Law firm consultants have endless advice about how best to compensate partners at firms. The consultants analyze the extremes: Lockstep compensation avoids quibbles about pay, but it may reward less productive older partners at the expense of the young turks. Eat-what-you-kill compensation rewards people who bring in business, but may cause bitter fights over client origination credit or cause partners to hoard their clients.
Various permutations on those extremes have their own advantages and disadvantages. But riddle me this: Why don’t we see consultants debating the pros and cons of pure black-box compensation? Under this system, the managing partner (or a small committee) sets compensation for each partner in the firm. There is no specific formula for allocating the spoils, and partners are forbidden from discussing their compensation with each other. Each partner is told what he’ll make in the coming year (either as an absolute number or as a projected draw assuming the firm hits 100 percent of budget), and the process is over.
At least a few large firms use black-box compensation systems, so this subject surely deserves a moment’s thought. What do you think of a black-box compensation system — good, bad, or indifferent?
Here’s the one undeniable good: Black-box compensation dramatically reduces quarrels about compensation. One partner may feel underpaid, but he can’t complain about being paid less than the other guy, because he doesn’t know what the other guy is being paid. And a partner can’t complain that he deserved more than he received, because there’s no set formula for allocating money: The Man (or, in the case of a committee, Men) looked at your performance, judged your value to the firm, and awarded you X dollars. There are no set rules and no basis for comparison, so there’s no objective ground for complaint.
(Besides, you were just told that you’d be paid more money next year than you ever dreamed of earning back when you were a kid. What’s the issue? Spend, and be happy!)
That’s the undeniable good.
Here’s one arguable benefit of black-box compensation: It may minimize fights over client origination credit and help to prevent hoarding of clients. In theory, partners are not being compensated for client origination, so there should be no competition in that regard. And partners are not being compensated based on the number of hours charged to their clients, so there should be no hoarding. If a firm could in fact avoid fights over clients, that would be a “consummation devoutly to be wished.” This would encourage partners to assign the right lawyer to the right matter, without fear of being punished financially for making that choice. That result benefits both the firm and the client. Eliminating fights over clients would also tend to maximize profits for the partnership as a whole and reduce the chance that the departure of a few key rainmakers would sink the ship.
But black-box compensation may not achieve these goals. Whether or not a firm discloses how it compensates partners, the firm necessarily treats some partners better than others: Some partners are being awarded positions of power within the firm, are being invited to participate in a disproportionate number of beauty contests, and are otherwise plainly the leaders among equals. If the anointed are uniformly the partners who bring in business, then the rest of the crowd may soon catch on: In a world of no rules, the rainmakers win. So much for avoiding fights over clients.
Even if a firm truly treated all partners essentially equally, some partners would nonetheless consider how to improve their bargaining position with the firm: How can I cause the firm to realize that it should pay me more? Generate portable business. How can I avoid the looming threat of de-equitization? Generate portable business. How can I hedge against loss of income or prestige? Generate portable business! No matter what the firm says, some individual partners are likely to decide that the road to riches is paved with the origination and hoarding of clients.
Finally, the possible disadvantages of black-box compensation: First, if a firm specifies what it’s paying people for, then many people will aim for that target. Tell lawyers that you’re paying them for salesmanship and you’ll create a firm of salesmen. Announce a different goal and watch the ship turn on a dime. If a firm doesn’t expressly tell partners what goal to aim for, it’s trickier to steer the ship.
Second, a female friend recently raised with me an issue that I’d never before considered: “As a woman, I’d never work for a firm that didn’t disclose how it compensated partners. That just invites the decision-makers to short-change women and minorities behind closed doors. I wouldn’t run that risk.” (That I was surprised by those words probably just shows that an old white guy doesn’t naturally view the world from all perspectives.)
I have no idea whether black-box compensation actually hurts disfavored groups. (How could I know? The numbers are all secret.) But, if it does, then that’s not right. And, whether or not black-box compensation firms actually discriminate, if large numbers of women and minorities feel the way my friend does, then black-box firms may find it trickier to recruit women and minorities into the firm.
But those are just my random musings. Perhaps, now that I’ve started this discussion, some of the law firm consultants will continue this conversation and we’ll stumble to something that feels like conclusions.
Mark Herrmann is the Chief Counsel – Litigation and Global Chief Compliance Officer at Aon, the world’s leading provider of risk management services, insurance and reinsurance brokerage, and human capital and management consulting. He is the author of The Curmudgeon’s Guide to Practicing Law and Inside Straight: Advice About Lawyering, In-House And Out, That Only The Internet Could Provide (affiliate links). You can reach him by email at firstname.lastname@example.org.