Law Firm Articles

Why Do We Have Compensation Programs?

The phone rings. The voice on the other end of the line introduces herself as the new managing partner of a century old law firm. She got the job two weeks ago, during a generational transition over concerns regarding management and direction. Her firm is mid-sized, does specialized work and is located in a mid-sized city in the central part of the US. The “old guard” acting as benevolent dictators led a tight, closed law firm. After some key departures, they agreed to a transition, but are still active and involved. Their “formula” is not working, particularly once a partner retires. And they need help putting something different in place.

And this is often how it begins: someone seeking a different program, structure, or process to decide compensation. What changes are appropriate?  First look at the reason compensation programs exist in the first place.

Why Do Comp Programs Exist?

They exist to make consistently good compensation decisions. It may sound self-evident, but it is a critical truth that is often overlooked. The compensation program is an aid, tool or framework that facilitates decision-making. Decision quality is assessed first. If the decisions pass muster, then the structure and process are examined to assure that the decision quality is likely to be sustained and there is good communication between decision makers and the partners. If the decisions do not pass muster, then the structure and process are examined to improve decision quality and understanding.

Making consistently good compensation decisions has become fundamentally harder. As the profession ages its boomer generation into retirement or a twilight zone of semi-activity, it simultaneously confronts fundamental shifts in client engagement as well as competitive pressures from technology and even more specialized providers of segments of services once handled exclusively by the firm. The business model of the profession is broader and more diverse than ever. What was once a profession where top line analysis was sufficient has become much more stratified, requiring more and different metrics and a bottom line assessment. Where growth was historically achieved by grooming associates coming out of law school, it is now primarily achieved from laterals bringing clients to their new firm. Lateral compensation premiums stress internal pay equity considerations within law firms. The environment in which compensation decisions are made is more complex and more difficult than ever. “Fasten your seat belts; it’s going to be a bumpy night” may best describe the journey that lies ahead.

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