Not All Partners are Created Equal: Developing Effective Compensation Plans

Transcription

1 May 19-22, 2014, Toronto ON Canada Not All Partners are Created Equal: Developing Effective Compensation Plans Presented by Kristin Stark, MBA FM22 5/20/2014 1:00 PM - 2:30 PM The handouts and presentations attached are copyright and trademark protected and provided for individual use only.

2 ALA Annual Conference Not All Partners Are Created Equal: Developing Effective Compensation Plans Kristin Stark Principal, Fairfax Associates May 2014 Page 0 About Fairfax Fairfax Associates provides strategy consultancy to law firms We help our clients to improve their competitiveness and achieve their strategic aims by identifying, planning and executing the practical actions that make a material contribution to their success. Fairfax supports our clients in four key areas of their business: Strategy & Direction, Merger, Performance & Compensation, and Governance & Management. Strategy & Direction Merger Performance & Compensation Governance & Management Strategy Development and Implementation Merger Strategy Partner Performance and Compensation Governance and Management Practice Strategy Merger Search Firm Performance and Profitability Improvement Operational Structures & Reviews Market and Sector Research Merger Negotiation and Structure Pricing Partnership Structure Client Research and Key Client Development Merger Integration Process Improvement Alternative Business Models Page 1 1

3 The Market s Impact on Partner Compensation Demand continues to be flat or down Many firms reporting revenue drops for 2013 Clients are demanding lower prices Alternative fee arrangements Discounts New staffing mixes Technology Greater efficiency Compensation systems are under pressure Gap between what firms say they value and what they actually value Gap between what clients want and what firms measure Stability an increasing issue Page 2 The Market s Impact on Partner Compensation Increasing focus on compensation in firms Heightened concern due to slow growth/flat profitability For some, a dramatic re distribution of compensation in recent years Growing disparity between top and bottom performers Single year increases/decreases upwards of 30 40% in some firms Increasing spread in ratio of high to low Competitive pressure and lateral recruitment forcing firms to focus more heavily on compensation Pressure to ensure market compensation levels for most valuable/mobile partners Parallel focus on introducing more effective approach to partner performance management Page 3 2

4 Current Partner Compensation Challenges Pressure on the system How do you reset compensation after 4 years of flat profitability and recession driven adjustments? How do you address partners whose compensation exceeds contribution? How do you deal with exceptions? How do you use bonuses effectively? Performance management How do you set clear performance expectations for partners without becoming formulaic? Where do you draw the line between income and equity? How do you pay for and evaluate the performance of firm management? Can you encourage long term behavior? Can there be a deferred comp element? Page 4 Spectrum of Partner Compensation s Driven by agreed upon goals for the firm and managing performance to achieve those goals Performance Based Subjective Driven by individual data Eat What You Kill Formula Seniority/Lock step Driven by seniority Page 5 3

5 Developing an Effective Performance/Merit Based Compensation Methodology: How does it work? Management assessment of individual partner performance and merit of contributions to the firm (without a formulaic weighting of criteria) What does it reward? Full range of contributions necessary to grow and build the firm How do you define compensation criteria? Derived from the goals of the firm, and generally involving key performance areas: financial contribution client service and management marketing and business development practice group and people management partnership contribution Page 6 Developing an Effective Performance/Merit Based Compensation How do you use performance data? Range of metrics reviewed, but no single perfect indicator Growing use of new metrics given changes in industry Today s Key Metrics Originations (collections) Working Attorney Collections Realization Leverage (or throw off ) Billable Hours (declining application) Client/matter profitability Drivers of Change Client concerns over value Alternative pricing Performance pressure Staffing model changes Possible Future Metrics Profit per share of practice managed Total profit of work originated/managed Unit cost of work originated/managed Client satisfaction rating Expansion of key relationships Employee satisfaction rating Cross selling / Cross working Page 7 4

6 Developing an Effective Performance/Merit Based Compensation How do you define origination? Open vs. closed? Prospective vs. retrospective? Not precisely or easily measured The fiscal year collections attributable to the partner or partners who are the reason why the client matter is currently at the firm Open systems more common, but focus on relative compensation tends to drive dissension Closed systems, with trusted leadership, tend to result in increased satisfaction Prospective systems offer opportunity to align partners with firm goals How do you align partner performance? Individual performance planning process or simple goal setting Page 8 Developing an Effective Performance/Merit Based Compensation Use of levels and increases/decreases Defined levels in which partners move up and down Reduces subjectivity Clear path for moving partners down based on performance Feedback process Pre compensation interviews Post compensation interviews, where appropriate Bonus pool s may use a retrospective bonus pool to reward extraordinary performance Typically ranging from 4% to 15% of net income Requires clear criteria and philosophy Page 9 5

7 Developing an Effective Performance/Merit Based Compensation Who sets compensation? Compensation Committee make up and size varies by firm, but the most common structures include: Membership: Benefits: Drawbacks: Management Executive Committee (or other governing body) acts as Compensation Committee Based on principle that one s ability to lead/manage an organization is derived from one s ability to set compensation Fails if partners do not trust firm leadership Page 10 Partial Overlap Partial membership overlap with Executive Committee; Additional members appointed or elected at large Allows for broader partner insight/input into compensation process May require greater time/effort in generating alignment between members of management and others Partner Expectations and Performance Management Defining and communicating expectations What does it take to be an Equity partner? Minimum expectations Expectations for advancement Managing performance How will partner performance be evaluated? Feedback and communication processes Pre, post, and mid year compensation interviews Processes for dealing with underperformance Page 11 6

8 Assessing the Efficacy of Your Firm s Compensation How do you know if your compensation system is working? Characteristics of Effective s Does your system.? Pay income that is reflective of: The market compensation value for a given partner The full spectrum of efforts needed to operate the firm Reward behaviors clearly linked to firm goals/strategy Enable management to more effectively align individual partner performance and contributions with overall firm goals and strategy Contribute to an environment which promotes collective firm growth and integrated practices Seek to reduce internal competition Demonstrate consistency in the process, and a clear link to and analysis of quantifiable performance data Page 12 Questions & Contact Information Your opinion matters! Please take a moment now to evaluate this session. Thank You! Kristin Stark Principal, Fairfax Associates Kristin.Stark@FairfaxAssociates.com (415) London Washington DC California Fairfax Associates 2014 This presentation may not be circulated, quoted, or reproduced for distribution without the written permission of Fairfax Associates. This material formed part of an oral presentation and is not a complete record of the discussion. Page 13 7