Law firms being partnerships, someone must decide how to split the pie at the end of the year, and except in some small firms, the pie is rarely split evenly. The task of deciding how large a slice of the profits should be given to each partner in medium and large firms usually falls to the compensation committee. One might think that the compensation committee would consist of human resources professionals with specialized knowledge in evaluating job performance, and perhaps that is the case in some firms, but in many firms the primary qualification for membership on the compensation committee is a large client base and big billings.
As you can imagine, there are many interesting stories that originate in the compensation committee, but my favourite story illustrates a fascinating characteristic of many of the lawyers who I met over the years.
Many years ago, there was a law firm whose compensation committee would determine how the pie would be split and then distribute the results to all the partners. Invariably there would be a stampede to the office of the managing partner/largest client originator/biggest biller/head of the compensation committee, and the managing partner would then have to listen to every partner gripe about how his or her slice of the pie was too small.
One year the managing partner took a different tack. After the compensation committee met and split the pie, the managing partner met with each partner to discuss whether the partner was satisfied with their share of the pie, but without disclosing the allocation to the other partners. Every partner was happy with their allocation for the very first time.
After confirming that every partner was happy with their allocation, the managing partner distributed the complete allocation to all the partners, each of whom promptly stampeded to the managing partner’s office to complain about their allocation. The slice of the pie that had seemed fine standing by its own, now looked too small when compared to the slice of the pie that one or more of the other partners had received. Some of the partners knew that he or she was more valuable to the firm than at least one other partner who had been allocated more. Other partners knew that their value to the firm far exceeded the value of another partner who had received less by even more than the difference between the two allocations as determined by the committee.
So, what does this tell me about lawyers? It tells me that we all did really well in high school which got us into university, and then we did really well in university, which got us into law school, and then we tried to do really well in law school so that we could get a job articling with the “best” firms. We were rewarded with “A’s” for being smarter than the other kids in school, and even now, many years later and with the confidence that we should have developed through years of proving our worth to ourselves, our clients, and our peers, many of us still need to get the “A” of higher compensation.
And I truly believe that it is not about the money. Partners earning a good number of hundreds of thousands of dollars a year have been known to complain that some other partner earned $10,000 more, the after-tax difference being negligible in the context of the complainer’s over-all earnings.
You would think that the members of the compensation committee would be so annoyed at having to put up with the whining that it would be difficult to recruit partners to serve on the compensation committee. Who needs that grief? Strangely enough, many partners jump at the opportunity to be on the compensation committee. Some have observed that being on the committee sometimes seems to result in a “fairer” allocation to a partner compared to partners who are not on the committee. Who would pass up the chance to increase their odds of getting an A?
Bottom line: Competing internally does not make for great relationships or for great law firms, or for a happier life. Law firms should find more ways to minimize internal competition and maximize external competition. I once had a partner who, making the argument that partners should not squabble about the allocation of credits for bringing in new clients, often observed that we should all remember that “The rising tide lifts all boats”, and then like a typical lawyer, advocated for an increase in the share of the pie to be allocated based on originating credits.