There are very many profit-sharing options for partnerships, ranging from the simple to the really sophisticated. The sophisticated models require record keeping and measurement of many variables in order to create ‘fairness’ using algorithms that reflect many assumptions of performance and contribution for/from the different roles assumed to operate in the partnership. A partnership operates largely on the basis of mutual respect and trust between partners. Any option to be considered should therefore seek to promote those attributes, while capturing the fact s that (i) there needs to be minimal resentment amongst partners about how the model operates in profit-sharing (ii) the partners need to be rewarded broadly in line with their contributions (however defined), and (iii) partners feel committed to the firm and feel that the model will encourage potential partners to want to join the partnership if offered, i.e. a belief that the model encourages sustainability and continuity of the firm. Four common options are; Equal Partnership option, Lock-Step option, Modified Hale and Dorr system and Team Building system. It is safe to say that there are very good examples of strong legal firms in Nigeria, some of whom have adopted these options or a cocktail of the options.
The Equal Partnership System
In this system, all partners share in profits equally or within defined groups of partners. For example, in a firm with eight partners that are divided into four senior partners and four junior partners, the senior partners equally share 60 percent of the firm’s total profits (15 percent each), while junior partners equally share 40 percent of the firm’s total profits (10 percent each). This system presupposes that each partners contributes equally to the overall firm performance, albeit in different ways – billable or non-billable. Individual performance is much less important than how well the firm does as a whole. As long as the firm does well, then the individual partners will do well. This allows for individuals to have performance swings – up years and down years – as long as overall the firm does well.
The paramount financial concern is firm profitability. The bigger the pie, the bigger a partner’s share of profits so emphasis is on the firm’s performance. Partners focus their competitive instincts externally rather than internally i.e. they collaborate to outperform other firms. Partners work well together. They do not hoard either clients or files – their goal is to increase the total profit pie. Partners have a certain sense of security as to what their income will be at any given time.
Lack of incentives: There is no perceived or real value in working harder. There is no individual financial difference between the partner who works long hours and the one who doesn’t. Lack of incentives can lead to resentment of partners who are perceived as lazy or underachieving. The impact of the most profitable partners leaving an equality firm can be devastating. Eventually only the poorer performing partners remain, profitability declines and the partnership dissolves because there is no point staying together as a firm.
The Lock-step system
In the lock-step system the basic concept is that each partner is rewarded an ever-increasing share of the firm’s profits, based solely on seniority. The longer a partner remains with a firm, the more money the partner will make. In a lock-step, income can be divided exactly along seniority lines or divided into levels. For example, the divisions might be senior partners (more than 15 years as a partner), middle partners (5 to 15 years as a partner) and junior partners (1 to 5 years as a partner).
Offers high financial rewards for the longest serving partners, providing a great deal of stability. Few partners, once committed to the system, would leave before they had risen to the top of the compensation ladder. Partners have a sense of security from knowing that their share of the profit pie is pre-set. The only variable then becomes how big the pie will be. This security can help to create a more collegial atmosphere among the partners. Encourages external rather than internal competition among partners because the only way to increase individual income is by making the overall pie bigger. There is no financial advantage to file/client hoarding among the partners so they tend to work well together, again contributing to the collegial atmosphere.
Lock-step does not directly reward individual contributions and initiatives. As a result, some partners will not put in extra effort when they know that all they need do is contribute at a normal rate to keep progressing along the compensation path. This lack of financial incentives can have a great impact on a firm’s profitability because, in some cases, it is actually a de-motivator. The younger partners may feel resentment toward the senior partners. In lock-step firms where senior partners are perceived to be taking more than their appropriate share of profits, there will eventually be an exodus of the younger, hard working partners. They will move to firms that are prepared to recognize and reward their efforts. The result for the firm is lower profits at best, and at worst, disintegration.
Modified Hale and Dorr System
This is considered as the first incentive-based compensation system. There are three categories in which a partner could earn income: Finder (originator of the client), Minder responsible for the client) and Grinder (the partner actually doing the work), there is also a small portion of profits set aside to be distributed at the discretion of the partners. The clear assumption is that if everyone is motivated by the compensation system, the firm as a whole will perform well. In this system, the weight given to the various categories depends on the firm’s vision and goals and also the current strategy.
As the system places more value on individual contributions, Partners know exactly what is required if they wish to increase their income. The system allows them to become the masters of their own financial destiny, either higher or lower depending on personal goals. There is less bitterness toward a partner who is perceived to be contributing less to firm profitability because when they contribute less, they receive less. Of course a partner who performs well below normal expectations will still have problems. Seniority has no direct value in compensation, though a more senior partner would probably bill at a higher rate and therefore command a larger percentage of the grinder share of the profits when doing the same amount of work as a younger partner.
Given the choice, partners will always opt for the billable work ahead of the non-billable unless rewards are built in for non-billable time – firm management, coaching, recruiting – which are necessary for running a profitable firm. Partners become so concerned with personal numbers and income, little time or effort gets expended on the type of activities that build teams. Also, partners who are paid only for their production may make the mistake of hoarding clients and work. This can lead to resentment, and impact on quality when partners perform work in areas in which they are not proficient. It is demoralizing as well to the juniors who are not getting enough work or enough quality work.
This is the ultimate team system of compensation. Individual contributions are given little consideration while firm profitability and practice group or department performances are paramount. The formula for the team-building system bases 50 percent of a partner’s compensation solely on how well the firm does financially. Another 40 percent is based on a practice group or department’s financial performance, and the remaining 10 percent is based on the individual partner’s performance. These percentages can be varied to suit a particular firm’s vision areas as the weighting would be driven by the firm’s vision and goals and its current strategy.
The system is totally objective and it downplays the role of the individual. All partners in a group or department will sink or swim based on collective efforts. It promotes firm goals. When everyone pulls together the firm succeeds to the highest levels and the competitive focus is external rather than internal. There is cooperation and collegiality at the group and firm levels: Partners have faith in one another to always do what is best for the team – to willingly waive individualistic tendencies when they conflict with the goals of the team.
Some partners may feel that there is a lack of recognition for seniority and experience. Unless there are levels of partners within the system, all partners would earn about the same amount. Partners may not make enough of an effort because they don’t see the direct rewards and don’t feel they need to perform at a level above others. The individual large contributor may well leave in search of a firm that will reward individual efforts more highly.
Olagoke Odubunmi LL.M, BL. Legal Practitioner and Tax Research Officer at Maples & Temples, Lagos.
Part I here
Part II here
Part III here
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