Lessons for Law Firm Compensation: Closed Models
Lawyer compensation is the most sensitive aspect of any law firm. Controversy and tension is ever present. Even when Partners are doing well financially, they still voice concerns related to the process and outcomes delivered by the model.
Compensation models drive the overall firm culture and shapes the lawyer — positive and negative – knowing full well that you get what you pay for. In “Lessons for Law Firm Compensation: Open Models” we examined various aspects regarding open compensation models. In this posting, we take a closer look at closed compensation models and impact on the practice.
Closed compensation models are ones where the firm’s partners do not know how much the others earn. While partners generally have a sense of how compensation is determined, they will not be party to the outcome by which individual compensation is arrived at.
Adherents to closed compensation models argue they result in significantly lower internal strife, as the politics of compensation is largely eliminated. Unlike other businesses, law firms are comprised of lawyers, who they feel are more likely to challenge peer decisions, particularly on such delicate matters as compensation. For many, closed compensation models thus eliminate what is viewed as the single most contentious issue between partners at a law firm, thereby fostering a more trusting work environment.
Closed compensation models also have the advantage of being able to more accurately reward star performance, as interpersonal and political considerations are less likely to directly influence compensation outcomes at the firm. Specifically, supporters of closed compensation models point to their ability to more readily reward rising stars in the firm, as perception issues and compensation comparisons are less likely to occur in a blinded model.
Critics of closed compensation models frequently cite the fact that few businesses would entertain the notion of a group of owners not knowing exactly how profits are being divided. They argue the model concentrates power in the hands of the few, and a lack of transparency creates the potential for favouritism and/or errors in application of the agreed upon compensation model.
The key to successful closed compensation models is trust. To be successful, there must be a high degree of trust within the firm; not only across all partners, but particularly in those tasked with evaluating and determining appropriate compensation levels for individual partners.
While the vast majority of law firms operate under open systems, for the few firms that have transition to a closed compensation model, rarely if ever do they revert back. This may be the most telling feature of all.
Dal Bhathal is a Managing Partner at The Counsel Network, a Canadian legal recruitment firm specializing in legal talent management strategies covering all levels of lawyers and practices for both corporate legal departments and law firms. To discuss effective compensation strategies, contact Dal at firstname.lastname@example.org or 416.364.6654/604.643.1708.
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