2020 Equity Partner Contribution & Compensation - listen to the podcast

Ray D'Cruz
,
CEO
,
Performance Leader

In this podcast, Ray D'Cruz and Michael Roch discuss the 5 key insights uncovered by the 2020 Equity Partner Contribution & Compensation Survey including:

  • Are partners co-entrepreneurs or production machines?
  • How has the partner pay gap has widened between the best and the rest?
  • What happens in a partnership when poor performance isn’t addressed?
  • Why is the partner contribution & compensation process inefficient?
  • How to fairly compensate partners who wear two hats – leadership & client service?

About the survey

Our 2020 Equity Partner Contribution & Compensation Survey examines current practices in relation to partner contribution and compensation management in professional firms. Our report puts these insights into a Covid-19 and post-Covid-19 context.


Over 160 respondents were comprised mainly from those who manage the contribution and compensation process in firms: managing partners, chief executives, chief operating officers, heads of finance and human resources and board members.

Learn more

As reflected in the report, partner contribution and compensation is continuously evolving. To continue the discussion, we invite you to:

In the coming months, we will be hosting a series of online roundtables on partner contribution and compensation.  Subscribe to our newsletter to receive further updates.

Transcript

Ray: [00:00] I'm here today with Michael Roch, my co-author, in a recent survey report on equity partner contribution and compensation. Welcome, Michael.


Michael: [00:11] Hello, Ray. Pleasure to be here.


Ray: [00:13] We're here to talk about the survey that we undertook at the start of this year. We opened the survey up in January. A lot's happened since then, which we'll talk about in a moment. But the survey was designed to shine a light on current practices in equity partner compensation practices and contribution management practices in the professions. It's similar to a piece of research we did three years ago on the same subject. And this is an opportunity to check in on some of the changes that have taken place since then, as well as look at some of the things that are on managing partner minds and the minds of those other people and organizations who are responsible for compensation and contribution management. And we found some really interesting results. But we'll get to that in a moment because we were interrupted, weren't we, buy Covid-19? It came a few weeks into us processing our results and it caused us to pause and just rethink some of the things we were seeing.


Michael: [01:20] Well, that's right, Ray. The interesting thing is that there are some results that we will share with the with the audience in the moment that go into compensation practices and how partner compensation practice has evolved over the last three years. A lot of those findings, of course, are still very valid. What of course is no longer valid is people's confidence in their business and their revenues and their profits. And that, in turn, of course, will have a knock on effect on how firms manage and apply their existing partner compensation systems. But the five findings that we'll share in a moment, they are they are very interesting findings and also provide some context for how managing partners, how firm leaders can maintain partnership cohesion during what will be a very difficult economic situation for some firms in 2020.


Ray: [02:26] Yes. Absolutely. Before we jump into that, let's just tell our listeners a little bit more about the survey. We put the survey out in late December, January and February. We had 160 respondents comprised mainly of those who manage the contribution and compensation process in firms, i.e., managing partners, chief executives, chief operating officer as heads of finance, HR and board members. And we also collaborated with some fantastic organizations on this research: NatWest, Managing Partners Forum, Chilli IQ and Edge International.


Michael: [03:03] That's right. And we're really grateful for our partners in getting the survey out. And also we'll work with some of them to provide some deeper insights beyond what we will. We will now talk about in this here podcast. ]Should we go ahead and jump into a couple of the findings, Ray?


Ray: [03:25] Yeah. Let's look at the first funding, Michael, that probably the most profound insight, I think, or the insight that yields the biggest challenge for a lot of firms, and that is this issue of where their equity partners are being managed and rewarded as production machines or co-entrepreneurs?


Michael: [03:45] Well, that's right, Ray. And what we did differently in this year's survey is we asked on a qualitative basis, we asked the respondents to tell us what are the five most important measures that impact partner reward at your firm. And of course, we expected to see business development. Success is a big factor. We expect it to a degree production being a big factor. But we also expected things like leadership to count. We expected things like innovation to count. We expected a lot of things to count. And when we evaluated the responses, again of about 160 people, we were a bit surprised to find that three quarters of the most important measures when you aggregate them and you eliminate for just verbal differences about how people articulate measures, 75% of the measures people express to us are production measures, meaning, you know, how many hours do you bill? How many invoices do you send? How high are those invoices? You know, what's your supervised revenue?


Ray: [5:02] Personal and team production.


Michael: [05:04] Personal and team production, exactly. And that is fine per se, of course it's an important number for the income statement. But the question that we that we asked is: is that enough to be an equity partner at the firm? And I've led professional services firms. I've led a very successful consulting business, Global Consulting Business Forum, for nearly 10 years. And I will tell you that in my world is not enough. What I want in a partner, a proper equity partner, is I want the partner to be a co-entrepreneur. I want that partner to not just look at production. I want the partner to be forward looking, looking at how can we innovate our services? How can we improve the overall strategic brand that we have that we have in the business? How can we improve our employer brand? I want a commitment to leadership excellence. There's a lot of other things that I want in an equity partner and that I'm happy to reward an equity partner for. It needs to be a very entrepreneurial mindset. And it surprised us that most of the respondents that we saw that the big factor that people are rewarded for is 'just production'. If that's for a salary partner, fine. You want to salary partner to just produce. But an equity partner who is working with you to overcome a Covid crisis, you know, production is fine, but you need more than that. And that's the one of the big outcomes from  the survey. And we're going to think about how can we evolve that discussion in the professions.


Ray: [06:40] You're absolutely right to say in this moment that we find ourselves, that these sorts of entrepreneurial skills are critical to helping a friend get through. But also, in the medium term, when things return to some kind of normal, we're still going to see that accelerated change in the professions. We're still going to be asking partners to innovate and collaborate. And those words will just remain words while we continue to reward people predominantly for production. Interestingly, from this research, Michael, innovation doesn't feature in terms of reward measures. Collaboration loosely might figure somewhere along the line depending on how we define it. But those two central challenges that a lot of people are talking about at the moment and a lot of effort going into teaching partners in leadership programs about what innovation and collaboration means aren't necessarily being reflected in the reward process.


Michael: [07:41] Yeah, that's right. I mean, partly it's possibly a bit defined by the sectors who were surveyed, right? There was a lot of law firms in the mix. There was a lot of accounting firms, some real estate advisers and some consultancies. But if I just put the legal sector out front, a lot of equity partners still believe that innovation of services means I learned about a new area of the law or or  I update a client on a new regulatory development. I think people have become more sensitive to it. But looking at how can data science help us improve how we provide our service, for example, or how can we restructure our business to buy to provide a more flexible labour model, both with respect to how we make our profits, but also what we offer to our clients? And that also counts as innovation and I think many firms have just begun to scratch the surface on that. And that is when you're talking about the acceleration of the digitization in the professions that is ongoing, that will continue to accelerate, these are important skills and important contributions, important outcomes.


Ray: [08:47] It's an opportunity now and this moment when a lot of things are up for grabs and the future is coming forward more quickly, perhaps, to ask that fundamental question of the partnership: are equity partners production machines or co-entrepreneurs? Do we want them to be, feel, act and be measured as co entrepreneurs? And, you know, we often get the question in our work, Michael, how do we incentivize or how do we get our salary partners to behave more like equity partners? And it's a really interesting question, but I think what we're saying here is, well, let's just take a step back for a moment and let's actually look at what it means to be an equity here before we even talk about that transition.


Michael: [09:34] You know, there is a big assumption in the professions that still runs, which is: in order for me to get partners to do something, I need to put a pay check behind that. That's a very lazy way of looking at motivation. You know, most professionals, certainly those who are sitting in the quarter percent of their off their market in the top quarter percent of the market excuse me, they are much more intrinsically motivated than we give them credit for. So, the if the answer is to how do we get more salary partners to behave more like equity partners, the answer often is not to say how do I tweak how I pay them? That might be part of it. But the much bigger part is how do I tap into their intrinsic motivation? And in that sort of gets you to a very different level of leadership skills that you need.


Ray: [10:26] Michael, that's a great Segway onto our second insight, which is that the top to bottom reward spread is creeping up to reward high performers.  


Michael: [10:35] That's right, Ray. So, when we ran this survey, 2017, we asked the same question, which is: what is the top to bottom spread of compensation among your equity partners?  Back then, the majority of respondents had the spread between 2:1 and 3:1, meaning the highest paid partner is paid three times as much as the lowest paid partner, that's what that means. In this year's survey, we found that the majority of the respondents said, well, no, our spread has gone from 3:1 to 5:1. So that increase in spread, that's an interesting fact by itself, the spreads are increasing. So, you know, what does that mean? But it's essentially two reasons why that is happening. So the first reason is that the spread is under pressure to be stretched. Why? Because firms always strive to pay high performing partners more. So, when you have a lower spread, you socialize more of the profits. If you've got a higher spread, you move more of the profits to whatever the firms deems to be high performers. The second reason why that is, is that in some countries, particularly in the UK, for tax reasons, you have taken some fixed share partners into the equity, so you could make more easy on the tax side, but also to shore up the capital of some of the firms. So, you move the fixed shares into equity and with partner capital loans, you then can shore up your equity. It's fine to us to stretch to the top of the equity. That's fine. But you have to be very careful that you don't stretch that too far. Why? Because when you stretch that too far, you risk partnership cohesion, right? If I take it to an extreme and say, look, we are 10 partners and each of us gets one tenth of the profits. You are a very there's no differences, right? And you are you are in it for the same gain. If you're pushing your spread to 10:1, 20:1, I immediately will ask you, well, are you really a partnership? Because how can it be? Is it really so that person A is worth 20 times as much as person B? I'm not saying that that's the 20:1 cannot be made to work. Of course, it can be made to work. If the culture, the governance, the structure of the strategy sits behind that in the right sort of way. But if you're assuming that you can just stretch the spread from 2:1 to 5:1 and not make other systemic changes in the business at the same time, to maintain that partnership cohesion, I think you will put some of that cohesion at risk. And it is a balancing act. But it was a very interesting finding to see that that now the spreads are really increasing.


Ray: [13:32] And some of the rainmakers who are typically the subject of these higher spreads, the people who are sought to be retained, some of these people don't necessarily do well when that cohesion goes out the window. The best rainmakers are really relying on a highly collaborative environment where work is shared, where clients is shared, so that they can play the sort of game they play. So, you know, you might spread the reward thin in order to reward that group of people, but in then jeopardising the cohesion, you end up hampering that same group don't you?


Michael: [14:10] That's right. It's some you know, it's the it's the partnership equivalent of the security and freedom equation, right? If you are happy to sacrifice some freedom to gain security, you will you risk jeopardising both. Right. In a partnership, it's the same, right? If you if you if you push this the spread too much in order to reward your top performers, you might lose both your top performers and the collaborative environment that you're trying to that you're trying to foster. So Ray, that leads me to the third insight. And we from which we've essentially asked two questions. One is 'to what extent do you agree that your firm's appraisal and review process recognises partners' strong performance? And to what degree does your process help you articulate clear improvement plans for poor performance? And, Ray, what did our respondents say?


Ray: [15:07] Well, Michael, the results were fairly similar to the 2017 results, which showed that the appraisal review process, which we know takes a lot of time and energy for most firms, does a pretty good job of recognising strong performance: 88% percent of our respondents said so. Whereas when it comes to articulating clear improvement plans for poor performance, that is addressing poor performance in a really practical way, only 59% of respondents agree that that's the case. Now, both of those figures might be swelled by the fact that our respondent group is primarily comprised of those who are responsible for the process. Perhaps a survey that sought the opinions of the rank and file equity partnership might yield a different result here. But it is fundamentally good news. It's saying, look, all the time and effort that's put into this process has is a positive in terms of when it comes to recognising good performance. But I don't think it's a huge surprise, Michael, that the appraisal process itself isn't well equipped to deal with poor performance. We know that dealing with poor performance is a you know, it's a longer game. If it's throughout the year, it can't possibly happen at that one point in the year when suddenly money's on the table. It needs to be part of an ongoing process.


Michael: [16:38] What risks do you see when we sort of let underperformance lie for too long?


Ray: [16:45] It comes back to that issue we've already raised, which is cohesion. We know that it's not  necessarily the quantum of remuneration, it's often the perceived lack of fairness around the quantum that's an issue for a lot of partners that seeds some resentment. And what we do what we don't want to happen is for there to be some sort of brooding sense of unfairness about the process. So, I think what we've seen is that in our consulting is that when equity partners are confident that management is proactively addressing poor performance, then a lot of the heat goes out of the situation. Most of the problem occurs when there's a sensitive system being dealt with. There are three pieces of advice that we give to two firms.


Our advice is to develop a systemic approach to addressing poor performance. Firstly, that means giving leaders permission and skills to have regular conversations. We know that the 'first amongst equals' issue makes it difficult for a lot of managing partners and practice group leaders to address poor performance. We need to be explicit. We need to say you have permission to address these issues and these are the ways in which we're going to address these issues. And following on from that, we also need to have really clear expectations around what performance, looks like, and where that performance is not being met, a plan, and regular touch points. And all of those things need to take place well in advance of the reward conversation. And finally, we see a role for making sure that these regular conversations can be supported. We know it's difficult, particularly in multi-site firms, particularly with remote working technology has got a really strong role to play here in facilitating a constructive dialogue where we're partners just can't be face to face all the time. It's just not realistic.


Michael: [18:51] Technology really does take a big role in this. In particular, when managing partners can no longer sort of manage partners by walking around. The same goes to department heads, right. Because we're now in a remote environment, will be in a remote environment for quite some time, even when people return back to the office.


Ray: [19:09] And I think this is a shared responsibility, right Michael. You know, we can't be heaping too much pressure on one or two people in the firm to sort these issues. We really need our whole leadership team stepping up. And so that view needs to be across the whole firm, but it needs to be shared by the leadership team. And so that's where technology can really make a lot of these things a bit more transparent.


Michael: [19:32] This leads me into the next topic. And in one of our key insights is that partner compensation systems still tend to undervalue leadership and management roles. And that seems a big paradox, given how you've just discussed what you know, what it takes to really manage underperformance or even manage performance, overall systemically, how much effort and how much how much energy that takes. And we've asked we've asked the respondents how effective is the firm's compensation system in providing fair reward outcomes for those partners who are in in leadership roles. And what we found is that only a third really expressly accommodate partners who 'double hat': partners who are both client facing partners and partners who are in management roles. And that's very consistent with our consulting practice, because most compensation systems are geared to the picture in your heads. The paradigm that partners are client facing and management sort of happens somewhere outside of the compensation system. And that, in our view, isn't a 21st century way of doing that.


Ray: [00:20:47] It's an extension of the production issue that we mentioned earlier.


Michael: [20:53] That's exactly right. So, it really puts when you don't expressly accommodate management roles in your partner comp system, and I grant you, the discussion is hard, right? To implement that, it's a hard slog politically and structurally. You've got to do a lot of design work. It's not an easy thing to do


Ray: [00:21:13] Michael, what's the what is the downside of not addressing these things more explicitly?


Michael: [21:18] That's a good question, Ray. The downside is twofold. One is on the firm. And one is on the partner who is taking up a leadership role. So on the firm side, what you want is you want the best people in leadership roles, whether that is the firm leadership role, managing partner or something similar or whether that is an important P&L role, right, somebody who runs a big part of the profit and loss of the firm. And if you don't look at compensation for partners in management roles explicitly, what you what you risk is that you don't get the best people for the job because either you get folks who may not have a great client facing practice and they want to get a role just to find a way to cover over that. Or you have and this goes to the individual side, you might have a partner who would be a great partner in a leadership role, maybe has a decent size book of business, but he doesn't want to take it up or she doesn't want to take it up because of fear: what happens to my compensation if my client numbers drop if I spend a lot of time on this leadership role? So, it's not having that side of a partners role explicitly addressed in the partner compensation system. And just looking at, again, that production element of the client facing partner, it's not the best situation for either the firm nor the nor the partner involved.


Ray: [22:47] So this must be an evolutionary thing where the 31 percent of firms that have said in our survey that they do explicitly acknowledge and reward these roles, is a growing number.


Michael: [22:59] You can also look at it in the context of maturity of a firm. You know, you had a lot of professional services firms that are today powerhouses that were started sort of 1980,1990, somewhere around there. And, you know, I founder-led firm runs very differently compared to an institutionalised firm that has gone through two or three partner generational changes. And many of the powerhouse firms today are have already gone through many generations of partners and there you will you will see management roles more institutionalised. So, it's some it's a combination. But I think you're right. Next time we do this, we do the survey and a couple of years’ time, I do expect the number to have increased the number of firms who have expressly accommodated management roles in their comp system to have that increased.


Michael: [23:50] Think about it in the in the context of the individual partner too, when, you know, if you don't expressly provide for something in your comp system about management roles coming into the role, I've expressed that already as a challenge. But what happens when you come out of the role? Right. You've picked a partner as managing partner has been pegged at a certain level for a period of time. The partner then doesn't want to retire or leave the firm when he steps down. So, the partner wants to return to practice. Well, if you if you can't accommodate the fact that the partner might have to rebuild the book or the party might have to contribute in different ways, we can't accommodate that in your partner comp system, then then, you know, you're just missing a trick of providing a competitive partnership structure for partners.


Ray: [24:39] The fifth and final highlight we want to talk about today relates to how effective and how efficient the compensation system is. So, we ask two questions, firstly, how effective is your partner compensation system in providing fair compensation outcomes? And secondly, how efficient is the process? By efficient we're talking about utilisation of resources: time, financial resources, etc. And we had a relatively interesting result here where most of our respondents said that the system is effective. Again, possibly skewed a little bit by our respondent group being those responsible for the process. But the same group wasn't as positive about the efficiency. Only 52 percent said the process was efficient. That's a pretty low number. It's not a huge surprise. We know from our work with firms just the level of personal exertion and exhaustion that encompasses the whole contribution and compensation process for a lot of leaders. So, what are the ways in which we can develop a more efficient approach?


Michael: [25:49] Yeah, that's a good question. There was something that heartens me about the result, actually, that says if you're saying we've got half of our respondents who are saying 'this is not very efficient', that that could be read to say that, you know, we don't think it's very efficient but we really work hard to try to get to a fair answer for our partners every year. And I think most partnerships actually try and try and do that. But the other side of that efficiency is, yes, a lot of effort, a lot of time goes into it. And the question is, is that necessary?


Ray: [26:26] Michael, in developing a more efficient approach, we advocate four things in our report. Do you want to lead us off?


Michael: [26:35] Sure. You know, a lot of firms tweak their process every time that they do around after they've got a compensation round. They see what can be tweaked about the process. But often what happens is they do more, and they don't take stuff away. Right. So a big part of about efficiency is simplicity. And a lot of the work that we do on partner compensation processes is actually taking a step back and saying, look, you know, what are the few steps that we need to have happen to get to an efficient process here? So simplicity is the first one. The second one is making sure that the decision making framework or the governance around partner compensation fits the size and maturity of the firm. So, for example, a founder led firm with 25 partners requires something very different compared to a global firm with 300-400 partners, both in terms of content, in terms of process, in terms of tools, in terms of engagement, and in making sure that your firm hasn't outgrown your governance or on partner compensation is a very is a very important point. A lot of a lot of time when we got involved in looking at some efficiency on partner compensation it's that the process no longer fits the size and maturity of the business.


Ray: [27:59] We also recommend utilising technology because we recognise that the effort associated with this process is enormous. And this is really an area where technology can save a lot of time. And that's critical because a time can be better spent on other things, including the year round approach to performance management or contribution management that is unfortunately lacking because often the interview process is so inefficient. The final thing that we recommend is a detailed after action review. We know this is often the last thing that managing partners and boards want to talk about at the end of the process because they just want to be a million miles away from it. But really, the proper close to a partner contribution and compensation process is a detailed after action review with the key people involved, maybe some of the participants as well. But with a real focus on finding opportunities to make the process more efficient next year. So back to your point earlier, Michael, rather than just adding things on every year, actually looking at what we could eliminate or take away, that it wouldn't make a substantial difference to the outcome. That would be a great focus for any after action review at the end of the process.


Michael: [29:13] The findings that we've talked about in our survey that go to making the partner comp system better, right? Making it more efficient. Make it more effective. Make it fairer and having it operate in a way that that helps motivate partners to do the right thing.  A lot of firms in the Covid times now will see revenues drop as a result, pressure on profits. We will be looking at partner de-equitisation, we will be looking at some revisions of profit share and a piece of advice on the firms who have to go through that. It's a very tight balancing act between just applying the system that you have to accommodate the partners in the in the kind of economic environment. But you can also use this time to take a step back and say, well, you know, can we have a discussion with our partners to essentially reset our partnership? Reset the expectations that we have as equity partners of each other? Look at how we share profits in a fundamental way. If you achieve a reset rather than a draconian. So, if you know we're de-equitisating and slicing partners left, right and centre. In the short term, it might help you pull the partnership together. And in the medium term, you might emerge as a stronger partnership when things pick up again. So, before you take the big the big slice to your partnership, think about if you can take a step back and do something more fundamental that will help you sustain the institution in the medium term.


Ray: [30:49] Michael, great to speak with you about this today. It's been great collaborating with you on this project. And I want to thank also our collaboration partners, NatWest, Managing Partners Forum, Chilli IQ and Edge International. And I want to thank all of our audience for listening today.

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