Lessons for Law Firm Compensation: Open Models
History repeats itself. Especially when an important learning is to be gained. The same situation will appear until lessons are learned or until a better approach to dealing with the issue is identified.
Each year, the law firm compensation cycle repeats. And as the process unfolds, inevitably a certain number of lawyers within the firm will express dissatisfaction with their compensation.
Over the years, the legal recruitment team at The Counsel Network has observed how compensation forms the core of many critical discussions among partners and associates, both within their firm and across platforms in the market.
While it might ring true that no single compensation system will be universally heralded by the firm partnership as perfect, we outline elements frequently examined when assessing open compensation models and their impact to practice.
Accountability Through Transparency
A vast majority of Canadian firms deploy what they believe to be an open compensation system.
An open compensation system is one where individual partner compensation is known by all partners of the firm. Champions of open compensation systems highlight the need for transparency among business owners as key to ensuring honesty and accountability by all participants.
Open models aim to reduce surprises and discrepancies among partner earnings based on contributions to the firm. Proponents argue open systems hold firm leadership accountable for decisions on who is rewarded for what, as all financial decisions, including allocation of origination, billing and non-billable contributions are subject to the scrutiny of the entire partnership.
Open compensation models also shine a spotlight on success — hopefully providing younger partners a clear picture of how success is defined within the firm (for better or for worse) — and they serve as a public reminder to those whose performance trails behind expectations of the firm.
Critics of open compensation models frequently cite how politicized the compensation process tends to become; as those tasked with assessing individual contribution must make difficult, subjective decisions on how non-financial contributions are valued by the firm. Non-financial contributions to the firm are typically harder to account for, frequently leading open compensation models toward a metrics-based formula — resulting in only those contributions that can be readily quantified as being rewarded under the system.
Open compensation models may also be subject to much greater internal criticism, particularly where a partner feels their contributions are not properly rewarded by the firm. Critics of open compensation models frequently point to the amount of time lost by partners who seek to appeal, challenge, or alter the compensation grid to more properly reflect what they feel is the correct valuation of their contribution.
Lessons for Success
The key to successfully implementing an open compensation model is transparency and consistency. It is critical all partners appreciate how the compensation model works, where the discretionary elements lie, and how the formula applies, resulting in an equitable result all parties can accept.
Regardless of whether the model is open or closed, the compensation model needs to:
- support the firm’s core values and strategic decisions
- promote an optimal overall firm culture
- emphasize continued growth at satisfactory rates
- be transparent and perceived as fair
- balance qualitative and quantitative criteria
As law firm leaders wrestle with tweaking or changing their compensation models to get it right, its important they address and manage the unsatisfied lawyers they seek to retain long term before they begin evaluating options and defecting.
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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