The billable hours approach to compensation, with its emphasis on individual work, is giving way at some top firms to a more collegial model.
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.