CAN WE GET RID OF OUR SPELL? EIGHT PROBLEMS THAT COMPENSATION SYSTEMS SHOULD TRY TO SOLVE

“Otra vez mi boca insensata vuelve a caer en tu piel”, LABIOS COMPARTIDOS, MANÁ.

It never ceases to amaze me how captivating the topic of compensation system is for partners in law firms. No matter what issue is being discussed, or in what forum the discussion takes place (professional, academic), it is most likely that compensation will appear as a relevant and complex matter that impacts every dimension of the firm … and which is very difficult to get right. In Mexico the term “formula” is used to refer to compensation, and it looks like an alchemist trying different and complex combinations of substances to obtain the magic combination that will end our problems. It’s like a powerful spell, that can only be solved by discovering this magic formula. So Latam partners walk around the region and the world seeking for the right formula, talking to other partners, professors and consultants in the hope that, someday, the magic system will be found and they shall be saved. Some say that they have been smart enough to find the right recipe, but in many cases not all partners from the firm would agree with that statement.

It is also true that some firms -notably among the most successful in each market- have understood that compensation is not so much about finding a creative and smart formula, but really about defining what a good firm should look like and just make sure that the compensation works in favor of that vision, and not against it.

As the saying goes, to get into the right bus you need to know where you are going. In my experience, one of the main reasons the compensation systems don’t work in many Latam firms is because they start with the wrong objectives. There are two main goals that partners normally want to achieve in their comp systems: (1) a fair compensation for partners and splitting of the pie, based on merits (as defined by the system), and (2) an objective formula that would define such merits, eliminating any criteria that would give -some- partners the discretion to decide the compensation of other partners.

The above goals are defined by a long standing -and mostly unconscious- view of the firm as a group of independent professionals organized around a partnership, where all partners are equal and where the business should be carried out by those individuals with little as possible participation of the firm -and other partners-. This peer-to-peer arrangement is reluctant to accept a strong firm with common goals higher than individual interests and a strategy that would make the firm look like a business. Partners may need to grumpily accept that the law firm is a business, but never to the extent of relinquishing the essential values of the partnership.

This traditional battle -at least in an underground level- influences decisions and postures adopted by partners, and compensation is the preferred battlefield. If law firms need to evolve to efficient professional business organizations, then partners need to have a clear view of what they want to achieve with their compensation systems. Fairness, on the one hand, is a desirable aim of a comp system, but without a vision and a strategy based on common sense about what partners are supposed to do, fairness could be -and normally is- an endless discussion with a million points of view. Objectivity, the second main goal to achieve, does not solve the problem. It works like an ostrich that cannot look at reality like it is and hides it’s head in a hole. Objectivity, meaning numbers and math calculations, only helps to look at part of that reality, but being it so limited it also fails to solve the problems.

When defining a good compensation system partners should try to solve or at least improve some of the classical problems law firms face in its evolution to a modern and successful organization:

1. The problem of client ownership. This issue is at the heart of the firms’ dilemmas. Firms where clients are owned by the partners -as defined by practices, behaviors and strategies- are doomed to remain weaker and with constant fights and discussion among partners. Only those firms where clients are served as clients of the firm are able to thrive and reach higher levels of quality and success.
2. The problem of client origination. This is somehow related to the previous issue but from a different perspective. If business development is not organized as a team effort and a firm’s objective, with a wide range of activities and contributions to that end, then it normally concludes in a classical and inefficient model of rainmakers and those who are not. This creates dependence on a few individuals and quarrels and resentments with the rest (see my previous article on Rainmakers and Twisters).
3. The problem of delegation and cross selling (or lack thereof). The silo business model where each partner owns a small business unit that does transactions with other business units owned by other partners has proved to be inefficient. Client credits and other mechanisms are examples of this model and normally don’t provide sufficient incentive for partners to interact and relate business to other partners. The trend is to make their own silos stronger and not grow business for other partners.
4. The problem with non-financial contributions. Firms need to dedicate time and investment in a variety of matters that define quality and sustainability. Areas like talent development, reputation, management, etc. are key in the future success of the firm, and yet it’s very hard for firms to recognize these contributions. The solution is not to declare the importance of these matters, but then avoid any economic recognition based on the difficulty to measure them. That would create two levels of contributions, those that are paid for and those that are not.
5. The problem of trust and collaboration. At the bottom of many difficulties that partners have with comp systems lies the inherent lack of trust that lawyers have within the partnership. This reaction is not based normally in objective doubts about the partners’ character -with whom sometimes exist relationships of decades-, but more on this intuitive and irrational lawyer instinct to be skeptical and controversial. The problem is that this situation creates a blockade for a healthy analysis on how the firm is working, and it also reduces significantly collaboration among partners.
6. The problem of specialization. The silo model works against an efficient structure of specialization. Partners prefer to hoard clients since that produces potentially better economic results and client ownership is subject to competition. But clients get a suboptimal service and the firm pays the price.
7. The problem of lack of investments. Partners are normally resistant to investments. They prefer to cash out the results of the business and invest only what is strictly necessary to keep the firm going. Investments relate not only to money investments -which sometimes are easier to make- but also investments of time and effort in matters that don’t produce immediate economic results. All relevant assets in a law firm require continuing investments to keep the quality and growth the firm needs. Probably the most important is partners’ development, which firms do not take as seriously as they should.
8. The problem of future generations. Perhaps most importantly, compensation systems need to focus on how future generations will participate in the law firm. The silo model tends to maintain the existing group of partners the longest possible. They have acquired a privileged position that they are reluctant to share with younger partners. This closed strategy anticipates the death of the firm, since firms only survive to the extent they are able to produce new generations of partners that are at least as good as the existing leading partners.

An analysis and discussion of a compensation system should be organized around the strategic analysis of the challenges that need to be addressed and resolved, and not as a spell that will be solved by a magic formula. Only from that perspective will the analysis and the results be fruitful. If we continue to be senseless, like in the beautiful song of Maná, and avoid facing reality, we will continue to fall on the same traps and the traditional problems of many law firms will continue.