The trend towards performance related profit share

Traditionally, law firms have rewarded partners using either equal profit share or lock-step to equal profit share. This approach has felt pressure in recent times, with more firms looking to incentivise and reward behaviours and performance, and also to attract and retain the best people.

An increasing number of firms are looking to implement at least an element of performance related profit share. Some have done it and it has worked well for them, others have done it and have found it incredibly difficult and divisive. 

At Armstrong Watson we help firms to implement bespoke schemes. Our experience tells us that if such a scheme is to be used, it needs to:

• Be objective and capable of being measured – division arises out of subjectivity
• Be relevant – to drive behaviours, the metrics need to focus on the firm’s objectives and what is needed from the partners
• Be transparent – mis-trust arises when partners do not know what needs to be achieved, and the intended behaviours are impossible when appraised retrospectively
• Be bespoke – as partners are set differing objectives, then perhaps their reward should be based on the actual behaviours that the practice desires from them individually
• Be balanced – there is no point in a partner focusing on one aspect to the detriment of others
• Be simple – when schemes are so complex that they are not understood, partners will not focus on them and their behaviours will not change
• Have targets that are agreed in advance – if partners know, and agree to, advance targets and they know what they need to do in order to meet their objectives, they are much more likely to achieve them
• Be measured – if partners know how they are performing as the year unfolds, they have the opportunity to improve – scoring them after the year end will not change what has already happened
• Include culture – but only if culture is defined, understood and measurable
• Allow for ups and downs – partners will need to have some stability, and so it may be that a proportion of the overall profit is split based on performance, and/or that bands are used that are set in advance of a year when the partners know which band they will be in, and also know what they need to do to move up (or down) a band for the following year

We tend to suggest that fees are not used as a target, as that can have negative impacts all round. Often the targets are set for a partner’s team as a whole in order to broaden the impact, and incentivise the partner to focus on the firm rather than themselves.

There is no one size fits all here. Careful thought is required firm-by-firm and partner-by-partner. It is difficult to implement, and even more difficult to get right and so if you do want to incentivise a high performance culture; if you want to align behaviours/culture; or if you want to attract and retain good people, then it pays to spend time and implement a performance related profit share scheme that works properly.