Research Shows Value of Metric-Based Partner Compensation Systems

Aderant Think Tank

Research Shows Value of Metric-Based Partner Compensation Systems

If you’re an equity partner in a law firm, it’s likely that you’re making more money than you were a few years ago, but remain unsatisfied with your firm’s partner compensation system and would welcome changes. Recent surveys of law firm partners show fairly similar patterns in these responses, even if the partner compensations systems are completely different.

While partner compensation systems worldwide span the full spectrum from purely subjective to purely “lockstep”, almost all firms report struggles with the process. That’s not surprising, considering this is perhaps the most important decision a firm can make, and the ramifications of such decisions can often linger for years.

Aderant recently released their new white paper titled Your Partner Compensation System Can Be Better: Here’s How. The report was a culmination of a six month research project that involved a review of industry studies, interviews with industry experts and five Aderant Leaders in Law events, attended by managing partners and senior leaders from more than 50 top U.S. law firms.

Among several interesting findings, our research suggests that data-driven compensation decisions are a key contributor to partner satisfaction. The study also concluded that compensation plans based on objective analytical data appear to be best practice among leading firms. Firms which are using actionable data metrics as part of their model are able to provide partners with clear and accurate explanations for the decisions of their compensation committee.

In the midst of the current trend of high-level lateral poaching, dissatisfied partners will likely start evaluating their options, and may end up joining the growing wave of lateral defections. By evaluating partner performance using clear metrics, Aderant determined firms can increase transparency and abate suspicions that the compensation process is arbitrary or unfair.

As we discussed the survey results, Ian Oxman, VP of Marketing commented that “Compensation is a difficult business issue regardless of the company or level of employee. For law firms, partner compensation becomes a strategic issue as it can drive retention, recruitment and ultimately revenue. For long term growth, firms need to get partner compensation right.”

In fact, the 2014 Partner Compensation Survey from Major, Lindsey & Africa found that while firm partners in the U.S. are faring relatively well in a recovering economy, 65% of the respondents would like to see a change in their compensation methods. In a related finding, only 45% of partners felt that their compensation was “about right”, leaving 55% wanting more.

While it’s still true that most firms don’t make proper distinctions between profitable and non-profitable client books of equal revenue value, for example, some firms are starting to use profitability as a metric in their compensation systems. Fortunately, the technology now exists to make this possible.

Various business intelligence tools allow firms to take raw data and convert it into actionable metrics. For example, firms can now benchmark partners on targets, budgets or prior performance, and can easily track pre-defined performance and management metrics. Newer applications even make suggestions when specific performance areas appear to be lacking. In other words, firms can easily now drill down into their data to produce reliable, actionable information for strategic decision—such as partner compensation.

As I recently told Legaltech News, “There’s still a lot of subjectivity to how firms are presenting their compensation models to their partners, but there are also a lot of firms that are really taking information and using that to almost calculate their partner compensation.”

As we noted in the white paper, the difficulty with the partner compensation process likely arises from an overall sense that the decisions are arbitrary, unfair or lack transparency. But by adopting the available data tools that now allow firms to evaluate performance using clear metrics, partners can avoid much of this anxiety. Of course no system is perfect, but today’s business intelligence tools can be implemented to support compensation systems that are more transparent and reward profitability.

Join the discussion on LinkedIn or Twitter @Aderant and let us know what you think!