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Moray McLaren
Lexington Consultants, London
moray.mclaren@lexingtonconsultants.com

 

I remember very clearly my first experience of lawyers falling out over money.

A law firm partner had asked to meet me urgently. She had received notice of her annual profit-share and opened by saying how happy it made her feel. It was, she told me proudly, a very large amount of money, much more than she would have ever expected when entering the law.

However, her joy was cut short. As her eye moved down the list of partners, she saw that a colleague, somebody who she considered not as hardworking, had been awarded more. ‘This is outrageous and so unfair,’ she told me angrily, ‘we need to find a way of preventing this in the future’.

Starting in the right place

Fast forward 20 years and many firms are still looking for the ‘magic solution’ to divide profits. Where are they going wrong?

Many are failing to appreciate the wider context of profit sharing. In the above example, we see the feeling of ‘unfairness’ as individual hard work had not been recognised and different contributions by partners were not reflected in the profit-share.

The most common challenge we see is when individual interests take priority over firm interests – short-term personal income over longer-term sustainability and business success. This results in a number of negative behaviours such as a ‘my client’ approach (with a subsequent lack of institutional ‘firm’ clients) and a very damaging reluctance to support firm-wide indicatives and infrastructures required of a successful firm.

The starting point should be to isolate the aspirations of partners and then understand their requirements of the firm (what I would call their shared ambition or purpose). If various partner agendas can be aligned, a firm is more likely to succeed.

Getting the balance right

When individual agendas drive the business, everything is ‘up for grabs’. Those who can shout loudest often get what they want, regardless of the best interests of the group. In my experience, every firm needs to find its own way of answering these issues. Although the challenges are similar, the solutions can be unique.

Not only are we seeing a larger number of law firms reviewing their profit sharing, but also the traditional languages and approaches are evolving. Faced with a more complicated set of issues, firms are becoming more open to adopting new approaches.

As I shall discuss in this article, the traditional approaches of ‘eat-what-you-kill’ and ‘lockstep’ have their limitations. Firms are now seeking to combine the best practice of each in a performance-based, hybrid approach. 

Neither eat-what-you-kill nor lockstep

Historically, many firms followed the lockstep approach whereby, in its purest form, a partner progresses automatically up the career ladder, receiving a larger profit-share annually with every further year of practice.

As with every approach, there are both positive and negative aspects that I have listed in the chart below.

Far from being a comfortable approach, many firms are surprised to discover over time how unforgiving lockstep can be. Though well suited for firms where partners share the same purpose or mission, as firms grow (with a wider and more varied contribution by partners to the business) tensions are inevitable. 

 

Lockstep approaches
Positives	Negatives
Simple to administer with no appraisal of fellow partners	Requires partners with broadly similar practice and profitability
All partners benefit from the work of each other, one partner’s success is everyone's success	Automatic promotion lowers profitability
Encourages teamwork, referrals, sharing of clients, sensible work allocation and a collaborative culture	Can be brutal, strong pressure to support or remove lower performers
No incentives to accept work outside your own expertise	Does not necessarily reward the highest performing partners accordingly
Can view conflict checking from a firm perspective, not their own revenue
Gives junior partners both space and time to develop their practice
Allows established partners to take risks, pass clients to junior partners and look for new clients
Encourages development of new areas of expertise and ‘volunteering’ for management responsibility

 

It is no surprise, therefore, that pure lockstep approaches are becoming less popular. Most lockstep firms have already moved away from automatic promotion, building in objective setting and appraisal processes, which can either pause promotion for lower performance or facilitate a quicker upward progress for those who are more successful. They are also introducing the bonus schemes and personal appraisals as outlined below.

We are also seeing challenges around the eat-what-you-kill approaches, although for very different reasons. Rewarding partners primarily on the income they personally generate inevitably leads to negative behaviours, such as prioritising their personal annual profit-share over the longer-term financial success of the business. Some of the positive and negative aspects of this approach are listed below.

 

Eat what you kill approaches
Positives	Negatives
Easy to administer	Each ‘killing’ what they can - not supporting each other
Very forgiving, no need to deal with any low performance by fellow partners	Not dealing with low performance means no opportunity to pull each other up
Partners focus on invoicing and collection	Clients are tied to individuals, this means the client base shrinks in size and quality as partners leave or retire
Can support origination of work for others or prevent it	Biggest fee producers may be the least profitable, requiring a balance of financial and non-personal / personal and team metrics
Ideal where partners are sharing costs more than building a business	Short-term income prioritised over sustainable long-term growth
	Restricts development of firm reputation
	Silos and holding onto work during slow times
	More generalist and less specialist practices
	Pulled into less complex multidisciplinary assignments
	Over time a lack of institutional clients
	Less investment in firm, eg, associate career plans
	More of a platform than a firm. Limited business infrastructure with partners unwilling to pay for, or manage, it

 

Towards hybrid approaches

In recent years, we have been seeing that both ends of the spectrum are morphing into a more hybrid approach.

Equity bands

Although language can be different across jurisdictions, the introduction of equity bands (more comparable to lockstep) are becoming common for the eat-what-you-kill firms as they move towards a performance-based approach. The key elements include:

• steady career development: the years from the bottom to the top of the equity bands should reflect a successful career path, from a junior to the most senior equity partner. Premature movement up the bands followed by falling back can be demotivating;
• band assessment and movement every two or three years, instead of modified lockstep approaches which typically require annual assessment. Appraisals are time consuming and reviews every two or three years allow for, and encourage, partners to build a more sustainable practice. Typical progression would therefore be one band every two or three years, with the option for accelerated progression (eg, moving two bands) in cases of exceptional performance; and
• partners are held at the same level, if their appraisal does not yet merit promotion, and can fall down if improvements are not made.

Bonus pools

We are also finding that most law firms operate a bonus scheme rewarding exceptional financial performance. Unlike movement up or down the equity bands, this is decided by a partners' annual financial performance.

The pool, therefore, needs to be sufficient to reward outstanding performance from a few, while not limiting the profit-share available to everyone. For those firms that are transitioning away from eat-what-you-kill, the bonus pool is vital to soften any hard edges for those winning from the current system.

Acknowledging leadership roles

To achieve growth and professionalisation, firms cannot rely solely on ‘volunteer’ leaders (individuals who fall on their own sword) sacrificing their personal client work for the sake of the firm. While some firms chose to recognise through the bonus pool, others calculate the number of hours required for each leadership role and substitute those hours for their performance targets within the band review process.

Annual appraisals

The beauty of both the eat-what-you-kill and lockstep approaches is their simplicity. The first relies on simple financial metrics to divide the profit, while the second relies on an automatic annual promotion.

A challenge of any band approach (be that a modified lockstep, or the similar equity bands described above) is that partners must assess the performance of their peers.

As a starting point, partners need to set out their objectives for the year ahead in terms of financial performance and leadership, and management, of their team, clients and markets. Firms seeking to build a common cause need to ensure the right balance between financial performance and other factors critical to the business, such as clients and developing people.

The aim is not to chastise partners, but to provide them with advice and support as they develop their careers. At the same time, partners should be held accountable for completing the annual objectives they have agreed. Every second or third year (depending on the approach they decide), the appraisal will contribute to the band review.

Impact upon governance and decision-making

In parallel, it is no surprise that the sharp edges of an eat-what-you-kill approach strongly impacts decision-making, causing some firms to experience a ‘he/she who shouts loudest’ approach, rather than reasoned joint decision-making by partners.

Indeed, the introduction of objective settings and appraisals of every partner requires clarity over his or her own role and responsibilities, as well as those of their colleagues.

Back where we started

This takes us back to where we started to the partner who was deeply unhappy despite her exceptional financial reward. As is often said, we must of course recognise that it is impossible to please every partner financially. It is perhaps far better (and fairer) to find that everyone is equally unhappy!

 

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