Despite persistent inflation and geopolitical instabilities, there are rising hopes for a generally better 2023 that is expected to see a revival in economic activities and business confidence.
The cautious optimism has prompted law firms to step up investment in retaining and attracting senior talent to keep up with an anticipated hike in legal demand. But with the pandemic seismically upending the labour market dynamics, firms are being prompted to review and adjust their compensation models to stave off intensifying competition.
Ray D’Cruz, Melbourne-based chief executive officer at Performance Leader - a professional services performance consulting firm – says flexibility has been playing an increasingly prominent role in firms’ remuneration structure for partners.
Traditionally, according to D’Cruz, who co-authored a book on partner remuneration, there are three major compensation models for partners in professional services firms, including law firms.
The first is a formula system, which is agreed in advance without requiring a governance mechanism to oversee profit allocations. Ray notes that these systems, which tend to be more common in smaller firms, include cost sharing agreements, “eat what you kill” systems and fixed-share systems.
Secondly, partners in a firm that subscribes to a lockstep model will find their remuneration tied up with seniority. “Examples include tenure-based locksteps, where partners ascend an equity ladder each year automatically; and managed locksteps, where partners may move up and down the ladder based on their meritocratic results,” explains D’Cruz.
There are also firms operating under a merit-based system, which reward their partners in accordance with agreed performance factors ranging from financial to client feedback and is determined by a governance mechanism.
“While each firm will basically fall into one of the above categories, firms tend to have nuanced and specific approaches. Some even seek to combine aspects of multiple systems. In the end, the variations are plentiful,” adds D’Cruz.
Consequentially, a rising number of firms now opts for a hybridisation of multiple models - for instance, a combination of the lockstep and merit-based structures - to bolster their competitiveness in the war for talent.
“Many lockstep firms are considering if their partner reward model has enough flexibility to compete for talent,” says D’Cruz. “U.S. firms are using the flexibility of their merit system to poach talent, particularly from UK and other firms operating a lockstep. This is causing lockstep firms to consider either modifying or abandoning their model.”
Apart from flexibility, fairness in remuneration also carries heavier weight among younger partners.
“Firms that are struggling to retain partner talent may look to add greater flexibility and fairness into their reward system. This may include the flexibility to fast-track talented young partners through equity tiers or the ability to reward outstanding performance by adding tiers or bonuses.,” explains D’Cruz.
While rewarding performance excellence, it’s equally imperative to maintain the cohesiveness and collaborative nature of the partnership. “Open dialogue in relation to these changes is always important if firms are to balance competing needs,” says D’Cruz.
D’Cruz also cautions firms against ignoring other non-monetary aspects when devising their partner remuneration strategies.
“It’s important to note that while pay and perceptions of fairness are important, partner motivation and retention is far more complex, and may relate to issues such as purpose, autonomy, strategic alignment, and recognition. Firms that address retention only through pay are missing major parts of the retention playbook,” he notes.
Indeed, firms may tend to find themselves weighing the compatibility of their compensation model with their commitments on culture and value, according to a Thomson Reuters report, and non-compensation advantages can be strong lures and retention mechanisms for top talent.
D’Cruz believes it’s down to law firm leaders and managers to maintain the relevance of the remuneration models their organisation chooses.
“Partnerships can engage in an activity that will ensure that partner contribution and by extension reward can remain relevant. That activity is a continual discussion about what makes a good partner in a firm. Usually this relates to short, medium, and long-term goals, balanced across a range of contributions, from financial to client to people and so on,” says D’Cruz.
“With this clarity, partners understand their role, and partner-leaders can make better reward decisions that are attuned to emerging market considerations,” he adds.