Formulaic compensation systems are popular with law firms, and it is easy to see why. They provide clear direction for lawyers as to the goals they need to achieve to be financially successful (lawyers are good students who know how to achieve good grades!). They are popular with lateral hires, because they do not require a lot of trust in the hiring firm in terms of compensation decisions. Formulas drive the profitability levers that firms need to achieve financial goals, such as personal productivity and business origination. And although compensation formulas follow some popular models, no two firm formulas are exactly the same.
Formulaic compensation systems can provide significant challenges, as well. For example, with little or no subjectivity involved, firm leadership has very little ability to drive behaviors outside of productivity and origination that are good for the long-term growth of the firm. Put simply, formulas make it much more challenging to manage a firm.
These systems make it very difficult to encourage non client-related activities, such as engaging in marketing and business development for the firm brand as a whole or for a practice group or industry team, regardless if it benefits you personally; or contributing to firm management; or participating on firm-focused committees or projects not directly tied to client revenue; or training and mentoring more junior partners or associates; or engaging in efforts related to client succession. They can also lead to bad behavior such as hoarding work – either partners doing work that they should be delegating to more junior lawyers or paralegals or lawyers holding on to work for which other partners in the firm have deeper subject matter expertise, just so that they can make their numbers.
There are patterns that emerge in firms with formulaic compensation systems that are heavily weighted to personal productivity. Formula firms tend to have reverse leverage – they are very partner-heavy and have a difficult time retaining associates, because partners are not willing to take away from their billable time to properly train and mentor. They are not likely to have thriving marketing and business development cultures – everyone is mostly focusing their efforts on keeping work on their own plates and not overly concerned about the firm brand or cross-selling.
And after time, sadly, in some formula firms, the talent they would most like to retain – the people with large books of business that keep multiple people busy who are good firm citizens and contribute in all ways to the firm’s overall growth and success – have no choice but to leave. What remains are the average partners, or worse, the under productive partners, who do just enough to survive under the formula.
So, what is the solution? Firms that are clear on their overall vision and strategic plan need to have a compensation system that provides for some level of subjectivity to allow firm leaders to manage and to reward good behavior for those who engage in all of the behavior necessary for the long-term growth and prosperity of the firm.
In James Clear’s bestselling book, “Atomic Habits,” he discusses the reflection and review process that extraordinary organizations and individuals take to ensure that their habits are creating the desired results, and that they are making the necessary adjustments if they are not.
He cites the 1986 Los Angeles Lakers, a team of remarkable talent that failed to make it to the NBA Championships. Legendary coach Pat Riley and his team developed a formula for measuring player’s performance and development. Riley asked each player to “improve their output by at least 1 percent over the course of the season.” If they succeeded it would be a CBE, or “Career Best Effort.”
Of course, they measured all of the fundamental performance metrics that led to a team’s and player’s success – points, rebounds, assists, but they also included credits for “unsung hero” deeds. These were things like diving after a loose ball, taking the hard foul, helping a teammate, saying those words of inspiration when needed most. They won the NBA Championship in 1987.
With formulaic compensation systems, it is challenging to reward the unsung heroes – the people who not only fulfill their productivity and origination requirements, they serve in firm management; lead departments, practice groups or industry teams; go to the meetings and lunches and dinners involved in mergers and acquisitions to ensure compatible firm cultures; interview countless lateral candidates; go the extra mile to mentor an associate or bring them along to a business development opportunity; engage with the staff to make sure they feel appreciated; show up for the retreats, the DEI programs, the things large and small that ensure the well-being of the human capital of the firm. The people who know that for the firm to survive and grow, it is as important to work on the firm’s business as it is to work in the firm’s business.
What can your firm do?
- Evaluate whether your firm’s compensation system is aligned with your strategic growth goals;
- Consider whether your compensation system is ensuring a good year at the expense of an expansive future;
- Clearly define the factors that determine the firm’s long-term success; and
- Recognize that the unsung heroes are the ones that are your starting line-up that will show up for every practice, play their heart out every night and hit the last-minute three to win the championship.