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Appraisal and Remuneration Schemes -– ‘Strategic Glue’

There is perhaps no better indicator as to the long-term health of any practice than its appraisal and remuneration (‘A&R’) system. It provides the vital link or glue between the firm’s strategic aspirations and their realisation. Why is that so?

Any discussion in this area must be cognisant of the changes that have occurred in the professional service firm environment. These changes are both economic and social.

The ‘Classic’ Model

The central features of the ‘classic’ partnership model were:

1 The profits of the partnership were shared equally (once a partner had qualified).

2 Equity was shared equally and there was full payment for goodwill on entry.

3 Goodwill was paid out on retirement in full.

4 Governance was achieved through a consensus model with all partners having an equal vote and generally all participating.

This is a much abbreviated summary but immediately, it can be seen that the right to a share of profits was linked to a partner having earned and paid for his/her share of equity in the partnership. There was no allowance made, in calculating any partner’s share of the profit, for any issues relating to that partner’s ‘performance’. If a partner’s performance became an issue, then the solution was to dissolve the partnership, often a difficult and very contentious process.

So what has changed and what changed it?

The ‘Modern’ Model

The ‘modern’ partnership is in many cases identical in legal form to the so-called classic model. In many cases, only some of the features are retained and in some others, features have been borrowed from the corporate environment. The most obvious changes have been to try and distance management from board responsibilities.

These changes have been introduced for a variety of reasons but they include:

1 The need to encourage new partners to join firms and take up equity.

2 The abolition of ‘goodwill’ – to facilitate both entry and exit of partners, the so-called ‘easy in easy out approach’.

3 The introduction of ‘managers’ who may be partners, but may not be.

4 The need to separate the owners of the practice from the management of it.

5 The need of owners to retain oversight of management.

6 The need to introduce effective processes to maintain equity between partners and reflect all partners’ contribution to the success of the firm.

7 To improve decision-making processes in firms.

8 To assist firms in pursuing their strategic, longer-term goals.

Many factors have contributed to firms’ ‘take-up’ of all or some of these changes. They include:

1 The difficulty in attracting new partners.

2 Loss of partners due to perceived inequities in the way partners are remunerated.

3 Adoption of values such as transparency and accountability.

4 Less tolerance of poor performance.

5 The need to have the ability to reward ‘high performers’.

6 The greater emphasis on achieving strategic goals.

7 The ability to more fairly remunerate incoming and exiting partners.

8 A greater emphasis on higher profitability in relatively short time frames.

9 The need for greater flexibility amongst partners as to income arrangements.

It can readily be appreciated, therefore, that if a firm wishes to put some ‘grunt’ behind its strategy, a properly administered A&R system can be a very sensitive means to drive those strategic priorities. A firm, specific policy and implementation process needs to be carefully devised, however, to avoid your sensitive instrument becoming blunt and ineffective.

The big policy issues are usually:

1 What are the key performance indicators (‘KPI’s) that individuals are assessed upon?

2 Are the KPIs common to all, ie firm-wide or personal or a mixture?

3 How are KPI’s defined, eg what is marketing?

4 Are the outcomes weighted?

5 How much of the profit pool/equity is at risk?

6 What are the consequences for a partner of ‘failure’?

In the end, this becomes a trade-off between the likely impact of the decision on strategic priorities versus the complexity of implementing the option under consideration, eg if the amount at risk in dollar terms is low, it is likely that there will be a lower impact on strategic priorities being realised. Similarly, an assessment process which tracks only financial performance is relatively easy to administer compared to one that tracks multiple indicators of performance, eg mentoring, marketing etc. The latter, however, will be far more complex to implement, but the impact on achieving strategic objectives is likely to be higher.

Figure A maps some of the alternatives.

The big implementation issues are usually:

1 Who performs the appraisals?

2 Who settles and signs off on the final appraisal outcomes?

3 Who settles the policy?

4 Sharing the responsibility for implementation between a board, remuneration committee, managing partner and team leaders.

5 Who appraises key players such as the chairperson and the managing partner?

6 Over what period is the system introduced?

7 The accuracy/integrity of data.

There are many options as far as implementation is concerned. I would urge extreme care in this area, however. Much discussion takes place on policy issues and implementation is left to one side. The best of schemes are often fatally compromised in the implementation phase when partners begin to object to being appraised by, say, the managing partner, or board members decide they should be dealt with separately and upon some different basis.

These difficulties should not deter you, however, in building a system that works for your firm. You must, in the final analysis, build a system that works not only on paper, but in fact. There is, perhaps, no other more important management objective than this in a modern law firm. It does not need to be introduced necessarily in one ‘big bang’; it can be introduced gradually, eg personal plans can come in year two rather than immediately, the percentage at risk can increase from 15 per cent to 30 per cent of the profit pool over two to three years.

It would be delightful if all partners were not only aware of the firm’s strategic objectives but strived to achieve them. We know that is often not the case. The appraisal system ensures that those objectives along with some personal ones are kept in the mind of the partner. Similarly, the firm’s management must strive for strategic objectives which can be translated into clearly understood KPIs which form the keystone of such an  A&R system.

Duncan S Hart

Duncan Hart Consulting

E-mail: dh@duncanhartcounsultancy.com