How to fairly reward equity partners who manage a client load plus internal leadership roles was the key topic of discussion at our second partner compensation roundtable held in September 2020.
Fifteen Managing Partners and Remuneration Committee members of large law, accounting and property advisory firms in Africa, Asia, Europe and the United Kingdom attended. Barolsky Advisors’ Joel Barolsky and Performance Leader’s Partnership Advisor, Michael Roch, facilitated the roundtable.
The discussion quickly revolved around three interrelated problems, with many interdependencies, that require sensitivity from the partnership.
Most partner reward policies in professional services firms have evolved significantly over the past decade in how they view partner contribution and how contribution translates to reward for the broad base of client-facing partners. Yet these same policies remain unclear about how to reward equity partners who double-hat.
Our 2020 Equity Partner Contribution and Compensation Survey found that only one third of respondents’ reward policies explicitly accommodate reward for partners in formal management roles.
In the minority of partnerships which operate clean lock-steps, this isn’t necessarily a problem. But it is a problem for the Remuneration Committees of most firms where individual merit plays a role in a partner’s reward: without an anchor of some type, point allocations are a combination of a partner’s original point position, firm history and highly political negotiations among partner factions and the partner involved.
Many articles have been written about the value of partners serving as managers of their partnerships. Suffice to say that well-deployed partners in management functions can enable partners to reach new heights of revenue and profitability by driving ability, stability, agility, connectivity and consistency, the five key success factors of any modern professional services firm today.
To keep our discussion narrow, we only considered reward for partners in formal management roles. In most firms, this means the role of Managing Partner and Senior Partner and, in larger firms, the role of business unit head or department head where partners spend a substantial amount of time in their role managing the P&L of their group.
“Substantial” here means upwards of 40% to 100% (two days per week to full-time). The roundtable recognised that partners also take on informal management roles. This can occur incidentally as part of what comes with the job of “partner”. Often, “informal management” isn’t so informal after all, for example where a partner heads up a new sector or key client initiative.
The criterion for a formal management role is simple: if a partner is responsible for a portion of the firm’s P&L and that role takes up more than 40% of his/her energy, there is a formal management role. This requires a different approach to measure partner contribution which requires reference in the firm’s reward policy.
A lack of clear policy on how much management is worth is usually is due to unresolved philosophical differences between different stakeholder group. Each stakeholder group argues its side of the point, often without a holistic view of the overall partnership (see Figure 1).
These different philosophical perceptions can largely be traced back to one key question: what is the value of management in professional firms?
Our roundtable did not articulate an answer to this question because – as so often – the answer is highly dependent on the firm’s circumstances. The seven factors at play are:
Regardless of the specific answers, partners need to periodically discuss and agree the value of management, and how this value translates to reward.
We discussed five important questions to ask in relation to each management role:
This could revolve around strategic, operational and financial parameters which apply to the type of role (e.g. Managing Partner, senior partner, business unit head, practice group head, office head).
The seven factors above will help inform if the role of Managing Partner is a 100% role or if s/he can continue client-facing work, and if so, how much? It is important to define a range to accommodate different situations.
Again, the seven factors above come to play. Do we want the Managing Partner to always earn in the top 10% of the point range? What should the point range be for the head of a small office? Again, always define a range to provide flexibility to management and RemCom.
It is here where strong governance is helpful. For example, a new head of a small, unprofitable office with several difficult partner characters that requires a turnaround demands as much energy as does a large office that is just motoring along.
Only after the above four questions are answered can a Board or a RemCom evaluate:
A clear reward policy provides essential guidance in this final step (see above).
At the end of our roundtable, we sought a discussion around three questions that Remuneration Committee chairs frequently ask. There was consensus that the answer always is “it depends.”
It depends. Similar to CEOs of publicly-held companies, there is an argument that the Managing Partner should always have the highest number of points, commensurate with contribution and authority. Yet the firm’s style and ethos could dictate that the highest points should be reserved to those partners who provide the highest client value to the firm (however that may be defined). If the firm elects its highest valued client-facing partner to a management role, the outcome is usually clear. A clean lock-step, of course, also provides for a clear outcome.
This partner is either a superstar or manipulates the metrics to ensure this result. If s/he is a superstar, RemCom needs to decide not whether this partner should be among the top earners, it will also need to decide how far to lift him/her above the rest of the partnership. What undoubtedly will be a highly politicized answer again will depend on balancing internal relativities and the type of partnership the partners want to have or create.
Not usually, no. In most professional firms, strongly performing partners tend to be those who get selected for leadership roles. (We don’t answer here whether this is good or bad – it is a reality.) This often means that a “Head of” subtitle will extend an already strong halo carried by that partner. At the other extreme, it is relatively rare that a relatively poorly performing partner – if s/he is elected to a leadership role at all – will all of a sudden achieve great client facing results because s/he has been elected to a “Head of” role. Sometimes, it is possible that a completely new contact – one who doesn’t know the firm at all – is more likely to call a “Head of” than an “ordinary” partner s/he sees on the website. However, most strategy-driven firms receive only a tiny portion from cold inbound calls firms. Great client-facing results come from focused and continuous efforts and previous client results – not from internal management titles.
Our roundtable participants left with three clear pieces of advice:
Our thanks to our roundtable participants for a stimulating conversation. Please get in touch if you’d like to discuss any part of this article, and read on to see how Performance Leader can help your firm with partner contribution and compensation issues.
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Michael Roch is Managing Director of MHPR Advisors and Head of Consulting for Performance Leader. For over 20 years Michael has advised global professional partnerships, international PSF networks and founder-led firms on partner remuneration, profit sharing, funding, governance, succession, business model design and other strategic issues. Having earned his spurs in Big 4 accounting (USA) and Big Law (UK), as an entrepreneur Michael has co-founded and led a global strategy boutique and served as Co-CEO Europe of a 4,000-member consulting platform. Michael is author of Partner Remuneration in Law Firms (Globe Publishing).