What is a 'fair' compensation system?

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Published on 9/11/06

As an earlier story on big-firm profits might suggest, averaging $1 million in profits per partner raises a host of questions on how those profits are realized in terms of partner compensation.

There are, of course, various formulae for determining compensation among partners and especially managing partners. One might suggest that it's not important what formula is used so long as all involved perceive that the process of determining that number is fair - recognizing that people respond to what they're rewarded for.

I believe it is also worth suggesting that people will accept a great deal less than the top compensation as long as they like the colleagues with whom they work. This has a far greater impact than money.

While money must be competitive (it need not be on the high end), "firm culture" is first and foremost. People must like the work they do and those with whom they do it.

Lawyers who are together physically in an office environment should share a camaraderie that shapes the development of a firm culture. Many factors come into play: the exchange of ideas, the guidance, the learning, the education of one lawyer by another. These are vital to a successful law firm.

Apply this concept to firm compensation. Typically, there are considered to be two general compensation models: lockstep, in which the firm's overall success each year is averaged out to determine a standard rate of compensation increase for lawyers in each strata of the firm, and "eat what you kill," in which all attorneys are rewarded on how much business they personally bring in.

Any firm that encourages lawyers to maximize their individual compensation may have fast near-term growth. But a willingness to approach compensation as an institution (lockstep compensation, or a variation on this theme) makes for firm longevity.

Perhaps it takes the entrepreneurial spirit to get going. Then the challenge is to change that into a managerial spirit, something that proves too difficult for most. Only a few really successful firms find a way to do it.

If a firm wants to promote "partnering" or "teamwork," that usually means that the law firm culture and compensation system must change to a more cooperative corporate model.

The compensation committee or the managing partner must affirmatively state that a requirement of being a member of the firm is that other members of the firm be involved in all matters involving "x" dollars exposure, minimum expected attorneys' fees or certain types of cases, etc.

Base compensation must, in some fashion, be tied to the effectiveness of involving other firm lawyers as part of the team delivering legal services to clients.

As this approach expands, the firm must shift the emphasis of its recognition programs from individual to team rewards. Even individual rewards should acknowledge people who are effective team players, freely sharing their expertise.

The fairest compensation approach gets away from a star system that rewards only the individuals who stand out from the crowd; it also rewards those individuals who help the crowd perform better.

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