170SMART COLLABORATION
Overemphasizing origination is countercollaborative. Often,
the barrier to collaboration presented by professional firms’ com-
pensation systems stems from the outsized rewards given to selling
instead of doing the client work. In the terms I used earlier, that
means overrewarding solo specialists and devaluing contributors.
Professionals who excel at developing clients and winning new
work are typically—and in many cases, rightly—the most cele-
brated people in a firm: without them, there would be no clients to
serve. But if this is taken too far, collaboration suffers.
Some firms reward rainmakers with a system that is akin to
commission, whereby a partner receives a percentage of his gross
sales (tellingly referred to as an “eat-what-you-kill” system). Other
firms work on a tiered system—the more revenues an individual
generates, the higher the percentage awarded to that person. The
transparency of these sorts of compensation models is an advan-
tage, since people know exactly what they need to do and how
much they’ll make in return. But they also discourage collabora-
tion, because professionals who bring in a partner to help close a
deal will need to split their commission. As one real estate broker
told me, “The commission system stands in the way of collabora-
tion, because I can make more money being greedy than sharing.”
Because generating new business is harder, riskier, and more
time-consuming than completing the work that someone else has
sold, it usually makes sense to reward it accordingly. As firms com-
pete with increasing ferocity for top rainmakers, they are increas-
ingly likely to reward their most important revenue generators
more highly than the average partner, and to pay them significantly
more than the lowest-paid one. It becomes a very tough balance to
strike—and if the firms get the balance wrong, then professionals
become reluctant to contribute their expertise to work that other
partners have originated.
In an extreme version of the system, the originating partner gets
a cut of the fees forever. A version of this system was used, for
example, by renowned Brazilian law firm Mattos Filho until quite
recently.
18
Initially the policy made sense as a way to incentivize
the founding partners to generate revenue for the fledgling firm.
As the firm grew, however, many younger partners felt left out of
Chapter_06.indd 170 05/10/16 11:52 pm
Collaboration for Ringmasters171
the system because they saw very few opportunities to bring new
clients into the firm. “When I started in this department, all the
clients I got were already clients of someone else,” remarked one
young partner. “And the problem was, the ‘partner owner’ didn’t
even know the client. They had done some job in the past, but there
was no ongoing relationship with the client.”
I’ve already encouraged you to avoid radical surgery in the
compensation realm whenever possible. But the leaders of Mattos
Filho decided—rightly, I believe—that their circumstance created
the exception to the rule. They undertook a significant overhaul
of their system, moving away from the formulaic eat-what-you-
kill approach to one that included a combination of objective,
outcomes-based performance metrics and subjective decisions
by a compensation committee. Changing the system was tough,
time-consuming, and risky; a group of high-profile partners who
resisted the changes defected en masse for a competitor. Ultimately,
though, says the firm’s managing partner, Roberto Quiroga, the
firm achieved its goal of making the culture more collaborative by
changing the system. It also enabled them to recruit some high-profile
laterals, and in 2015 Mattos Filho was named Best Law Firm in
Latin America by Chambers, which publishes a research-based
ranking of firms by geography.
If your firm needs to rebalance the rewards between solo special-
ists and contributors, but in a less radical way than Mattos Filho
undertook, you have several options. First, you might limit the
period during which the origination credit is available, or require
that eligibility for it is contingent on a partner having substantial
ongoing involvement in a matter. Second, you can “multicount”
origination credits: if a project is worth a hundred credits, rather
than asking partners to split it fifty-fifty, give them each credit for
one hundred. I know that sounds like book-cooking—ultimately,
the firm can pay out only those profits that have actually been gen-
erated, right? Yes, but the difference with the multicount option
is that people who collaborate extensively will be rewarded more
than lone hunters. And as argued above, metrics drive day-to-day
behavior more than annual pay, so not having to split credits makes
an important psychological difference.
Chapter_06.indd 171 05/10/16 11:52 pm
172SMART COLLABORATION
Finally, you might consider using a “top-up” fund to take some
of the sting out of the investment that people make in providing
excellent service to “other people’s” clients.
19
For example, some
firms set aside a pool of money that originating partners can draw
on to reward colleagues who invest in building global accounts.
No, those rewards typically do not boost compensation as much as
origination credits do. But they can take the sting out of “merely”
contributing, reduce the time invested in mental calculus, and off-
set a contributor’s sense of sacrificing himself or herself on some-
one else’s altar. They also communicate the importance and value
of contributing to high-quality client service.
Relative compensation matters more than absolute pay.
Science shows us the sometimes counterintuitive effects of relative
compensation. Simply stated, a person’s satisfaction with her finan-
cial condition is based not on the amount of money that she earns,
but on how much she earns compared to the people she regards as
peers. One study suggested that people who make $40,000 a year
and who know that their peers are making $35,000 are happier than
those who are making $50,000 but know that their peers are making
$60,000.
20
A celebrated study of Capuchin monkeys illustrated that
even primates have a finely honed sense of justice: if they get cucum-
bers for completing a task but then see a companion getting grapes
(a higher-value reward) for doing the same job, they fly into a rage.
21
Likewise, keeping partners satisfied is an especially difficult task
when their compensation differentials get to be enormous. In the legal
industry, for instance, the spread between highest- and lowest-paid
partners in the average US firm was 10:1 in 2014—but that dispar-
ity was a whopping 23:1 in some firms.
22
Think about it this way: if
you’re an average partner in that last firm and see that disparity, you
will soon realize that it will take you almost five months to earn what
the star in the big office down the hall makes in a week.
So transparency about partners’ compensation cuts two ways.
On one side, the idea of transparency has great appeal because it
proves that leaders have nothing to hide. In truth, however, com-
plete transparency almost never finds a home in successful pro-
fessional firms. Leaders need discretion—for example, to reward
Chapter_06.indd 172 05/10/16 11:52 pm
Collaboration for Ringmasters173
exceptional but hard-to-quantify efforts on behalf of the firm, to
allocate pay for a valued partner who underperformed while griev-
ing for a lost loved one, or to make a partner “whole” after she has
sacrificed her local practice to open a new office in a region that
was risky but important for the firm.
So to foster collaboration, where should firms come out in terms
of compensation-related transparency? I think the best answer
is a closed system that gets opened up selectively. Why closed?
“The advantages of a closed system,” according to a report by one
respected compensation consulting firm, “are that it consistently
produces better morale, stronger teamwork, and more satisfaction
with compensation.”
23
Richard Rosenbaum, the CEO of Greenberg Traurig, strongly
endorses his firm’s black-box system: “This allows us to run what
is a large business in many disparate locations and practices with-
out politics and without visible competition between our share-
holders. This has been a major plus in our culture. It allows us to
make decisions that make sense to the market.”
24
You may need to make at least some of the data available on
an as-needed or as-requested basis. Firms that have moved in this
direction find that there is a fairly predictable “weaning period.” In
the first year or two, quite a few partners ask to see the data. But
once they’ve assured themselves that the compensation system is
working in a reasonably equitable way, they stop feeling compelled
to monitor it. In effect, they’ve gotten to where you need them to
be: trusting you and the system, and staying on task.
Changing a compensation system
If you’re convinced that you need to change your compensation
system, here are a few tips to keep in mind.
Understand and plan for all the costs of this expensive move.
Eminent professors James Baron and David Kreps categorize the
price of changing a compensation system as “switching costs” and
“legitimation costs.”
25
Chapter_06.indd 173 05/10/16 11:52 pm
174SMART COLLABORATION
Switching costs, as the name implies, comprise all financial and
other charges associated with changing an organizational process.
For example, my students often suggest in class that a firm under
discussion would benefit from a compensation system that rewards
consultants based on project profitability instead of revenue. They
often recognize the cost of developing, installing, and running
accounting systems that would accurately capture the detailed data
needed to calculate this metric.
What they fail to consider in this approach, however, is the
further costs that would arise to train employees to input data,
maintain the system and its interlinkages with legacy programs,
produce reports based on the data, interpret those reports, provide
feedback to others, use the data for decision making, and so on.
I have counted twenty-two consequential actions that such a firm
needed to undertake to implement even a modestly different com-
pensation system. Switching costs are certain to be high—know
them going in.
Legitimation costs are less tangible but no less important.
Changes in the compensation system may be seen as misaligned
with organizational norms—especially if those changes also
disrupt the existing status hierarchy—which therefore may
require leaders to put a lot of effort into legitimating them. And
although these costs are almost impossible to quantify, they are
nonetheless real.
Use a full-year transition in order to increase understanding—
and therefore trust—of the new system.
The leaders of
Mattos Filho did this when changing their firm’s compensation
structure. To minimize the effects of the transition and increase
buy-in, the executive committee agreed to slot everyone into the
new system at a place equal to either their last year of compen-
sation or the average of their last three years of compensation, at
the partner’s choice. By so doing, it assured that no one would
be immediately penalized under the new approach, and it gave
partners at least one year to learn new behaviors and meet new
performance standards.
Chapter_06.indd 174 05/10/16 11:52 pm
..................Content has been hidden....................
You can't read the all page of ebook, please click here login for view all page.