That said, not all pay-for-performance models are created equal, either.

Despite freeing up partners to focus on revenue generation, many large firms still use compensation models that do not encourage revenue generation across tiers.

To reward equity partners and distribute profits, some law firms still use black box models whose criteria for compensation are subjective and opaque. As well as being out of date, the black box model disproportionately affects those on the lower rungs of the organization. These individuals are less aware of the harder-to-measure contributions they need to make from a cross-function viewpoint, to elevate their compensation and make bonuses commensurate with their expectations.

Regardless of these unclear guidelines, it’s usually obvious to all within the organization who the top performers are. The irony is that most top law firms don’t have compensation issues with their top-performing partners—the drag on profitability and opportunity is mostly in the “muddy middle,” where good (if not stellar) partners are generating good revenues, but could be generating even more with the right focus, attention, and support.

The reality is that the high performers are typically provided with additional resources, such as client-management teams or client development resources, over and above those that are afforded to people at the lower levels. Top-performing individuals are cemented at the top, while those struggling at the middle and bottom levels have less opportunity and clarity as to how to achieve upward mobility. Without clear guidelines and transparency into their pay potential, the middle and bottom performers are at risk of leaving—or even worse, staying with the firm, but becoming disengaged, thus deteriorating firm culture.

It’s time for this to change, and there’s a clear path to get there. Along with eliminating black box guidelines for partners, firms must also demystify the path to equity for nonequity partners. Fortunately, in the next three to five years, we are seeing an industrywide shift in compensation toward more transparent, performance-based models.

That said, not all pay-for-performance models are created equal, either. In straying from black box models, many data-backed models go too far in the opposite direction. Some assess employees based solely on their productivity (billable hours); others on a single revenue metric, likely origination or client managed revenue, disregarding the unique qualities that make that individual a valuable asset to the firm. These “data-blind” qualities, while seemingly less tangible and hard to measure, include the ability to cross-collaborate, impact on associates, commitment to client retention, and other key attributes. The ideal compensation model should be both data backed and human-centric.

A Revaluing of Partner Archetypes

Firms should take a holistic approach to determining an employee’s value—considering not only revenue, but new logo revenue and cross-selling as well. This involves considering the personifying qualities of each partner, which, taken across the entire organization, fall into several composites or archetypes. While a firm can have many different archetypes of partners, two dominant personas emerge when factoring in these additional metrics. Both are critical to a firm’s success.

Type 1 partners—we’ll call them Accelerators—excel at acquiring new client relationships, transitioning new clients to other partners to “put them in business,” and building the external brand. They are the starters and the deal-closers, the ones who generally represent the firm in public.

Type 2 partners, whom we’ll call Stewards, excel at expanding existing accounts, identifying potential cross-serving opportunities, developing associates, and ensuring client satisfaction. They take the tree, once planted, and cultivate it for maximum health and yield at harvest.

It should be noted that the goal of defining partner archetypes isn’t to eliminate comparison within the partner group, nor to eliminate any one individual’s responsibility for generating revenues. In a meritocracy, some competition is healthy and benefits the organization as a whole. Rather, identifying partner archetypes clarifies how to hone the inherent “highest and best use” skills in each individual to generate results for the firm. This eliminates the painstaking effort many firms take to turn natural type 2 “Steward” partners into type 1 “Accelerator” partners, who may never have the skills necessary to become effective in a Type 1 mode of operation.

To align your compensation system with your firm’s objectives, consider these three questions:

1. What does good performance look like for each archetype or persona?
2. Within and across archetypes, how does an individual’s performance stack up against others
3. What is the pathway to higher performance (and higher pay) for a partner, given where they are today within their persona?

In our experience with large firms, when the compensation system is clear and transparent regarding how higher pay levels can be achieved, partners tend to get behind it. It’s when firms are not clear about how partners are able to achieve higher levels of pay or higher levels of performance that compensation starts to break down, partners become less satisfied, and you see a lot of the movement among partners—often heading out of the firm.

More Than the Sum of Parts

The benefits of a persona-based compensation model extend beyond the firm to the client base. By grouping partners by persona or archetype, firms can break the “practice only” view of compensation and focus on firmwide impact of an individual’s performance. The most successful Big Law firms are more than the sum of their parts—they’re a brand, not merely a confederation of practices or individuals in separate silos. These organizations pride themselves on bringing the firm’s larger narrative to the client, not only experience in matters that directly relate to the engagement being sought.

As a result, clients are more likely to agree to rising rates when they believe the firm will bring multiple points of expertise as a full-service provider. If firms value this form of cross-serving when drafting compensation packages, they will naturally encourage firmwide cohesion and the creation of a strong, multi-service brand.

Purely measuring billable hours and revenue generation overshadows the value created through collaboration. For example, corporate and IP often work in tandem to help each other gain clients. Another common mistake firms make when drafting compensation guidelines is to prioritize widening the gap between the highest- and lowest-paid partners, with the aim of succeeding in the lateral market—that is, attracting high performers from other firms. A sizable ratio isn’t inherently bad—it’s only detrimental when firms instigate this ratio purely as a lure for external talent, rather than to support existing partnerships. In actual practice, the lateral market will be fleeting. Firms should focus on the long term by structuring compensation to promote loyalty among their current high-performing partners.

It’s true, however, that encouraging retention can be a delicate balancing act—this line of thinking can sometimes be at odds with the push to value current contribution over legacy contribution. Chasing a wide profits-per-partner spread can also lead to a partnership consisting of many underperformers and average performers, with only a few highly paid shining stars. This can create issues with a firm’s operations and leverage model and drags down the overall average of partner performance. By trying to aggressively push this leverage ratio, firms can overcrowd senior associates by overloading the partner level.

The high demand seen during the pandemic gave way in 2023 to greatly reduced demand, and a scramble for legal partners and associates to prove their value to the firm. Compensation models need to evolve to keep up with these changes. It will be interesting to see how this evolves over the rest of this year.

By Maggie Miller
Originally published in The American Lawyer, August 9, 2024