Like It Or Not: Your Compensation Plan Shapes Your Firm’s Culture
One of the most interesting aspects of finding the right compensation plan for your firm is this: there is no such thing as the “right” plan. The “right” plan is the particular one that works for your distinct circumstances, the combination of personalities which make up your partnership and your firm goals. The cookie-cutter approach does not work when a firm decides to re-engineer their compensation plan largely because what your compensation plan rewards will shape your firm culture.
A firm that fails to reward origination, for example, will penalize their rainmakers – and create a culture of technicians (an unsustainable situation), while a firm that fails to reward its managing partner penalizes those who try to manage and creates a culture in which there is a leadership void. In both situations, the compensation plan rewarded the wrong behaviors. Successful firms design a compensation system that acts as a management tool with an emphasis on merit and performance; partner stability and collaboration; origination and client retention; adherence to firm policies and procedures and firm wide profitability.
This is one of the reasons that the process of arriving at a plan takes so long – there is a great deal more at stake than how partners are paid. When we’re working with a firm we know we’ve got the right compensation plan when it will:
- Achieve a strong sense of fairness among the partners
- Motivate & reward partners to excel and contribute to the firm’s success
- Be simple to understand and measurable by objective standards where possible
- Help attract and retain talented individuals
Given all of these objectives, one of the most difficult attributes to achieve when designing a plan is creating one that does all of this and is still simple to understand. Compensation plans range from those that feature a benevolent dictator who metes out “rough justice” to those that have entirely objective criteria painstakingly measured by special committee. But, when partners are given the choice between a complicated plan that may pay-off slightly better for them, and one that is somewhat less generous but easier to understand, the partner will generally opt for the simpler plan. In our experience, very few partners like dealing with formulas that are overly complex and reject any plan that features too many calculations.
When we’re asked to help a firm re-engineer their compensation plan — or design one from scratch — we take an educational approach and review at least four Compensation Models with them explaining the pros and cons of each one. Then we work to have all parties agree on an approach by testing the models against the firm’s core values. While this takes time, ultimately it clarifies and reinforces those same core values in the process. It’s an essential step for them to move forward as a powerful, aligned partnership. So, if you’re planning to re-engineer your compensation plan, give yourself six months to a year and work with someone who understands that a compensation plan is more than a profit-sharing plan – it will pay you great dividends in the end.
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