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Make sure your law firm’s partner compensation policies have been captured in writing and are in sync with your strategy, values and the marketplace – especially if transformative changes are being contemplated, says Calibrate’s David S. Schaefer.

The legal industry – both the business of law and the practice of law – has been undergoing a transformation for some time.  Until recently, the transformation has been relatively gradual, albeit with changes coming in fits and starts, allowing most law firms to gradually adopt.

For sure, there are innovators and early adopters.  However, the pace of change has been accelerating, even before the pandemic, and there are signs that the acceleration of change will not slow down anytime soon. That acceleration will put even greater pressure on those law firms that have not yet adopted or are only in the early stages of adopting to the changes in the industry, especially the business of law.

There is a laundry list of items to be addressed.  But before any changes are proposed, you should undertake an assessment of your firm’s current position and whether the applicable firm documents (e.g., partnership agreement, strategic plan, compensation polices, organizational chart, practice management plan) reflect said position and what if any changes are required to properly position your firm for the current environment.

Every attorney will want to know how the proposed changes will affect him or her and compensation will be at the top of the list.  If the firm’s compensation policies are not in sync with reality, the business is probably already struggling with itself just to maintain the status quo, and will be less prepared to address upcoming changes.  Therefore, the review should start with the compensation policies.

Review What You Have in Place

If there is a written compensation policy, the first order of business is to review the policy to assess whether it reflects the current values and strategy of your firm.  If there isn’t a written policy, then now is the time to create one.  A written policy is essential.  Many firms today are a composite of mergers, acquisitions of other firms or practice groups and lateral partners. In an environment where there are constant changes in the partnership ranks outside of promotion from within, it’s difficult, if not impossible, for a partnership to sustain a culture if the partners do not understand and commit to a compensation philosophy.  So, before changes are proposed, make sure there is a written compensation policy that reflects the current state of play.  If possible changes to the business or practice of law will not require any material changes in compensation policies, it will be that much easier to implement.  If that’s not the case, then clearly describing the current state of play, the proposed changes, the end result and the benefits – compensation and otherwise – will make it much more likely than not that buy-in for change can be achieved.

What Should a Partner Compensation Policy Include?

A written compensation policy should reward and promote the firm’s standards for partner performance.

  • Generally, this means the compensation policy should recognize contributions for:
    • Legal practice (e.g., business origination, client and practice builders);
    • Firm service which demonstrably advances the firm’s business, including the goals of the partner’s practice or industry group; and
    • Other services which advance the firm’s commitments (e.g., pro bono).
  • A firm’s compensation policy also has to take into account the marketplace for legal talent and reward performance consistent with the marketplace so as to retain talent and attract the best lateral candidates.
  • A firm’s compensation policy should incorporate incentives into the compensation so as to reward contributions in the year of performance.
  • A firm’s compensation policy should avoid practices that create ill will such as small differences in compensation among partners and changes in compensation year over year that are abrupt or not consistently applied to all partners similarly situated.
  • Finally, to the extent a firm’s compensation policy relies on statistical data, the integrity of that data must be assured and its application must be clearly and consistently applied.

 

About the Author

David S. Schaefer is a Managing Director with Calibrate.  A former Managing Partner of an AmLaw 100 law firm, David advises law firm leaders and COOs on how best to align the practice of law and business of law to best push forward a firm’s culture, vision and strategy.

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