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The way Canadian law firms divide profits is usually based on a single element: billable hours recorded. The more hours a partner records, the greater his/her pay packet. 

But a partner of Catalyst Consulting, a firm that provides services to law firms and law departments, says in some cases this might not be strategically sound. 

“The starting point is often related to how clients pay their lawyers. Clients traditionally pay by the hour based on an agreed hourly rate. The temptation therefore is to translate this into the compensation structure for the firm’s partners,” says Simon Taylor who brings his experience of other partner compensation systems to the Canadian market.

And, Taylor maintains, there are other potential problems with partnership compensation systems based on billable hours.

“A big part of a partner’s job should be to bring business to their firm and work on building solid client relationships. To create the necessary time to achieve this, a partner needs to delegate routine work to less senior staff.

“But the more time partners spend building relationships, the less time they have for doing their own billable work and with a compensation system overemphasizing the partner’s billable hour record, their income can fall. This is a financial disincentive to delegating work and spending time with new clients. So even though one of the key drivers of profitability is the ability to effectively delegate, the partnership is collectively shooting itself in the foot.

“This calls for significant changes in partnership behaviour. But this stuff isn’t learned at law school. Entire careers are built on billable hours.”

Team-based compensation

Taylor, who himself worked for 25 years as a lawyer in London, England, and Hong Kong before becoming a consultant, has been working with a Canadian law firm to implement a radically different compensation system that addresses the concerns he points out. It is a compensation model that Taylor experienced in Britain where it is commonly used.

At its basic level, Taylor’s compensation model involves approximately half of a partner’s pay being set at a flat rate based upon revenue projections for the current financial year.

The other half of the pay is based on the collective efforts of each practice group to meet targets that encompass profitability as well as total revenue. This way the firm encourages high levels of total business (revenue) and the effective delegation of the work (profitability).

But, says Taylor, there is a third component that needs to be added — client satisfaction. Some clients will initially be happier if a senior partner handles their file as often as possible, which eats into the profitability. Partners need to ensure they communicate to clients that their legal issues are being handled effectively by a combination of senior and junior lawyers, whatever the delegation is.

Client satisfaction is determined by a survey that quantifies how well the client perceives they have been served.

“When those three targets – revenue, profitability and client satisfaction – are hit, then the bonus pool is available for distribution,” says Taylor.

Allison Wolf of Shift Works Strategic, says in The Lawyer Coach Blog that, “the basis of this scheme is to bring the partners’ compensation into alignment with the firm’s strategic objectives. It is all very well to talk about ... teamwork, but if the compensation system does not reward this type of behaviour, then the concept will remain just fine words.”

Wolf, an executive coach, says that traditional compensation schemes are frequently contentious. “I often have conversations with lawyers who aren’t happy with the way they are compensated. They say teamwork is not valued.”

According to Wolf there are potential challenges with Taylor’s system. “You are asking partners to make a very big change in the way they reward work. It may be easy to implement but getting buy-in from everyone is something else.”

Wolf says practice leaders have to be good people managers that can delegate well for Taylor’s system to work. This is not a natural attribute and in some cases coaching is advisable at the group leader level.

“Financial reward systems are one part of a bigger picture. Compensation is not a replacement for good management. Firms must invest the time and resources to support the professionals in seeing the value of teamwork and helping them to adapt this in their own practices.”

Taylor says that another major problem is how to distribute the bonus. This can be the most contentious issue as Taylor learned from his experience in Britain. Some practice groups use different formulas and in some cases it is uniform across firms. Also, the bonus may be reserved for partners only, partners and associates only, or partners, associates and all support staff contributing to the practice group’s results.

Taylor says, “I would always suggest that the bulk of the bonus should go to the partners, as they carry all the risk and it is they also who have the ability to drive the scheme forward or let it die.” 

This compensation model is currently in the process of being implemented by a firm, starting in 2006. Thus it represents a work in progress. But so far, Taylor says the feedback has been positive and that the new system is working well.

“We’ve also spoken to a number of other Canadian firms interested in this type of partner compensation system. The difficulty is that is so different from the status quo. The partnership needs to be willing to embrace change, and for some firms, that is difficult to achieve.”

Compensation strategy

There is a variety of ways to approach compensation according to Tracy Bosch, a senior consultant with Hay Group, a global human resources consulting company. Bosch says there are three main variables for structuring pay: the size of the job; the market and what pay surveys indicate other people in similar positions are getting paid; and the individual and his/her capabilities.

“Companies generally focus on one or the other variables depending on an organization’s philosophy,” says Bosch. “For example, a company might be focused on the market and compensate depending on how that profession [or practice] is valued outside the company. They will feel an obligation to pay these people what other firms are paying or they will lose them.

“Larger organizations tend to have set compensation systems with salary grades and detailed policy around how they arrived at the salary ranges. Technical models will vary depending on the philosophy of the company.”

Agreeing that overall firm strategy should drive compensation is an easy conclusion. For law firms, the bigger question is how to do it. And that’s when it’s best to turn to experts, like Taylor, Wolf and Bosch for options and direction.