“The Formula” Defines Most Firms

I posted recently concerning the idiocy of most partnership compensations formulas here. The post drew a lot of commentary because I was essentially arguing that any compensation-sharing plan had to contain all of the fundamental incentives which comprise the firm’s business plan. Most firms have a business plan which rewards only two activities. The first one is originating clients. Partners actually compete against each other within the firm on origination. Firms that overemphasize origination typically suffer from internal discontent. The second pillar of most law firm business plans includes billing hours. That’s it. The firm doesn’t care how you bill hours or whether the hours you bill provided any value to the client. They simply measure hours worked and paid by a client.

While a partnership sharing formula designed on the pillars of origination and paid hours is certainly simple, it wouldn’t be a business model which any educated client would want to be a part of. Why? There is literally no component of such a law firm business plan which measures productivity, achievement of client goals or working with budgets. The law firm has literally zero risk and promises nothing.

My recent post drew a lot of commentary, with some suggesting that increasing the number of metrics would be complicated. While a sharing system needs to reward all of the attributes of the firm you are trying to design, I would agree that there is a certain attraction to simplicity. Ultimately, my approach was to create a list of measurement criteria and categorize them by group. Each group would be categorized by importance. The partners would then sit down and agree on a fair distribution of profits as they are generated (as opposed to a single distribution at the end of the year). My premise is that once the lawyers agree on the important metrics by which they are to be measured, they will likely agree on a fair distribution as well.

So what happens if partners cannot agree? The answer is simple. Each lawyer always has the option of splitting from the firm and going out on their own. In our business where non-competes are unlawful, lawyers speak with their feet. Lawyers who sit around and complain that they are being treated unfairly will never get much love from me. Get up off your rear-end and change your situation.

Of course, many law firms put all sorts of tactics in place which work to preclude lawyers from departing. They could care less whether the system is fair or perceived to be fair. They compel a formula and force it on to everyone. And when a lawyer votes with their feet, they whine and cry like babies as though someone "stole" something from them.

Here is what Chuck Newton recently had to say about partnership formulas. As usual, I think Chuck is right on the money.

"The amount of animosity, gaming and infighting that pours from these firms based upon their compensation plans is truly amazing. It puts to shame what others think is office politics. How to divide up the money. How to divide up the profits. Who is to take the risks? Who is not delegating enough? Who is not getting in their time records in on time for the billing cycle? What about the winter trip to Aspen so we can sit in a cabin to discuss compensation plans instead of skiing? Nobody is happy about what they get compared to what others in the firm get. Somebody believes they are more valuable than the rest of the organization. Everybody has an opinion as to who is working harder and deserve a bigger piece of the pie. Nobody wants to take responsibility for getting less.

It is a nightmare. It consumes countless, countless hours of time of lawyers who could be, and should be, practicing law."