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 The billable hours approach to compensation, with its emphasis on individual work, is giving way at some top firms to a more collegial model.
Lawyers seldom talk to their clients about how they get paid. It could
be a touchy subject for a cash-strapped client smarting over his fees.
And, if your firm’s compensation scheme is based on an “eat what you
kill” philosophy, discussing this publicly could reinforce some
unfortunate stereotypes. Besides, it is surely not relevant to clients
and essentially none of their business how your firm divides the spoils
— or, if you prefer, the fruits — of its professional activity.
This is not the case, however, at Davies Ward Phillips & Vineberg
LLP. Look on the firm’s Web site under the topic of “client service”
and you will see a description and rationale of the firm’s compensation
scheme. As managing partner Bill O’Reilly explains, the compensation
system is designed to encourage a collaborative culture that is
ultimately in the best interests, not only of the firm, but also of the
clients. He maintains that it is a competitive advantage over other
firms and that clients feel more comfortable knowing that their lawyers
are not focused on aggressively accumulating as many billable hours as
possible in order to boost their own incomes.
If it is true that Davies enjoys a competitive advantage because of its
compensation scheme, it remains to be seen how long it will keep that
advantage, as other firms are also looking for ways of moving away from
an addiction to the billable hour and a predatory eat-what-you-kill
mentality.
As Buff Levinson, president of The Law Office Consultant in Toronto, a
management consulting firm that helps lawyers focus their practices on
productivity and product enhancement, puts it, “Law firms are
increasingly recognizing that being a team player rather than a sole
practitioner in a big firm makes an important contribution to the
firm.” For example, she says, firms are realizing that they must
provide incentives for non-billable activities such as mentoring, or
else risk falling behind competing firms that do reward mentoring and
will thus end up attracting and retaining better associates.
Consultant Karen MacKay, a Toronto partner with Edge International
Inc., agrees that many Canadian law firms are now grappling with ways
of improving their compensation systems, so as to reflect contributions
that are above and beyond the billable hour. Nevertheless, she says,
most systems still tend to be heavily weighted towards quantifying the
work done by individual partners. As a result, she says, “it is very
difficult to get long-term thinking because people are rewarded based
on what they’ve done personally.” Partners are often intent on “filling
their own plate first,” rather than pushing work down to associates,
she adds, “and this goes against building an institution.”
Tom Collins, chief executive officer of the Brentwood, Tennessee-based
financial management software company Juris, Inc., says
eat-what-you-kill models can lead to “sub-optimization,” where the
interest of the parts gets in the way of the good of the whole. He
cites the example of a large firm in New York whose partners vetoed a
proposal to increase fees, even though it was generally agreed that the
firm’s current fees were below competitive rates and an increase would
bring more revenues to the firm. The reason for this was that under the
firm’s eat-what-you-kill system, each partner got credit for revenues
from clients they originally brought into the firm, as well as for work
they personally did or supervised. Individual partners were concerned
that a rise in fees would drive clients away from the firm and that
they would lose out, particularly on the originating credits for
clients that they brought into the firm in the past. Consequently, each
partner voted to hold on to his or her slice of the pie, rather than
making a collective decision to start baking a bigger pie.
So how can a law firm compensation system persuade partners that it is in their own self-interest to act unselfishly?
O’Reilly at Davies believes his firm has the right formula, but he
questions whether other firms can replicate it, since it is a system
that has evolved over many years. Partners’ compensation at Davies is
based on a process of peer review that was originally put in place more
than thirty years ago, when there were just 15 lawyers in the firm. Now
there are 135 lawyers in the Toronto office and 240 across the country,
so that peer review is a far more cumbersome process, but still
possible, according to O’Reilly, because the firm is strongly oriented
towards teamwork and its focus on high-end transactional matters
results in a great deal of collaboration between various practice
areas. “We avoid the problem where large parts of the firm operate
completely independently from the rest of the organization and you
don’t have any way of measuring their contribution other than by
objective measures,” he says.
When compensation reviews are conducted, every two years, the
management committee interviews every partner in the firm. But instead
of asking each partner to brag about his or her own performance, the
committee asks partners about their experience working with other
lawyers in the firm and their assessment of other people’s
contribution, not only in terms of work, but also such issues as their
writing, teaching, mentoring, example to younger lawyers, and
willingness to pass work on to others.
Even though the firm considers itself to be a meritocracy, the
compensation system is partially based on the old lock-step model
whereby partners’ share of revenues increased with seniority. As
O’Reilly explains it, no distinctions are made between partners of the
same seniority until it is clear that distinctions are warranted “as
people settle into a pattern that fits their degree of commitment and
their degree of success.”
Another key feature of the Davies compensation system is that each
partner’s share of the firm’s revenues is established for two years in
advance. “So the only thing that will improve our incomes over the next
two years is our collective success,” O’Reilly says. This is important,
he adds, because it encourages everyone to take a long-term view for
the good of the firm. It also protects partners from sudden loss of
income because of circumstances beyond their control, such as the loss
of a major client due to a corporate merger or other external event.
Cassels Brock & Blackwell LLP is another firm with a compensation
system that attempts to provide partners with some stability and
protection against sudden loss of income. “We’re trying not to be an
eat-what-you-kill firm,” says managing partner Mark Young, who explains
that the firm has established ten bands or levels of compensation into
which each partner is slotted. Reviews are conducted every two years on
the basis of statistical data as well as the results of a survey in
which partners outline contributions that cannot easily be measured
statistically; that includes their efforts to raise the profile of the
firm, manage clients, develop new clients or perform management
functions. Not only does this process establish each person’s share for
the next two years, it also ensures some continuity of income because
there is a policy that no one goes up or down more than one level at a
time, except in exceptional circumstances.
“So, from day one, you know what your income level is for the next two
years. It allows you some time to invest in business development, and
marketing and professional development activities that would benefit
yourself or the firm without worrying about your personal billings for
the moment,” says Young.
In order to inject further incentives into this scheme, Cassels Brock
also has a bonus pool for rewarding lawyers who overachieve relative to
others in their category in a particular year. Young says the system
“satisfies the super achiever immediately, while at the same time
softening the blow for partners whose achievement is starting to wane a
bit, giving them some comfort that they are not going to drop too far
in compensation too quickly.”
Young and O’Reilly both say their firms’ compensation systems give them
an edge over firms with a more formulaic approach that puts a premium
on personal billings. But O’Reilly notes that it is difficult for firms
with an eat-what-you-kill system to change their diet. “It’s virtually
impossible for any major law firm that relies on objective measurements
to make the shift to the approach we’ve taken here,” he says.
Nevertheless, Levinson and other law office consultants suggest that
law firms can take an incremental approach and modify their
compensation systems by, for example, mandating the compensation
committee to base 20 per cent of the compensation on non-measurable
factors such as mentoring.
One problem involved in rewarding lawyers for time spent on management
or other non-billable activities is that it is often hard to assess
whether or not that time was well spent, says Wylie Spicer, managing
partner of McInnes Cooper in Halifax. “Some firms would describe the
way you value that time as voodoo,” he says. He suggests consulting
others in the firm to get an assessment as to whether or not an
individual has been successful in performing these activities.
MacKay of Edge International suggests that demographics will ultimately
ensure that compensation systems change. The eat-what-you-kill approach
fits in well with lawyers of the acquisitive, hard-working,
self-starting baby boomer generation, she says, but the generation of
lawyers following them values balance and co-operation more. She
predicts that law firms will eventually abandon the law of the jungle
and return to a kinder, gentler, more traditional approach to sharing
the fruits of their labours.
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