By Mark Masson
The pandemic economy, and the new ways of working that it necessitated, laid bare a not-so-hidden need for change in the way accounting and law firms design their partner compensation models. According to a Law.com article, “Firms were already feeling pressure to rethink their approach to partner compensation, but the current crisis has forced them to reach deeper into the toolbox for solutions.”
Even before the pandemic, professional service firms started feeling the need to evolve compensation models to reward new behaviors and capabilities needed in a changing industry, drive collaboration in go-to-market and client delivery, and simply get better results from their partners through clarity and accountability.
Most professional services firms use one of these fundamental compensation structures:
In the lockstep or seniority-based model, everyone is in this together and the only real differentiator is tenure. Everyone at a certain seniority level earns the same amount. This form of model is based on the firm’s overall success rather than an individual’s, and does not reward or punish outlier performance.
This system retains the philosophy that everyone is in this together, but does recognize partners that contribute an exceptional amount — the “rainmakers.” A discretionary fund is set up for management to incentivize, reward and hold onto those who exhibit, for example, exceptional achievements in revenue generation, client service, associate development or diversity initiatives. A modified lockstep can also be set up to maintain the same movement through a level or tier but gate elevation to the next tier based on specific criteria. This gives firms flexibility to reward both exceptional experienced partners and superior young partners.
In a unit plan, partners receive a certain number of units based on their role or tenure, and these units translate into a share of the firm’s profits at the end of each year. Once partners receive units, they typically keep and add to them for as long as they remain in the firm.
More often, unit-based plans allocate units to partners (or partner equivalent roles) based on performance. The modified unit plan is similar but delivers units predominantly based on performance. Partners either earn sizable blocks of units for moving from one defined tier of performance to the next or earn an undetermined number of units based on individual performance against goals and comparative performance in the peer set. Modified plans often denominate ranges of possible units based on value of the role to the firm and competitive market pay for those skill sets.
This structure often looks similar to a modified unit plan, but delivers income by dividing pools of profit based on the comparative contribution of the partners in each pool. The allocation of profit to each pool is based on predetermined performance metrics of that region, practice, or other group. Systematic contribution reviews then match value contributed with income rewards.
A commission model uses formulas based on financial contributions — how much a partner sold or helped to sell. Revenue and profitability are typically the predominant (in some cases the only) criteria, and if a partner hits their numbers, they get their expected reward.
Choosing a fundamental structure is just one aspect. In fact many different structures could work for a given firm as there are many considerations that go into changing partner compensation, including what partners really value and what your firm truly needs from your partners. You also need to know what you can realistically expect from a partner compensation model and, last but not least, how to sell and drive change that truly moves the needle on performance.
That’s why, at Axiom Consulting Partners, we use both data and behavioral science to build effective models for our client firms and ensure the changes are not only accepted but help drive achievement of the strategic vision. We start with a fact base on how each partner has performed across many dimensions and how their performance relates to initiatives and behaviors that are critical to the firm’s strategy.
Along the way, we engage leaders and partners to clarify individual and firm issues and test ideas. The goal is to pull together, as closely as possible, what leaders believe needs to happen to achieve their goals and what partners are willing to do. Consensus is built through credibility, clarity and connecting better outcomes for the firm with better individual outcomes.
If you are considering or struggling with building a new partner compensation model, our Partner Performance Management Playbook can help jump start your journey. For more information and help, reach out and let us know what we can do for you.