While there are continuing differences between compensation practices between U.S. and Canadian firms, and law firms in the rest of the world, findings from the latest Kerma Partners’ survey reveal that global harmonization of performance and compensation management may be more likely than ever.

The basis and process used to compensate partners is becoming increasingly similar among law firms around the world, but there continue to be some interesting cultural differences. Among those differences:

• U.S. and Canadian law firms lean toward much more subjective compensation systems than firms in other countries.

• The growth of non-equity partners is increasing in every country and the use of these partnerships is also anticipated to increase.

• U.S. and Canadian firms have compensation spreads (lowest to highest paid partner) more than twice that of other countries.

These are among the primary findings in the Kerma Partners survey of law firm partner compensation systems around the world. The survey included large law firms in the United States, the United Kingdom, Europe, Canada, Asia, South Africa and Australia. This is a follow- up to a similar survey taken two years ago.

Basis of Compensation

The philosophical basis on which compensation is determined strongly reflects culture, particularly national values. Not surprisingly, in almost every regard, compensation decisions are made in a highly similar manner in the U.S. and Canada. As shown in Figure 1,

Global Survey Figure 1

approximately 70% of U.S. and Canadian law firms primarily base their partner compensation on subjective criteria. Subjective criteria means that the overall contribution of partners, both qualitative and quantitative, are taken into account in deciding compensation and while statistical performance may be a factor in these decisions, it has no predetermined weight in the deliberations. In the UK, Europe and Australia, 50% to 70% of partner remuneration is still largely based on a predetermined, seniority-driven schedule, but the use of pure, unadjusted lockstep continues to fall steadily in these jurisdictions. Instead, hybrid forms of lockstep are slowly growing in which performance-related adjustments of some kind are made based on qualitative criteria.

This reflects a fundamental difference in partnership culture in which U.S. partners appear more willing to place their compensation in the judgment of others while UK, European and Australian law firm partners prefer a more predictable and pre-established set of criteria. Since the similar 2006 survey, changes to existing lockstep systems in the UK and Europe have, for the most part, taken the form of lockstep modifications rather than a complete change, while at the same time, there has been an almost complete abandonment of any form of lockstep in the U.S.

There is a significant difference among countries in what law firms take into consideration in setting compensation. In the UK and Australia, business development and client management are the most highly valued performance criteria in compensation. In those countries, approximately 75% of responding firms rated various aspects of business development as being extremely or reasonably important in the determination of partner compensation. At the same time, personal performance (how hard a partner works on billable matters) was found to be of high importance by only 20% and 48% (the UK and Australia respectively). In the U.S. and elsewhere in the world, the most important factor is the personal performance of the partner in terms of the value of the legal work he or she personally performed — closely followed by business development. In none of the countries was technical expertise and capability, or non-billable work as a firm manager or practice group leader, found to be of any more than moderate importance in setting compensation.
(see Figure 2)

Global Survey Figure 2

The spread between the highest and lowest paid partners appears to be much broader in the U.S. and Canada than in any other country. As shown in Figure 3, the majority of firms have compensation ratios below five to one. In fact, in Europe, the UK and Australia, the majority of firms are below three to one — reflective perhaps of the tighter and relatively inflexible equity structures usually found in firms with a history of lockstep.

Global Survey Figure 3

The use of bonus compensation for law firm partners is another indication of cultural differences. In the U.S. and the UK there is a wide diversity of levels of partner bonuses starting with approximately a quarter of firms not using bonuses at all and from 20% to 28% of firms devoting more than 10% of profits to partner discretionary bonuses. The remainder of the firms were roughly evenly divided, setting bonuses from one per cent to 10%. In Canada, South Africa and Australia, bonuses are much less substantial and they average below five per cent. The exception is Asia, where bonuses are a much larger portion of partner compensation and all responding firms devoted more than 10% of profits to such bonuses.

The Compensation Process

While the basis for compensating partners is different among law firms in different countries, the process for setting partner compensation is remarkably uniform. Virtually all firms perform the compensation setting process annually. The differentiating factor is firms with lockstep where reevaluation is not required. By the same token, in countries where there is not a significant amount of lockstep, the process is prospective; i.e., the prior year’s performance is the basis of setting the following year’s compensation.

In the U.S. and Canada, responsibility for setting compensation is roughly evenly divided between the elected governing body (Executive Committee or Board of Directors) and a specially constituted Compensation Committee, with no role for the Chairman or CEO other than as a member of one of those committees. In most other countries, a significant number of firms (ranging from 29% in the EU, 27% in Australia, 17% in Europe to 11% in South Africa) put the decision in the Chairman’s hands.

Non-Equity Partners

When we performed this survey two years ago, non-equity partners were an emerging concept outside the U.S. Today, it is a widely used concept throughout the world and growing in popularity. As shown in Figure 4, only Europe is below the U.S. level of use of non-equity partners.

Global Survey Figure 4

There is an almost equal division (Figure 5) in the motivations that firms are using in making non-equity partners, except that fewer firms seem to favour it as a means of a demotional platform for underperforming equity partners.

Global Survey Figure 5

This trend seems to be changing, however. When asked about the likelihood of increased use of non-equity partnerships in the future, the highest area of usage is anticipated to be de-equitization (Figure 6).

Global Survey Figure 6

Conclusions

It comes as no surprise that the means and performance standards for compensating the equity partners of law firms are becoming increasingly homogeneous throughout the world. The gradual erosion of pure forms of lockstep in some parts of the world in favour of systems with greater elements of subjective performance related factors has been equally matched by the growth in North America of entirely subjectively based compensation. As law firms become more global and compete internationally for clients and lawyers, we would expect further harmonization of performance management and compensation at all levels among law firms.

The survey was based on a sampling of 136 law firms as represented by online surveys completed by their Managing Partners. We appreciate the assistance of Beaton Consulting for handling the Australian survey and Robert Millard for his assistance in the South African survey.