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Several years ago, I was asked to speak at an event hosted by a major U.S. bank, a five-day sales incentive awards trip to Maui. Attending the event were top performers chosen for their exemplary individual sales achievements. While known for its sales culture, this was the first time the bank had employed such an extravagant approach to sales recognition. And extravagant it was.

When I joined the opening night luau, I observed the bank’s charismatic chairman, working the room like the father of the bride. Only three weeks into his new position, this was the first time he had met most of the attendees and he took time to appropriately meet and greet. I, of course, always the conscious observer, positioned myself to eavesdrop.

“So, why are you here?” he boomed to a young man a few feet away. Without missing the opportunity, the banker replied:

“I worked on the largest deal in my division generating the most fees this year.”

The chairman was obviously pleased. For several minutes they discussed the transaction details. The chairman congratulated the banker’s performance, wished him sales success in the coming year, and sent him to find another Mai Tai.

“And, what got you here?” he addressed the next unsuspecting banker.

“My group exceeded its goals last year and I was part of the team.” Again, congratulations all around.

By now the Chairman was less the father of the bride and more a convention savvy politician.

He sidled up to a group: “What got you here?”

The confident response: “My group completed the largest transaction of the quarter and I had the time to get away.”

Now he was getting nervous: “What got you here?”

“One of the other division vice president’s went last year, so this year I got to come this year.”

And finally: “What got you here?”

“I don’t know,” was the unfortunate response.

The jovial politician became one angry chairman. “What do you mean you don’t know? You flew 6,000 miles, for one week, in the middle of the winter, all expenses paid, and you don’t know why?” “Afraid not.”

Now visibly angry, he sought out someone of authority who could explain.

“Why are you here?” he yelled at me. While I was tempted to say, “so that someone could identify for you the names of the managers of those people who don’t know why they are here,” I told the truth. “I flew for nine hours to make a 15 minute speech recognizing these people for their accomplishments.”

“Finally, somebody who knows why they are here” I expected to be promoted immediately. I wasn’t.

The lesson, of course, is that compensation and incentives are only effective if the recipients understand and value the cause/effect. On that night, very few of the bankers could directly tie the trip to their performance. This event (and related expense) would have no effect on their future sales efforts or effectiveness.

Your firm is really no different. At the end of each fiscal year, when partner’s draws are calculated, would your partners know “what got them there”? We have all experienced compensation programs that are ambiguous, arbitrary and often subjective. Yet, law firm compensation should be and can be straightforward.

Let’s examine the various methodologies:

1. Pay by seniority—the only place in life where it pays to be older (other than at Denny’s before 6 p.m.)
2. Pay by billable hours—reward the people who put in the most time.
3. Pay by responsibilities—chairman and practice group leaders get the most and divvy up the rest
4. The star system—the rainmakers take all the money
5. Pay based on subjective variables—aka: 14th century feudalism and most major law firms.

The following are the strengths and weaknesses of these approaches:

Under the seniority system, pay is based on longevity and simply showing up everyday. While objective and fact based, such a plan often leads to dissension among younger partners.

The billable hours system, while also objective, doesn’t differentiate the quality or complexity of the work. Further, there is no value attributed to effectively leveraging associates, and there is no qualitative component for client relationship management, new business development, or time-consuming associate management and training. Billable-hour based compensation often results in a firm comprised of solo practitioners simply sharing office space. Certainly, this is not an effective approach to expand or motivate a cohesive team.

Alternatively, a compensation plan where pay is differentiated by responsibilities is subjective. If based on well-defined, well-understood, and communicated objectives, the responsibilities based incentive plan can produce a harmonious working environment. The problem, however, is that no one takes the time to figure that out.

The star system rewards the big rainmakers, allowing the other 95 percent of the firm to be technically competent practitioners that never leave their offices. This pay plan is well suited for both the rainmakers (until they cease to make rain) and those firm introverts who never wanted to leave the office in the first place. It is ineffective for the future firm rainmakers who take their practices elsewhere when it is economically advantageous to do so. Further, the star system encourages partner defection, both when the rain is pouring and when the inevitable drought occurs.

The feudal system is just that, if not traced all the way back to the medieval Europe, at least to the time of less complexity. The legal profession has been transformed by the rise of national or international practices, multiple practice groups, firm mergers, and firm client mergers, deteriorating client loyalty, and changing lawyer’s compensation requirements. Compensation based on historic plans is no longer effective.

So, how do you and your partners go about designing a comprehensive and effective compensation plan?

The Steps:

1. Interview the partners: What brings them to work? How are they motivated? Generally, law firms have distinct cultures: tribal or nomadic, a collection of individual contributors or collegial teams. Understanding the culture is primary to crafting an appropriate compensation plan.
2. Focus on your strategy: What are you trying to accomplish? What are the goals of the firm on which a majority can agree? Everybody is not the same. If you have no common strategy there is no way to have a compensation that rewards activities consistent with that strategy.
3. Limit Benchmarking and Compensation Surveys: Firms are sufficiently different to negate the value of firm compensation comparison. Generally, comparing compensation paid at firm A and firm B is either factually incorrect and/or the data points are too narrow or too broad for effective comparison. Further, compensation comparison is really only relative. It is reflection of relative equity within the same firm: ultimately about the share of the pie, not the absolute pie, itself.
4. Identify and prioritize behavior and activities that firm leadership seeks to motivate:
   1. Billable hours
   2. Fee responsibility
   3. Practice development
   4. Pro bono activities
   5. Associate development
   6. New business development
   7. Client retention and relationship expansion
   8. Teamwork
   9. Practice group technical competence
   10. Overall firm success

Honest and open discussion among firm leadership, often with the assistance of an unbiased external facilitator, will produce consensus of the desired activity balance. Attempting to compensate in a vacuum will guaranty an ineffective plan.

Generally, compensation equality can be distilled to the following factors:

1. What I got last year
2. What the people who support me got
3. What people in similar practice groups got
4. What other partners in my relative age group got
5. What was the total pie
6. What my friends from law school got

Firms must understand these factors and link them with the prioritized activities and behaviors.

Firm compensation analysis and plan design is hard, and frequently is the third rail in modern legal partnerships. Partnership management avoids confronting the challenge given the necessary emotional investment. Consultants steer clear given the risk of offending an important constituency. Corporations, however, rationalize compensation plans all the time, particularly when integrating mergers. And while absolute equity is impossible, consistency is possible. With effective communication and clearly articulated goals and strategy, a properly aligned compensation plan is possible.

Trips to Hawaii are also possible, but not for the sales professionals at the bank where I spoke. Since so many people could not articulate what got them there, the chairman killed the whole thing the next year.

Take note.