Law firm remuneration is always a controversial topic.
For the firms which have stuck with pure lock-step arrangements
there are often complaints that the system does not reward high performers well
enough, or penalise those who rest on their laurels at the top of the lock-step.
For firms which have introduced performance related pay, there are
often fierce arguments regarding what type of contributions should be most
highly rewarded (Is personal billing more important than nurturing a good
pyramid of associates? Is winning a new
client for another part of the business more important than one’s own fee
earning performance? How do you deal
with a star biller who won’t collaborate?).
But always up there amongst the hottest topics tends to be how to
remunerate non-fee-earning roles, and particularly the senior management
positions.
Most of the wrangling, though, tends to stay behind closed doors; lawyers
are notoriously tight-lipped about money and don’t like to air their dirty
laundry in public. That is why it is
somewhat surprising to have seen a relatively public spat within Hogan Lovells,
whose new bonus system has provoked some quite public criticism from partners
that the process is not sufficiently independent, that it over-rewards the international
management committee (IMC) members, and that it has led to fee earners “hogging”
client relationships and a consequent diminishing of the collegiate atmosphere
within the firm.
A number of partners (and ex-partners) have
expressed dissatisfaction about bonuses complaining that only a small number of
fee earning partners have been well remunerated. This is hotly denied by the firm, who say
that there is already an independent three-member compensation committee led by
the Chairman, that IMC members are not involved in deciding their own bonuses,
and that the allegation that it is IMC members who have received the largest
bonuses are simply incorrect.
Whoever is right and wrong, this is not good publicity for the firm.
In boom times, of course, such unedifying squabbling is less
common. When there is plenty of largesse
to distribute and most partners are seeing their total remuneration rise, then
rebellion tends to be somewhat muted.
But Hogan Lovells, like many other firms in tough times, is facing decline
in global revenues for 2012 of 1.9% and a 6% drop in average profits per equity
partner. That means of course that as a
simple mathematical consequence the majority of partners are likely to see
their total remuneration package decline, unless there is a cull in their
numbers. So when the spoils are more meagre, the
jostling for position becomes much more noticeable, and in particular the
contribution made by “the management” is (rightly) subject to more scrutiny.
Until relatively recently, law firms tended to have a very flat
structure, and the managing partners were also expected to be fee earners. It
was quite common to see them maintaining a significant client role, even in
large firms, as the role of management was not seen as one which was
particularly onerous. Furthermore, those
elected to senior roles were often drawn from the ranks of the star billing
performers, and so their overall contribution to the success of the firm tended
not to be questioned, despite the fact that the management role itself was not
necessarily very highly valued. As law firms
have grown, often into multi-national businesses, then the management roles
have in most cases become full time tasks, meaning that fee earning roles
usually have to be relinquished. But the
esteem with which law firm management is held is still patchy. Whilst those occupying have a tendency to view
their roles as meriting higher remuneration that fee earners, as they are
superior in the hierarchy, there are others who still see them as little more
than glorified administrators. Those who
are pulling in the big fees in the here and now will often argue that it is they
who are the life blood of firms, and they should be the most richly
rewarded.
So who is right and who is wrong?
There is no one simple answer to this, as no firm is exactly the same as
another. But I am always wary of remuneration
systems which continue to reward management teams very richly when profits are
falling. A good management team can make
a huge difference to the financial performance of a firm, even in a recession, by
trimming resources to fit, or by ensuring that leverage is at its optimum, for
example; whereas individual fee earners can make less impact. To my
mind, this means that the senior managers should be amongst the most highly
rewarded when times are good, but should take the pain if profits are
falling. Fee earners, on the other hand,
I would argue, should see less volatility in their total remuneration.
Having structurally high remuneration for senior management roles
regardless of the overall profit performance of the firm leads to an unhealthy
situation where star fee earners may be driven towards those roles in order to
maximise personal reward. Quite apart
from the fact that there is little proven correlation between the ability to
earn fees and the ability to undertake a complex management role, this
remuneration situation is likely to lead to a draining of a firm’s best talent
away from the vital task of fee earning.
Having a high degree of variability in management remuneration, on the
other hand, will ensure that only those with a genuine talent for the role are
likely to want to put themselves forward.