This is the basic business model of the law firm: the lawyers, associates and partners bill clients. The associates get salaries — these are part of the general overhead of the firm, along with rent, IT systems, and other personnel. The partners – the equity partners, the owners of the firm – get a share of the profit.
How much of the share? This is where it gets complicated. There are a variety of models (see sidebar: Partner Compensation Systems: What's Yours?, p. 61), an infinite supply of formulas and approaches, and an intimidating body of literature on the subject. And in Canada, a dearth of information of how partner compensation really works: what it is that partners really get compensated for.
Why the sensitivity? “Call five of your closest friends and ask them how much money they make,” says one lawyer. “What will their response be?” But it's not just social resistance to discussing money. Canadian law firms are in general proprietary over their financial information; as a result, estimates of how profitable a firm is – or challenged – are notoriously unreliable. How they distribute those profits among their hungry partnership can be just as elusive.
“Nothing is more sensitive than the pocketbook, and firms are very sensitive in how they deal with the issue,” says James Casey, managing partner of Alberta regional law firm Field LLP.
Again, why? Glenn Solomon, the managing partner of JSS Barristers, a litigation boutique in Calgary, has a flip answer. “Every partner in every firm ever in the history – ever – believes that their compensation in terms of dollars and percentage should go up every year,” he says. “And that's easy to do — until you realize that, if your share goes up, someone else's has to go down.” For law firms that are, in reality or just nominally, struggling to create team cultures and get their partners to pull in one direction and not a hundred different ones, the tension created by that process can be destructive to the firm. Discussing it can be frightening. If not precisely disastrous, definitely counterproductive.
“I can't talk about this on record because no matter what I say, tomorrow at least one partner will come to me and say, ‘You said we value x and we reward y. Well, I did x and y last year, and I don't think my compensation reflects that,” says one national managing partner. He's had that conversation with her already — he doesn't want to do it again.
Norman Bacal, the co-managing partner of Heenan Blaikie, is more courageous. Or perhaps less cynical. “If you can convince your partners that the system works, that they trust the people who administer it, it will work for you,” he says. Pauses. “Mostly. Not everyone believes you,” he adds. But when you're a partnership that's counted in hundreds, getting everyone on side with anything is pretty much impossible. “You'll never get 100-per-cent buy-in,” Bacal concedes. But the senior people, the thought-leaders in the firm — at least they need to walk the talk.
Walk the talk on what? What is it that firms really reward? The rhetoric around it varies considerably, on and off the record. There are firms that embrace their “Eat What You Kill” models, in which compensation is closely associated with individual performance, and you take out of the firm more or less what you've brought into it. There are even more that function as “Eat What You Kill” systems but claim they're not — or immediately revert to that model when times are rough. Says one senior lateral who's left an “Eat What You Kill” shop for one with what he calls a more “communitarian” system of profit-sharing, “When the pie's smaller, it's harder to share, and even this place reverts to the basic every-man-for-himself model.”
Bacal's seen it. “You don't really test the partnership in good times,” he says. “Everyone is prepared to put aside their petty gripes and say, ‘Gee whiz, we're all earning a lot of money.' It's when times are tough you find out if you are indeed all pulling together.” It's when times are tough that negotiations around who gets how much credit on what file really heat up — sometimes before the file's even in the door. “We didn't even have the file yet,” says one partner, “but I couldn't bring it in the door until I made arrangements with another partner on how we were going to bill — who would get credit for what.”
At Heenan Blaikie, Bacal believes the firm deals with that by “relying on the anecdotal as much as the statistical.” They track billable hours, of course, and look at them come compensation time. “But we don't let it dominate our thinking,” he says. “A partner may tell us, ‘Okay, my number on the sheet here is a million and a half, but here's why my real number is three million. And that's what I'm really trying to encourage, that kind of communication. And I'll take the memos of five partners working on the same thing — and out of that comes the true version.”
True version of, in brief, the behaviours that the firm wants to encourage. “You can't divorce compensation from everything else you're doing in the firm. And you also can't expect alignment of your vision and achievement of your goals if your compensation system isn't completely consistent with those goals,” says Bacal. “So you can talk all you want about building teams and client service coming before everything else, but if you're compensating on who is sending the bill and who is opening the file, you will get a different type of behaviour.”
Casey agrees. One of Field's current strategic goals involves an emphasis on alternative fee arrangements. Partners' implementation of this is taken into account within the firm's compensation system, which weighs a combination of objective and subjective factors, such as economic contributions; contributions to client attraction and retention as well as movement of the client to other lawyers in the firm (“Bringing in work that is done by others has to be the highest rewarded activity in a firm,” Casey says); contributions to firm management, both in formal and informal roles; contributions of “partners to do those things that bind the firm together and that makes the partners proud to be a member of the firm and help ensure the whole of the firm is greater than the whole of its parts”; and finally, contributions made by partners on behalf of the firm to the profession and the community. For the record — the stuff on top of the list gets weighted more than the stuff at the bottom. But it all counts.
Bottom line: reward what you want to see more of. Obvious, right? Except…nothing's ever obvious or simple in a large, even obscenely profitable partnership, much less one that's struggling during an economic downturn. A senior partner with a national law firm explains, “It doesn't matter what your system is on paper, what you say your criteria or formula is. What it comes down to is this, and this is true of every firm I've been at: if you take a list of lawyers at any firm, you can basically break it down into three tiers. At the top, you've got the people whom you just can't lose. It doesn't necessarily matter here what their billings are — these are the people where, if they left, the reputational damage to the firm would be catastrophic. Whether through intangibles like goodwill or their business connections, or more concrete things like their billings and client relationships — these are the people you can't lose, and they are the people that, no matter what your system is officially, you basically go to them and say, ‘What do you want us to pay you?' And so long as it is not insane, that is what they will get paid. And these guys might bitch a bit, but generally, they are satisfied, because the firm will do pretty much anything to keep them satisfied.”
Oh, to be in that bracket. But the criteria for what gets you into the bracket is perhaps the one aspect of partner compensation in Canada that has changed the most dramatically over the past decade or two. There was a time when technical expertise was king. Even 10 years ago being a technically brilliant lawyer was pretty important. But now? It's not irrelevant — but it's not what gets you the brass ring. Christopher Sweeney, President of ZSA Legal Recruitment, explains, “Law firms are more rewarding than ever to rainmakers.” That's who is in this bracket. To use the Hale and Dorr terminology (see sidebar to the right: Partner Compensation Systems: What's Yours?), the “finders” — the people who get the business.
That's not most partners, the senior partner continues. Most partners are in what he calls “the big, fat fungible middle.” These are the people that the system starts to apply to — “and that's where the problem of how to reward them appropriately really is.” At this level, he says, “it's mostly about how much money you bring in, buffered by how much people like you.” Oh, yes. Even if you're the one major Canadian law firm still clinging to an allegedly objective formula, your personality has an impact on your compensation. “At the top level, it doesn't matter if people like you. But in the big fat middle, if they don't like you, you're fucked,” says the partner. “The weight given to your billings and the perception of your productivity is affected by how much they like you.”
Then there's the bottom tier. “Here it's purely mechanical. Here's your number of billings, here's your point,” the partner continues. “The bottom people are basically employees and they are basically paid as employees.” They might be called equity partners – or non-equity partners – but they're “drones.”
“The people in the top third, they might not have the billings, but generally speaking, they're worth what they're being paid, or even more than they are being paid,” he continues. “My judgement is, most of the middle guys aren't really worth what they're getting paid, and with the bottom guys, that's where the mechanics of the system works best.”
A little bleak? Perhaps. But true for at least some firms, some of the time. Another senior partner and veteran of several different law firms has seen a reiteration of this three-tier system in some shops. And other, more dysfunctional things. “I've been in compensation committee meetings that have been nothing but negotiations — where everybody took their pot and the people they were responsible for, and they would negotiate between themselves who would get what,” he says. “That is not a very good system.”
And no system works when the partnership does not trust the management. “People have to trust management,” he says. “They have to trust management during the process, be able to say, ‘I know they won't use this to screw me.'” He adds, “If I was worried about that – that management would screw me during comp – I would just leave.”
Because – let's be frank – partner compensation is used to screw people. “Assholes will be punished,” says one managing partner. So will underperformers. In some firms, it's easier to slash someone's compensation than to have a conversation with them about why they're underperforming. “Law firms are terrible at this,” says one national managing partner. “We don't like to have the unpleasant talk. We'd rather people just left.”
But even in reluctant firms, egregiously bad behaviour will be punished by compensation. Unless…remember that three-tier system the senior partner was talking about? It takes less bad behaviour to get your knuckles cracked in the middle or at the bottom than at the top of the heap. “I have seen that happen more than once — a top performer punished,” says a national managing partner. “But, life being the way it is, it may not happen as often as it ought to. I've definitely seen partners whose compensation did not go up or fell down because of bad partner behaviour.”
Some firms are better at this than others: they will tolerate no bad partner behaviour, no matter what the partner's economic or other contribution to the firm. Some firms are better at negotiating with stars and prima donnas than others. That top third that will get paid whatever it demands? It thrives better at firms that want to be transactional top dogs at any costs. There are those who, to paraphrase the chairman of one, “will not negotiate with terrorists.” If a partner is unhappy with his point or the band of his compensation – or the dollar value attached to her band – she is welcome to walk across the street.
How many do? Quite a few think about it. Recruiters get the most calls from dissatisfied partners right after firms' books of business are released. Fortunately for recruiters' balance-of-life issues, law firms vary in when they release their results to the partnership: Bay Street firms have a preference for starting the exercise in October and finishing it in time to make everyone miserable before the Christmas break; Western firms prefer to start looking at the past calendar year come January and wrap up by March or early April. Almost all do it every year now. “We used to do it every two years because it was such a drain,” says one partner. “But we've had to move away from that, and others are as well. Today, two years is a lifetime.”
A national managing partner of one of Canada's most successful law firms (define that as you will) says that any given year some 85 per cent of the partners are fine — with the process, with their personal result. But the unhappy 15 per cent takes up a lot of effort — leading to evasion tactics on the part of compensation committees not fond of having the tough conversations with partners in the first place.
“Every year when you do comp, you have to sit in your office and wait for people to come and complain,” says a senior Bay Street partner with extensive compensation committee experience. “And I will tell you, at a lot of firms, if the envelopes go out at 3 p.m. on Friday, every member of the comp committee is gone by 2. The reality is that, generally speaking, even in Canada, based on our contribution to society we're vastly overpaid, so please don't come in and tell me you're poor. You can come in and tell me you're not happy. But don't tell me you're poor.”
Glenn Solomon laughs. “Every lawyer in the history of every law firm is underpaid come comp time.” He pauses. “But that's not it. If you're a partner in a law firm in Calgary that's doing well financially, well, there's an embarrassment of wealth to be had. It's not that you're not making enough. The problem is that the partner next door is making $10 more.”
That's the way she goes. “The joke I tell is, partners will come in and say, ‘I'm happy with what I'm earning but I can't believe that SOB is earning that,'” says Norm Bacal. “And everyone has one ‘that SOB' they're comparing themselves to.”
Is there a perfect formula, approach, system? “I fully believe every system has advantages and disadvantages,” says Casey. If there is a silver bullet, it's transparency, and rotating as many partners through the compensation committee as possible, so that they see how tough – and, hopefully, fair – the process is. “It's a tough, tough job, and I think it's the worst job in the firm,” says Casey. “You have to make distinctions between your partners, all of whom you like and respect. It's a very difficult task.”
So, what kinds of things do Canadian law firms compensate for? What's the real score? Christopher Sweeney reiterates: “Law firms are more rewarding than ever to rainmakers and those who can produce their own billings, and they are less rewarding to those who cannot. … The focus is, really, how much work can you bring in? I wouldn't say it's almost incidental that you're a good lawyer, but it is your ability to bring in clients and keep key clients happy that is becoming paramount.”
How do you effectively measure that? Appropriately reward that? Balance that reward with the need to fairly reward that “big, fat, fungible middle”?
There is no perfect system, no perfect formula, says a partner. “And if a law firm ever finds that — they will guard it as top secret and won't let anyone else replicate it.” A law firm consultant shakes his head. “The problem with partner compensation systems is that law firms keep on thinking if they find just the right system – the right formula – all their problems will be over.”
And real life – real law firms – don't work like that.
Marzena Czarnecka is a Calgary-based freelance writer.
How much of the share? This is where it gets complicated. There are a variety of models (see sidebar: Partner Compensation Systems: What's Yours?, p. 61), an infinite supply of formulas and approaches, and an intimidating body of literature on the subject. And in Canada, a dearth of information of how partner compensation really works: what it is that partners really get compensated for.
Why the sensitivity? “Call five of your closest friends and ask them how much money they make,” says one lawyer. “What will their response be?” But it's not just social resistance to discussing money. Canadian law firms are in general proprietary over their financial information; as a result, estimates of how profitable a firm is – or challenged – are notoriously unreliable. How they distribute those profits among their hungry partnership can be just as elusive.
“Nothing is more sensitive than the pocketbook, and firms are very sensitive in how they deal with the issue,” says James Casey, managing partner of Alberta regional law firm Field LLP.
Again, why? Glenn Solomon, the managing partner of JSS Barristers, a litigation boutique in Calgary, has a flip answer. “Every partner in every firm ever in the history – ever – believes that their compensation in terms of dollars and percentage should go up every year,” he says. “And that's easy to do — until you realize that, if your share goes up, someone else's has to go down.” For law firms that are, in reality or just nominally, struggling to create team cultures and get their partners to pull in one direction and not a hundred different ones, the tension created by that process can be destructive to the firm. Discussing it can be frightening. If not precisely disastrous, definitely counterproductive.
“I can't talk about this on record because no matter what I say, tomorrow at least one partner will come to me and say, ‘You said we value x and we reward y. Well, I did x and y last year, and I don't think my compensation reflects that,” says one national managing partner. He's had that conversation with her already — he doesn't want to do it again.
Norman Bacal, the co-managing partner of Heenan Blaikie, is more courageous. Or perhaps less cynical. “If you can convince your partners that the system works, that they trust the people who administer it, it will work for you,” he says. Pauses. “Mostly. Not everyone believes you,” he adds. But when you're a partnership that's counted in hundreds, getting everyone on side with anything is pretty much impossible. “You'll never get 100-per-cent buy-in,” Bacal concedes. But the senior people, the thought-leaders in the firm — at least they need to walk the talk.
Walk the talk on what? What is it that firms really reward? The rhetoric around it varies considerably, on and off the record. There are firms that embrace their “Eat What You Kill” models, in which compensation is closely associated with individual performance, and you take out of the firm more or less what you've brought into it. There are even more that function as “Eat What You Kill” systems but claim they're not — or immediately revert to that model when times are rough. Says one senior lateral who's left an “Eat What You Kill” shop for one with what he calls a more “communitarian” system of profit-sharing, “When the pie's smaller, it's harder to share, and even this place reverts to the basic every-man-for-himself model.”
Bacal's seen it. “You don't really test the partnership in good times,” he says. “Everyone is prepared to put aside their petty gripes and say, ‘Gee whiz, we're all earning a lot of money.' It's when times are tough you find out if you are indeed all pulling together.” It's when times are tough that negotiations around who gets how much credit on what file really heat up — sometimes before the file's even in the door. “We didn't even have the file yet,” says one partner, “but I couldn't bring it in the door until I made arrangements with another partner on how we were going to bill — who would get credit for what.”
At Heenan Blaikie, Bacal believes the firm deals with that by “relying on the anecdotal as much as the statistical.” They track billable hours, of course, and look at them come compensation time. “But we don't let it dominate our thinking,” he says. “A partner may tell us, ‘Okay, my number on the sheet here is a million and a half, but here's why my real number is three million. And that's what I'm really trying to encourage, that kind of communication. And I'll take the memos of five partners working on the same thing — and out of that comes the true version.”
True version of, in brief, the behaviours that the firm wants to encourage. “You can't divorce compensation from everything else you're doing in the firm. And you also can't expect alignment of your vision and achievement of your goals if your compensation system isn't completely consistent with those goals,” says Bacal. “So you can talk all you want about building teams and client service coming before everything else, but if you're compensating on who is sending the bill and who is opening the file, you will get a different type of behaviour.”
Casey agrees. One of Field's current strategic goals involves an emphasis on alternative fee arrangements. Partners' implementation of this is taken into account within the firm's compensation system, which weighs a combination of objective and subjective factors, such as economic contributions; contributions to client attraction and retention as well as movement of the client to other lawyers in the firm (“Bringing in work that is done by others has to be the highest rewarded activity in a firm,” Casey says); contributions to firm management, both in formal and informal roles; contributions of “partners to do those things that bind the firm together and that makes the partners proud to be a member of the firm and help ensure the whole of the firm is greater than the whole of its parts”; and finally, contributions made by partners on behalf of the firm to the profession and the community. For the record — the stuff on top of the list gets weighted more than the stuff at the bottom. But it all counts.
Bottom line: reward what you want to see more of. Obvious, right? Except…nothing's ever obvious or simple in a large, even obscenely profitable partnership, much less one that's struggling during an economic downturn. A senior partner with a national law firm explains, “It doesn't matter what your system is on paper, what you say your criteria or formula is. What it comes down to is this, and this is true of every firm I've been at: if you take a list of lawyers at any firm, you can basically break it down into three tiers. At the top, you've got the people whom you just can't lose. It doesn't necessarily matter here what their billings are — these are the people where, if they left, the reputational damage to the firm would be catastrophic. Whether through intangibles like goodwill or their business connections, or more concrete things like their billings and client relationships — these are the people you can't lose, and they are the people that, no matter what your system is officially, you basically go to them and say, ‘What do you want us to pay you?' And so long as it is not insane, that is what they will get paid. And these guys might bitch a bit, but generally, they are satisfied, because the firm will do pretty much anything to keep them satisfied.”
Oh, to be in that bracket. But the criteria for what gets you into the bracket is perhaps the one aspect of partner compensation in Canada that has changed the most dramatically over the past decade or two. There was a time when technical expertise was king. Even 10 years ago being a technically brilliant lawyer was pretty important. But now? It's not irrelevant — but it's not what gets you the brass ring. Christopher Sweeney, President of ZSA Legal Recruitment, explains, “Law firms are more rewarding than ever to rainmakers.” That's who is in this bracket. To use the Hale and Dorr terminology (see sidebar to the right: Partner Compensation Systems: What's Yours?), the “finders” — the people who get the business.
That's not most partners, the senior partner continues. Most partners are in what he calls “the big, fat fungible middle.” These are the people that the system starts to apply to — “and that's where the problem of how to reward them appropriately really is.” At this level, he says, “it's mostly about how much money you bring in, buffered by how much people like you.” Oh, yes. Even if you're the one major Canadian law firm still clinging to an allegedly objective formula, your personality has an impact on your compensation. “At the top level, it doesn't matter if people like you. But in the big fat middle, if they don't like you, you're fucked,” says the partner. “The weight given to your billings and the perception of your productivity is affected by how much they like you.”
Then there's the bottom tier. “Here it's purely mechanical. Here's your number of billings, here's your point,” the partner continues. “The bottom people are basically employees and they are basically paid as employees.” They might be called equity partners – or non-equity partners – but they're “drones.”
“The people in the top third, they might not have the billings, but generally speaking, they're worth what they're being paid, or even more than they are being paid,” he continues. “My judgement is, most of the middle guys aren't really worth what they're getting paid, and with the bottom guys, that's where the mechanics of the system works best.”
A little bleak? Perhaps. But true for at least some firms, some of the time. Another senior partner and veteran of several different law firms has seen a reiteration of this three-tier system in some shops. And other, more dysfunctional things. “I've been in compensation committee meetings that have been nothing but negotiations — where everybody took their pot and the people they were responsible for, and they would negotiate between themselves who would get what,” he says. “That is not a very good system.”
And no system works when the partnership does not trust the management. “People have to trust management,” he says. “They have to trust management during the process, be able to say, ‘I know they won't use this to screw me.'” He adds, “If I was worried about that – that management would screw me during comp – I would just leave.”
Because – let's be frank – partner compensation is used to screw people. “Assholes will be punished,” says one managing partner. So will underperformers. In some firms, it's easier to slash someone's compensation than to have a conversation with them about why they're underperforming. “Law firms are terrible at this,” says one national managing partner. “We don't like to have the unpleasant talk. We'd rather people just left.”
But even in reluctant firms, egregiously bad behaviour will be punished by compensation. Unless…remember that three-tier system the senior partner was talking about? It takes less bad behaviour to get your knuckles cracked in the middle or at the bottom than at the top of the heap. “I have seen that happen more than once — a top performer punished,” says a national managing partner. “But, life being the way it is, it may not happen as often as it ought to. I've definitely seen partners whose compensation did not go up or fell down because of bad partner behaviour.”
Some firms are better at this than others: they will tolerate no bad partner behaviour, no matter what the partner's economic or other contribution to the firm. Some firms are better at negotiating with stars and prima donnas than others. That top third that will get paid whatever it demands? It thrives better at firms that want to be transactional top dogs at any costs. There are those who, to paraphrase the chairman of one, “will not negotiate with terrorists.” If a partner is unhappy with his point or the band of his compensation – or the dollar value attached to her band – she is welcome to walk across the street.
How many do? Quite a few think about it. Recruiters get the most calls from dissatisfied partners right after firms' books of business are released. Fortunately for recruiters' balance-of-life issues, law firms vary in when they release their results to the partnership: Bay Street firms have a preference for starting the exercise in October and finishing it in time to make everyone miserable before the Christmas break; Western firms prefer to start looking at the past calendar year come January and wrap up by March or early April. Almost all do it every year now. “We used to do it every two years because it was such a drain,” says one partner. “But we've had to move away from that, and others are as well. Today, two years is a lifetime.”
A national managing partner of one of Canada's most successful law firms (define that as you will) says that any given year some 85 per cent of the partners are fine — with the process, with their personal result. But the unhappy 15 per cent takes up a lot of effort — leading to evasion tactics on the part of compensation committees not fond of having the tough conversations with partners in the first place.
“Every year when you do comp, you have to sit in your office and wait for people to come and complain,” says a senior Bay Street partner with extensive compensation committee experience. “And I will tell you, at a lot of firms, if the envelopes go out at 3 p.m. on Friday, every member of the comp committee is gone by 2. The reality is that, generally speaking, even in Canada, based on our contribution to society we're vastly overpaid, so please don't come in and tell me you're poor. You can come in and tell me you're not happy. But don't tell me you're poor.”
Glenn Solomon laughs. “Every lawyer in the history of every law firm is underpaid come comp time.” He pauses. “But that's not it. If you're a partner in a law firm in Calgary that's doing well financially, well, there's an embarrassment of wealth to be had. It's not that you're not making enough. The problem is that the partner next door is making $10 more.”
That's the way she goes. “The joke I tell is, partners will come in and say, ‘I'm happy with what I'm earning but I can't believe that SOB is earning that,'” says Norm Bacal. “And everyone has one ‘that SOB' they're comparing themselves to.”
Is there a perfect formula, approach, system? “I fully believe every system has advantages and disadvantages,” says Casey. If there is a silver bullet, it's transparency, and rotating as many partners through the compensation committee as possible, so that they see how tough – and, hopefully, fair – the process is. “It's a tough, tough job, and I think it's the worst job in the firm,” says Casey. “You have to make distinctions between your partners, all of whom you like and respect. It's a very difficult task.”
So, what kinds of things do Canadian law firms compensate for? What's the real score? Christopher Sweeney reiterates: “Law firms are more rewarding than ever to rainmakers and those who can produce their own billings, and they are less rewarding to those who cannot. … The focus is, really, how much work can you bring in? I wouldn't say it's almost incidental that you're a good lawyer, but it is your ability to bring in clients and keep key clients happy that is becoming paramount.”
How do you effectively measure that? Appropriately reward that? Balance that reward with the need to fairly reward that “big, fat, fungible middle”?
There is no perfect system, no perfect formula, says a partner. “And if a law firm ever finds that — they will guard it as top secret and won't let anyone else replicate it.” A law firm consultant shakes his head. “The problem with partner compensation systems is that law firms keep on thinking if they find just the right system – the right formula – all their problems will be over.”
And real life – real law firms – don't work like that.
Marzena Czarnecka is a Calgary-based freelance writer.
