Understanding Partner Compensation — and the Business of Law — as a Competitive Advantage: A Q&A With Kent Zimmermann, Zeughauser Group

Kent Zimmermann is a principal at Zeughauser Group, a management consultancy that advises law firms exclusively. Zeughauser Group advises firms on strategy and related topics such as succession planning, compensation, and growth; combinations; and marketing including marketing strategy, marketing organization assessments, branding and positioning.

We sat down with Kent for a deep dive into law firm compensation models and how to leverage those to drive business development success.

Your recent Big Law’s Big Paychecks video on Bloomberg Law lays out different models of law firm partner compensation. Can you give us a quick recap of how they each work?

A small number of firms continue to use a system called lockstep in which compensation is driven by seniority. Partners are paid more as they become more senior at the firm. The thinking goes that lockstep compensation leads to a team-oriented culture where partners work together without concern for credit, knowing that their compensation will be based on their seniority as opposed to contributions with which they are credited.

One challenge of lockstep is that it creates an impediment to meeting the market on compensation, including for rising stars that are very significant contributors but who may not be among the most senior lawyers in the firm. Most firms have moved off strict lockstep, with several high profile firms in New York and London making that decision recently.

This takes us to merit-based competition where a partner’s compensation is driven by a partner’s contribution to the firm, including originating client relationships and matters and servicing them. Typically, a firm considers the last two- or three-year average of partner contributions relative to the firm’s expectations for performance in determining a lawyer’s compensation. In merit-based systems, there’s an opportunity for the firm to incentivize behavior that is necessary to achieve the firm’s strategic plan.

Firms outside of New York and London generally have gravitated to a merit-based approach to compensation to provide more flexibility in their systems, to compensate high performers at market regardless of their seniority. Some of those firms in the US outside of New York eventually came to set the market on compensation for high-performing partners.

In your experience, do the different compensation models affect an attorney's approach to business development?

Yes. In a lockstep firm, there is a perception that there is less direct financial incentive to develop relationships and bring in business than in merit-based firms. In lockstep firms, where there is often work being generated by institutional relationships, the highest and best use of the firm’s lawyers — even at the partner level — has historically been to do excellent legal work rather than to focus on bringing it in.  

In merit-based firms, there is increasingly an expectation that to become and remain an equity partner, a partner needs to be excellent in both doing the work and in bringing the work in. In other words, there’s a clear message to people in non-lockstep firms that being an excellent lawyer is necessary but not sufficient — equity partners are also expected to be excellent and very successful at developing relationships with and bringing in business from clients who use the firm for its strengths and pay its rates.

Are there any potential issues or concerns with firms trending toward incentivizing business development via partner compensation?

Yes. Some firms have historically counted all originations equally at comp time. When that happens, sometimes partners have been incentivized to focus singularly on bringing dollars into the firm without concern for the profitability of those dollars. That is obviously a flawed approach for a firm that wants to increase its profitability.

What matters more is how much originations contribute to both revenue and net income. High-performing firms have increasingly focused on both over time. That is healthier because it incentivizes partners to focus on bringing in business that commands the firm’s rates or which can be done very efficiently so that it contributes adequately to net income. That approach is more aligned with achieving the strategy of most firms, given that most firms have gross revenue and profitability goals they need to achieve to achieve their strategy. This is because, in part, larger and more profitable firms have a talent advantage, and attracting and retaining the best talent in their areas of focus is critical for most law firms to become market leaders.

How can law firm marketing teams leverage their knowledge about partner compensation models to help drive BD efforts?

As a starting point, I think it's very helpful for marketing and BD professionals to have a deep understanding of their firm's overall business strategy and the behavior that the firm is trying to incentivize with its approach to compensation. Most firms that outperform the market clearly articulate and define their expectations, including those that drive compensation decisions. At those firms, the ones that clearly articulate what they expect of their lawyers, it’s easier for marketing and BD professionals to help the lawyers achieve and sometimes surpass what’s expected of them to advance the firm’s business strategy.

In firms where expectations of partners and the drivers of their compensation is not as clear, marketing and BD should take the opportunity to talk with leadership about their expectations for attorney contributions that drive compensation in an effort to guide the conversation on how marketing can play a role in helping partners meet and exceed expectations.

For every marketing department I’ve ever worked with, there’s not enough time or money to do everything that the department is being asked to do.

Without clearly defined strategic priorities articulated by the firm’s leadership, it can be much harder for a marketing or BD professional to de-prioritize or push back on requests from rank and file partners that do not advance the firm’s strategy. Also, it’s easier to secure partner buy-in for prioritizing marketing and BD’s time and money when the prioritization is necessary to help the firm achieve its plan, and necessary to help lawyers achieve performance expectations that have been communicated to them.

The job of law firm marketing professionals is a really hard one. Without a clear understanding of how priorities affect strategy — and ultimately partner compensation — it is more likely that chaos will reign. What’s the purpose if your time and money spent on marketing gets spread too thin across too many priorities? With clear priorities for the firm, which lead to clear priorities for marketing and BD, it’s possible to build a high-performing team that knows what is expected and knows how to prioritize their time and money to hit as many home runs as possible for the partnership.