Last week was noteworthy because two major anticipated mergers were called off; Orrick/Pillsbury due to reported conflicts and Dentons/McKenna for what may be best described as “cultural reasons.” But even if there were no conflict issues and cultures meshed well between two firms, most proposed mergers won’t get to a closing if their respective compensation systems are not compatible. Different compensation systems can create concern and uncertainty in partners being asked to vote in favor of the combination. Similarly, the architects of the proposed merger, likely to be charged with managing the combined firm, will have concern if the two systems don’t fit well.
For a merger to have the greatest chance of success, certain firm characteristics should be compared to assess the overall fit. In addition to cultural compatibility previously discussed and the financial metric fit discussed, the law firm leaders from the two potential merger partners must be mindful of the two compensation systems to be melded.
Compensation compatibility is best determined by a review of the following variables.
Nomenclature. Compensation terminology in a firm gets embedded over time and does a great deal to stimulate attorney behavior. One firm’s term for hourly work collected may differ from another firm’s, but the essence of both terms is to determine the value of the “time in the machine.” Similarly, most firms go beyond bare revenue and create measurements to determine whether the dollars collected are profitable. As long as the fundamentals behind the terms are similar, lawyers brought together can learn the new terms. Understanding the meaning and use of compensation terms, however, is very important.
Overall System. A Lock Step system and a pure formula system can’t be more different. Similarly, a system in which data is used subjectively to set compensation is very different from one that uses the same data in an objective exercise. A system in which compensation is set every two years instead of annually is clearly different. A fair review finds similarities as well as differences so the pro’s and con’s can be weighed.
Data Points. As part of setting compensation, many firms will assemble significant amounts of data to assess a lawyer’s past contribution and to project future performance. While firms may collect different data, if two firms generally place emphasis on the same data, for example originations, production and margins, a fit may exist. Conversely, one firm may heavily weight originations over working attorney performance while the other firm may do the exact opposite. A merger of those two systems could prove difficult.
Current and Deferred Compensation. Even assuming a partner’s compensation will be set to his satisfaction, the frequency of payment, the percentage of payment and the deferral of compensation can be as important as the projected amount of compensation. Going from a bi-monthly to monthly distribution, 70% to 50% current distribution and added conditions to the payment of deferred compensation can be unacceptable to some partners.
The Keeper of the Purse. When merging, the merger partners must decide what happens to their respective compensation setting bodies. While a merger of equals may actually “merge” those two bodies, in many instances that is not the case. The setting of compensation involves a process in which partners trust their leaders to fairly recognize a partner’s value. But trust is built up over time and on whom you know. Consequently, a “phasing in” of the two systems or guaranteeing partner compensation for a few years can give newcomers comfort and time to acclimate.
Implementation Calendar. Blending two compensation systems cold turkey is tough. If sufficient similarities between the two systems exist, phasing in unification may be appropriate if not wise. For the ambitious, developing a new compensation system that brings together the two firm’s best practices is an alternative. It can replace possible unease with broad buy-in.
For many law firm partners, nothing is more important than their compensation. A merger that upsets partners’ compensation expectations is a merger that may force unwanted departures. Thus, the importance of minimizing compensation turmoil is obvious.
What compensation differences do you think make a merger a “non-starter?” What methods have you found helpful in bringing together lawyers brought up in different systems?