About Floods and Compensation: Assessing value in the Partnership

One of the most complex affairs in a partnership is determining who does what, and also determining the value that should be assigned to various tasks and roles. There are several counteracting issues that impact in this analysis, like long-term and strategic objectives vs. short-term and financial goals, or subjective vs. objective criteria associated with tasks and roles that have different ways to be observed and evaluated, or finally the perpetual tension between each individual´s objectives and the firm´s goals and values. Although lawyers always hope to find solutions that are ruled by rational standards, the truth is that emotions and relationships play a significant role and prevent what should always be the essence of a compensation system: a strategic project for the firm, where compensation is, above everything else, a useful tool to execute a strategy.

A few weeks ago I had an experience at home that triggered some thoughts about this topic. Buenos Aires is suffering more and more from storms with heavy rain (yes, climate change is also here). I live north of the city in a low lying area more prone to flooding, that suffers even more this increase of rain. In my house I have a basement which includes one of the most favourite spots for me: my music studio. So the other day we suffered the perfect storm: intense rains, power disruption and failure of our alternative emergency power system. Consequently, water started to flow into the basement and jeopardized the music studio. Unfortunately, it was a Sunday and difficult to get skilled technical help in the short term. So we formed an emergency task force with two distinctive groups of friends and family: (1) those with some technical ability who would have to solve the problem of the emergency pump system, either by fixing the existing one or getting another from a neighbour; and (2) a less sophisticated and more numerous group (which included myself) who would use buckets to get the water out on to the street until the system was fixed. The challenge was that the definitive solution would only be achieved when the technical group could make the pump system work, since the amount of water coming in was significant and the bucket workers would not be able to keep the water away for a long time. But on the other hand, the technical solution would take some time and without the bucket workers keeping the water at bay for some time the music studio would be flooded before the technical solution would finally prevail. So both groups were needed. Fortunately, after three hours the technical guys were able to make the system work (I can´t really explain how they did it) and the problem was solved without the music studio being affected. After the event there was a gathering and a cake was shared, with a lot of jokes about who should take a bigger slice (although I was in the less sophisticated group, my role as head of house ensured a fair share of the cake for everybody).

This incident triggered for me some parallels with the way law firms function. The tech guys reflected what in law firms are considered the bigger producers of fees. It was obvious that without them the basement would have been ultimately flooded. The bucket system was slow and kept the water from flooding in, but we were not making great progress. Eventually, we would have ended exhausted and the water would have flooded the music studio. When the pump system started again it pumped gallons of water 20-times faster than the bucket group did. But on the other hand, without the latest group all the work of the tech guys would have been meaningless and within three hours the music studio would have been under water.

The bucket guys are other areas of the law firm that typically produce lesser fees and profitability. The nature of their practices operate in that manner. However, because of the way markets work, many firms need to have this combined platform of expertizes known under the general concept of “full-service”. Stil, partners often expect to analyze the firm as if all areas should function under the same performance criteria, that is, mainly economic productivity.

If you evaluate the two groups who had worked to prevent the flooding of the music studio by the amount of gallons of water taken out to the street, the tech guys should have deserved an enormous piece of the cake. The difference was simply too big. But if the criteria to analyze is the strategic goal of preventing the flooding of the music studio, then the analysis would change because without the bucket guys the effort of the tech group would have come too late and therefore resulted worthless. Would that mean that the tech guys and bucket guys should have received an equal portion of the cake? Certainly not! The final solution was provided by the tech guys. Without them the project was not sustainable. So how much for each group is hard to determine, but it certainly does not look like the amount of gallons of water was the more equitable way to do it.

In full-service firms where the strategy is to provide top quality service in a variety of areas of expertise, one should understand that compensation needs to be tied to that purpose. If you seek a practice area that is less profitable than another -as a structural matter- you should not punish those partners for that reason. Otherwise they will probably consider other alternatives. I often hear the complaint that productive partners do not want to subsidize other areas. That term would be appropriate if the subsidy is due to inneficiencies of that other area. But in many cases the right term would be to “invest” in a particular area, on the understanding that an efficient and collaborative service platform of many expertises would probably increase the profit of the firm as a whole, and also provide a more solid relationship with clients. In this new environment, firms need to think wisely where, how and when money is more efficiently gained. Again, I do not imply that partners with different productivities should earn the same, but direct productivity does not describe the real value a firm offers to its clients. Remember, it´s not about gallons of water but about saving the music studio long term.