Is “Eat-What-You-Kill” a good formula for growth?

The discussion about compensation systems among lawyers is among the hottest you can find in the legal industry in Latin America. The extreme systems (Eat-What-You-Kill -or EWYK- and Lockstep) provoke passions and heated conversations that resemble those in the soccer arena, like Barcelona/Real Madrid or River/Boca. This might seem surprising for those outside the legal profession: can such a boring subject like compensation ignite these intense reactions?

From my perspective, the answer to that question is that compensation entails a much larger and deeper impact on law firms than what the specific concept suggests, and that is the reason lawyers –with or without knowledge- award such a significant meaning to this matter. Few professional or business activities create the tension between the individual worker and the organization that lawyers face when they decide to pursue a collective legal practice. The high need for independence and autonomy that lawyers experiment from early in their careers -and maintain during all their professional lives- creates a constant and structural inbalance between the firm and the individual. This natural individual trait in lawyers even make harder for them to have a clear understanding of the broader issues of the law firm as an organization. One of the consequences of this limitation is that lawyers give enourmous importance to one the more tangible ties between the firm and the individual: compensation. So when other elements of understanding the firm might be totally or partially unclear, compensation stands as a light in the darkness indicating where you are and where do you have to go.

But of course we cannot expect compensation to solve all organizational matters of the firm. Actually it is uncapable of solving any problems … by itself. One of the more repeated statements I hear from those supporting the EWYK system is “EWYK develops the entrepreneurial skills of partners since everybody needs to get out and find their work. Overtime, this system allows growth more than any other.” From this perspective, the need for individual survival is the engine that can assure the long-term success of the firm since every individual partner will be sufficiently motivated to produce to their best capabilities. But, is this true? Is EWYK a better formula for growth both at the beginning and later in the life of the firm?

My travelling around the region and conversations with partners from all kinds of firms, with their unique stories, is that the compensation system is not a relevant indicator of success in the young stage of firms. In other words, firms are successful or not irrespective of the compensation system they have chosen to start the firm. Why is that? The determinant factors of success in the initial years of the firm have to do with the quality of the individuals –specially partners-, the focus they put in what they intend to accomplish, and a general market context that is favorable for what those individuals have to offer. Successful young firms –and partners- don´t need a specific compensation system to get motivated. They just want to succeed! And lockstep, EWYK or any other alternative will not change significantly that trend. I have seen young firms organized around opposite systems, and all of them succeeded when individuals were good enough to make it. Entrepreneurial lawyers will not stop being so because they have chosen –probably by chance- some sort of lockstep or common pot devise, and conversely, EWYK does not transform less-driven lawyers into dynamos.

So if the compensation system is irrelevant for determining success in the earlier stages of a firm, does it matter what system they use in the long term? I heard some leading partners in Latam firms arguing that they need EWYK to keep their partners “on their toes” looking for business, and to safeguard the future growth of the firm. Under this interpretation, the need of each individual partner to survive –which is the nature of the EWYK- will produce the highest level of productivity possible in the firm. Also, it will generate sufficient motivation since all partners will have the opportunity to achieve higher and higher levels of income, without depending on politics or other non-economic issues.

But here again, evidence does not support this claim, at least in many cases. Why? Firms that operate under the EWYK system tend to maintain the natural predominance of their most prominent individuals, tipically founders or high-profile partners. Firms might grow for a while, but much of that growth tends to remain concentrated on those highly successful individuals, and that is because clients tend to call the most well-known partners in the firm, specially in firms that work under individual and low-collaborative models. So the best become even better –or bigger- and the rest have absorb the work generated by those few. Maybe a small number of younger partners are able to avoid that trap and create a name for themselves, but those are the exception. It is only seldom that an EWYK system produces a more democratic pie-sharing in the long run. The uncollaborative environment that EWYK typically generates does not help younger partners to learn from more experienced partners, and more successful partners naturally tend to hoard clients –and potential opportunities-.

Some firms have been able to detect these limitations of the EWYK system, specially in connection with growth. A notable case in the last two decades has been the Brasilian firm Mattos Filho, who used to be a very good firm in the Brasilian legal market more than a decade ago using an EWYK model. However, they realized that growth and complexities in a more competitive market required a better sincronized mechanism among partners, which the existing model was not providing. In a remarkable long-term-view process Mattos Filho changed radically their compensation system towards a modified lockstep (for more details, see my chapter “Law firm founders, goodwill and partner remuneration”, in the book “Partner remuneration in Law Firms. A Guide to Reward Structures, Performance Management and Decision-Making” published by the Gold Law and Business in collaboration with the IBA) opening the gate for a striking success in the following decade and beyond with significant growth, profitability and reputation.

I often stress to partners along the region that there is no perfect fit-for-all compensation system. Each firm has to find the right combination for their market, clients and history. But in doing so, partners need to have clear objetives of where the firm is going and what are their personal goals. The failure to do that will likely result in bad consequences for both the firm and the individual partners.