Not All Partners are Created
Equal: Developing Effective
Compensation Plans
Presented by
Kristin Stark, MBA
FM22
5/20/2014
1:00 PM - 2:30 PM
Page 0
ALA Annual Conference
Not All Partners Are Created Equal:
Developing Effective Compensation Plans
Kristin Stark
Principal, Fairfax Associates
May 2014
About Fairfax
Strategy Development and Implementation Practice Strategy Market and Sector Research
Client Research and Key Client Development
Strategy & Direction
Merger Negotiation and Structure
Merger Integration
Merger
Governance and Management Operational Structures & Reviews
Partnership Structure Alternative Business Models
Governance & Management
Partner Performance and Compensation Firm Performance and Profitability Improvement Pricing
Process Improvement
Performance & Compensation
Fairfax Associates provides strategy consultancy to law firms
We help our clients to improve their competitiveness and achieve their strategic aims by identifying, planning and executing the practical actions that make a material contribution to their success.
Fairfax supports our clients in four key areas of their business: Strategy & Direction, Merger, Performance & Compensation, and Governance & Management.
Merger Strategy Merger Search
Page 2
The Market’s Impact on Partner Compensation
•
Demand continues to be flat or down
– Many firms reporting revenue drops for 2013•
Clients are demanding lower prices
– Alternative fee arrangements – Discounts – New staffing mixes – Technology – Greater efficiency•
Compensation systems are under pressure
– Gap between what firms say they value and what they actually value – Gap between what clients want and what firms measure•
Stability an increasing issue
The Market’s Impact on Partner Compensation
•
Increasing focus on compensation in firms
•
Heightened concern due to slow growth/flat profitability
•
For some, a dramatic re‐distribution of compensation in recent years
– Growing disparity between top and bottom performers – Single year increases/decreases upwards of 30‐40% in some firms – Increasing spread in ratio of high to low•
Competitive pressure and lateral recruitment forcing firms to focus more
heavily on compensation
– Pressure to ensure ‘market’ compensation levels for most valuable/mobile partners•
Parallel focus on introducing more effective approach to partner performance
management
Page 4
Current Partner Compensation Challenges
•
Pressure on the system
– How do you reset compensation after 4 years of flat profitability and recession driven adjustments? – How do you address partners whose compensation exceeds contribution? – How do you deal with exceptions? – How do you use bonuses effectively?•
Performance management
– How do you set clear performance expectations for partners without becoming formulaic? – Where do you draw the line between income and equity?•
How do you pay for and evaluate the performance of firm management?
•
Can you encourage long term behavior? Can there be a deferred comp
element?
Eat What You Kill Formula Seniority/Lock step
Spectrum of Partner Compensation Systems
Performance Based “Subjective”
Driven by agreed upon goals for the firm and managing
performance to achieve those goals D riven by seniorit y Driven by individual data
Page 6
Developing an Effective Performance/Merit Based Compensation
System
Mechanics of subjective or merit based systems… Methodology: How does it work? • Management assessment of individual partner performance and merit of contributions to the firm (without a formulaic weighting of criteria)What does it reward? • Full range of contributions necessary to grow and build the
firm How do you define compensation criteria? • Derived from the goals of the firm, and generally involving key performance areas: •financial contribution •client service and management •marketing and business development •practice group and people management •partnership contribution
Developing an Effective Performance/Merit Based Compensation
System
Mechanics of subjective or merit based systems… How do you use performance data? • Range of metrics reviewed, but no single perfect indicator • Growing use of new metrics given changes in industry Possible Future Metrics Drivers of Change Today’s Key Metrics •Originations (collections) •Working Attorney Collections •Realization •Leverage (or “throw off”) •Billable Hours (declining application) •Client/matter profitability •Client concerns over “value” •Alternative pricing •Performance pressure •Staffing model changes •Profit per share of practice managed •Total profit of work originated/managed •Unit cost of work originated/managed •Client satisfaction rating •Expansion of key relationshipsPage 8
Developing an Effective Performance/Merit Based Compensation
System
Mechanics of subjective or merit based systems… How do you define origination? • Not precisely or easily measured • The fiscal year collections attributable to the partner or partners who are the reason why the client matter is currently at the firm Open vs. closed? • Open systems more common, but focus on relative compensation tends to drive dissension • Closed systems, with trusted leadership, tend to result in increased satisfaction Prospective vs. retrospective? • Prospective systems offer opportunity to align partners with firm goals How do you align partner performance? • Individual performance planning process or simple goal settingDeveloping an Effective Performance/Merit Based Compensation
System
Mechanics of subjective or merit based systems… Use of levels and increases/decreases • Defined levels in which partners move up and down • Reduces ‘subjectivity’ • Clear path for moving partners down based on performanceFeedback process • Pre compensation interviews
• Post compensation interviews, where appropriate Bonus pool • Systems may use a retrospective bonus pool to reward extraordinary performance • Typically ranging from 4% to 15% of net income • Requires clear criteria and philosophy
Page 10
Developing an Effective Performance/Merit Based Compensation
System
Mechanics of subjective or merit based systems…
Who sets compensation? • Compensation Committee make‐up and size varies by firm, but
the most common structures include: Management Partial Overlap Membership: Executive Committee (or other governing body) acts as Compensation Committee Partial membership overlap with Executive Committee; Additional members appointed or elected at large Benefits: Based on principle that one’s ability to lead/manage an organization is derived from one’s ability to set compensation Allows for broader partner insight/input into compensation process
Drawbacks: Fails if partners do not trust
firm leadership
May require greater time/effort in generating alignment between members of management and others
Partner Expectations and Performance Management
•
Defining and communicating expectations
– What does it take to be an Equity partner? • Minimum expectations • Expectations for advancement•
Managing performance
– How will partner performance be evaluated? – Feedback and communication processes – Pre‐, post‐, and mid year compensation interviews – Processes for dealing with underperformancePage 12
Assessing the Efficacy of Your Firm’s Compensation System
How do you know if your compensation system is working? Characteristics of Effective Systems Does your system….? • Pay income that is reflective of: • The market compensation value for a given partner • The full spectrum of efforts needed to operate the firm • Reward behaviors clearly linked to firm goals/strategy • Enable management to more effectively align individual partner performance and contributions with overall firm goals and strategy • Contribute to an environment which promotes collective firm growth and integrated practices • Seek to reduce internal competition • Demonstrate consistency in the process, and a clear link to and analysis of quantifiable performance data
Questions & Contact Information
Kristin Stark
Principal, Fairfax Associates
[email protected] (415) 215-9294 www.FairfaxAssociates.com California London Washington DC © Fairfax Associates 2014
This presentation may not be circulated, quoted, or reproduced for distribution without the written permission of Fairfax Associates.
