By Brenda A. Barnes and Camille Stell
Law firms are not unlike other professional service firms with regard to how they compensate the leaders of their firms. Historically, the compensation of the managing partner has developed over time and correlates to the role that the partner will play in leading the firm. A successful managing partner compensation plan should include merits for developing a strategic plan, increasing lawyer and client profitability and recruitment of lateral partners.
There are several fundamental approaches to managing partner compensation plans: the one-size fits-all approach, the CEO approach and the balanced approach. We will review each over the next several paragraphs.
One-Size-Fits-All Approach
It is not uncommon in many small to medium sized firms to treat the managing partner compensation the same as the other partners are compensated. This is commonly called the one-size-fits-all approach. Through this approach, a firm assigns a value to the managing partner non billable hours and then fits it into the current partner compensation model. Unfortunately, this approach does not take into account the value that the managing partner adds to the firm. It also can lead to partner resentment or confusion if partners suspect that the managing partner is getting unreasonable credit for the nonbillable hours that others do not.
CEO Approach
Another approach is often called the CEO approach. This approach frequently employs an analogy between law firms and public companies. If profits go up, then the managing partner should be compensated accordingly, and if profits go down, their compensation should decrease as well, just as public company leaders are rewarded and penalized for trends in their stock. Of course, many public CEOs have a base compensation plan that is extremely lucrative.
If a law firm managing partner was compensated solely on the profitability of the firm it could lead to a biased decision making process. One example is a decision by a managing partner to upgrade the firm’s technology platform. Decisions such as these take from the coffers of the firm. If the firm philosophy is to empty the coffers each year, visionary decisions such as an upgrade to technology will not be seen as beneficial.
The Balanced Approach
The balanced approach is a system that evaluates managing partner performance based on subjective and objective criteria. To be successful in implementing a balanced approach, the partners would need to be committed to evaluating the factors of a successful managing partner.
Brenda A. Barnes and Camille Stell are co-authors of RESPECT — An Insight to Attorney Compensation Plans (lawofficemanagementbooks.com). They will present a webinar on compensation and bonuses this Thursday, Feb. 23. It’s free for members of Law Office Manager, and there is still time to register here.