practice, you might decide she really adds around four times more value.

Perhaps four times is too conservative, but it could also be too extreme. Regardless, however, all firms have lawyers like this. They all have people like this in their ‘support’ functions too. Given just how much more value they add compared to the average employee, you will probably have devoted significant time to thinking about how best to reward them in a way that recognises the contribution.

For a number of years now, Towers Perrin has consulted with law firms on a range of HR and reward issues. Reward and contribution are high up the agenda of most firms. We know that no two law firms are quite the same, but they still struggle to distinguish themselves in terms of what they have to offer prospective and current employees. The starting point is to develop a ‘people and reward’ strategy that helps attract, retain and engage the right people, while also remaining clearly recognisable in a congested and competitive marketplace.

Setting out the strategy

The first step is to articulate your organisation’s business strategy and what it is that differentiates you from your competitors. If properly worked through, the uniqueness of your business strategy will be reflected in the overall employment proposition – the ‘total reward deal’ – you develop. This deal is about much more than just pay though. The concept of total reward covers all the different elements of pay, as well as benefits, learning and development, and aspects of the working environment such as leadership and culture.

In practice, a high-growth acquisitive firm might extol the potential benefits of a firm’s career opportunities to its employees. Its performance-management and reward programmes may look to reward employees for their contribution to the successful growth of the firm. These can also be made flexible enough to be applied to newly-acquired or affiliate organisations. By contrast, a firm with a focus on controlling cost at any particular point in time may look for ways of creating greater differentiation in its base pay spend. It might think about whether a profit-share bonus arrangement really represents a wise spend, introducing market-aligned pay ranges for support staff and carefully controlling pay drift.

Besides clarity of business objectives and the importance of cost, however, there are two other crucial inputs to reward strategy:

Properly understanding and factoring in the needs and preferences of your people;

Incorporating the trends apparent in an ever-changing marketplace.

Most firms will conduct employee research of some description. Whether this takes the form of employee surveys; focus groups; or opportunities for employees to engage with partners and senior management, the methods can offer useful insight into your workforce. The challenge, however, is to go beyond simply measuring incremental change in employee attitudes. There is a clear lack of empirical evidence to demonstrate a link between employee attitudes such as satisfaction and business performance, which can make measuring them – and indeed taking steps to improve them – potentially worthless.

Employee engagement, however, is an entirely different matter. Research by Towers Perrin and others, consistently demonstrates a link between engagement, client attraction and retention, and organisational performance. Engagement concerns the extent to which employees are personally motivated to help their organisation be successful, putting in significant effort beyond what is expected. Engagement matters because we know that engaged employees produce better results and are more likely to stay with their organisation.

Next-generation employee research methods used by Towers Perrin deliver true insight by ascertaining the drivers of engagement. At an organisational, office, practice or team level, these survey techniques identify what those drivers are, and where to focus efforts and resources to obtain the maximum return.

If engagement drivers are identified, and employee preferences properly understood, it is possible to quantify whether a pound is better spent on base pay, benefits, training, or the effectiveness of partners – bringing a much higher degree of rigour to investment decisions. The largest cost to any law firm is people. Yet senior management will spend more time evaluating the spend on a relatively insignificant piece of IT kit in nearly all cases. Historically, managing the return on investment in HR and reward interventions was perhaps more difficult. But now that the tools exist to do this effectively, the time has surely come to evaluate people spend more critically, aligning this with what employees really want and value, and what will drive a better firm-wide performance.

Understanding the market

Having understood the implications of business strategy on reward, as well as engagement drivers and employee preferences, the remaining task is to consider the market. If the strategy is effective, the likelihood is you will be in a strong position to avoid making knee-jerk reactions to the latest hike in lawyer pay. No other increase in cost will have a bigger impact on firm profitability than an across-the-board increase in base pay. And there has to be a limit to how much longer clients will pay for this through increases in fees. In any case, we all know that pay in itself is not a strong driver of engagement. The aim, therefore, is to be broadly competitive with the market on pay, but to truly differentiate your employee proposition through emphasis on other aspects of the deal.

As things stand, it is fair to say there is relatively little variation in approaches to pay across the sector. Lawyers are broadly paid a base salary the same as – or very similar to – that of others in their cohort. They are more likely to benefit from a profit-share arrangement tied to firm performance, than a bonus that rewards their individual contribution, and they will have a benefits package that looks much like that on offer in other firms. The lawyer whose contribution is clearly far greater than that of her peers, will in the vast majority of firms earn only a fraction more than them. The trends we observe in the legal sector – admittedly far from dramatic – are for greater differentiation in base pay driven by contribution, and for an increase in the prevalence and value of individual bonuses. There are, however, a number of success factors that are key to achieving this alignment. And these also hold the key to translating a good people and reward strategy into reality.

Considering contribution: looking at lockstep

Perhaps the most obvious is the extent to which a greater focus on individual contribution for lawyers is consistent with the approach to managing the contribution and reward of partners. There is clearly an inherent inconsistency in maintaining a pure lockstep for the partnership, while at the same time managing lawyer reward on an individual basis. Modifying the lockstep and rewarding partners, at least in part, for their contribution will send the strongest possible signal to the firm that individual contribution matters. Admittedly, this is easier said than done. Numerous firms have modified lockstep, however, even if they have not abandoned it, and in order to do so they have had to articulate what contribution means unambiguously, putting in place appropriate processes to measure it. Once in place, the first steps to fostering a performance culture are taken – and changes to lawyer reward, and indeed that of those in support functions, become culturally more acceptable.

Hours charged by individual lawyers remain a primary driver of value, and therefore a key measure of contribution. It may be crude, but to an extent most firms accept that hours billed is a proxy for other aspects of contribution, as they reflect the willingness of clients and colleagues to work with a particular lawyer. The best lawyers, it is argued, will therefore be the busiest lawyers. Regardless of how much emphasis you place on hours – and whether you link them explicitly to reward – you can be sure that partners, colleagues and clients know an exceptional lawyer when they see one. Think of that lawyer again, the one who is so good. What is it that makes her so good? I bet you could tell me. The challenge is to tease out what makes them so good, define it and align that with your performance-management and reward processes. Over time, defining, measuring and rewarding contribution will enable your firm to better differentiate the performance of lawyers, as well as their reward, whether through base pay, bonus, or both.

Showing support

So what of the employees in your ‘support’ functions? The deal you develop for your lawyers will not work for this group, and there is a very obvious reason why. For lawyers, career progression and pay progression are determined by increases in individual competence and contribution. Progression is fluid, continuous even, and the career path fairly clear, even allowing for the fact that many firms are seeking to introduce alternatives to the linear track to partner. By contrast, for the majority of your support staff, progression is job based, and increases in reward do not pay for themselves through accompanying increases in charge out rates to clients. To some extent, therefore, managing cost is even more critical for this group than it is for your lawyers.

Towers Perrin has worked with a number of firms to articulate the career paths for support staff, introducing reward structures that balance the need to control cost with the ability to adequately reward high performers. Career ‘pathing’ does not create career opportunities where they do not exist, but it does help employees better understand the options available to them and what they need to do to progress. Aligning the career structure for support functions with your pay structure in an integrated manner can deliver real benefits to the firm and employees alike.

Reward and retain

That lawyer. Now that you understand what engages her; know what it is that makes her so much more valuable to the firm than the average lawyer; and have in place processes to measure and reward her contribution, you are much more likely to retain her and attract more people of her calibre. At the same time you can rest assured that what you spend on your people is far more an investment than it is a cost.

Joris Wonders is a senior consultant at Towers Perrin. He can be contacted at joris.wonders@towersperrin.com