Greener-Grass Pay Systems

Last Word: Greener-Grass Pay Systems

Lexpert, March 2010

by Marzena Czarnecka

It’s compensation anxiety season again. Sometime between February and March – after compensation committees sift through partner self-evaluations and compare them to reality – law firms crunch their numbers and set their partner compensation points. It is, without question, the most tense and unpleasant time of the year at most law firms. And after particularly bad years, it prompts some to reconsider their systems and processes.

Does it have to be this painful? Is there a better way?

After 10 years of listening to lawyers praise their compensation systems for 10 months of the year, only to gripe about them when they’re in action, I’ve decided the unequivocal answers to these questions are, first, “Yes,” and second, “No.”

Sure, law firms have tinkered with their compensation system since Year Zero. They’ve tried to minimize the angst, acrimony and stress of internal competition by setting up lockstep systems, in which partners get what they get based on years of experience. Didn’t work. Why should Tom, Dick and Harry get the same slice when Tom’s a star, Dick’s brilliant but lazy, and no one’s quite sure how Harry got to be a partner in the first place?

Why should Tom, Dick and Harry get the same slice when Tom’s a star, Dick’s brilliant but lazy, and no one’s quite sure how Harry got to be a partner in the first place?

Pot of Gold

They’ve tried to silence the complaints by cloaking compensation in secrecy through closed systems in which no one knew what anyone else was making. Didn’t work. Lawyers are awful gossips. And even if you minimize the intra-firm gossiping and comparisons, you can’t stop them comparing themselves to their out-of-firm colleagues.
Recognizing this, most firms in North America have dropped lockstep and closed compensation systems. Some have gone entirely the other way and made every aspect as transparent as possible — well, for law firms, which means “not that transparent but more than anyone’s comfortable with anyway.” Man, did that not work! Making things transparent is, alas, no guarantee of making them understood, much less accepted.

One solution that seemed to offer some relief started gaining popularity among the open-system law firms: instead of going through the pain and mess every year, they did so once every two years. It was an approach rooted in acceptance of the fact that the process caused pain and heartache no matter how “fair” it attempted to be, and that the only was to protect the sanity of a law firm’s people was to engage in it less often.

Did it work? Well … it achieved its goal of limiting the bellyaching to once every two years. But when, in 2009, partners split the pie according to numbers set in early 2008, which were based on trends seen in 2006 and 2007… need I go on?

The weakness – dysfunctionality, if you will – of law-firm compensation systems is inevitable for two reasons. First, it pits the firm as an institution against the lawyer as an individual, and one of them has to lose. Lawyers may talk about teamwork and all that, but when it affects their take-home cash, how altruistic are they going to feel about their firm’s needs?

Second, lawyers’ perspective on monetary reality sucks. At the largest firms, even poorly compensated partners make ridiculous sums — that is, when compared to the average Canadian’s salary or entrepreneur’s profits. But these lawyers don’t hang out with average folk. They work and socialize with, for the most part, each other.

Worse, they spend a lot of time working for people who make their ridiculous sums look like peanuts — investment bankers, hyper-successful CEOs, entrepreneurs who borrow, lend, spend, lose, double and quadruple money in amounts that make the best compensated lawyer’s take seem utterly insignificant.

So, yes, setting partner compensation in a law firm has to be this painful. Because no matter how fair the process, no matter how big the ultimate share of the profits, it will never be big enough when service providers compare themselves, consciously or not, to their most successful clients. And, no, whether you’re in an open system or a closed one, there isn’t a better way. The grass may look greener on the other side, but there is no system that will give you income on par with the TD Bank’s Ed Clark or Magna’s Frank Stronach, never mind Blackstone’s Stephen Schwarzman. Is that the sound of a bubble bursting?

Marzena Czarnecka is a freelance writer whose annual income makes the worst performing partner with the worst performing national law firm look like King Croesus. But as she’s never golfed with Stephen Schwarzman, she’s happy that way.

Thomson Reuters article record