Recently Ron Friedmann posted an intriguing idea on his blog about having some partner (or lawyer) comp being tied to sales efforts (a.k.a closing on new business). I had the incredible fortune of attending the dinner he referenced and was able to participate in this dialogue.
One might argue all partner comp is tied to sales, since partner comp by definition is profits from sales. However, I think that perspective misses Ron’s point. The method most firms use for distributing profit is tied to ownership shares. These are re-evaluated and redistributed every year or two. So really partners are compensated on past sales and delivery performance, and not current sales performance.
The old adage – you get what you pay for – applies here. Law firms pay for hours, and the revenue tied to these hours, which is a very indirect and belated way of rewarding sales and new business. They do not reward sales efforts directly. So why not explicitly reward this behavior in a direct fashion as Ron suggests? I think this idea deserves attention. For law firms to survive in a competitive market, they will need to shift their compensation model to directly reward more behaviors then hours and revenue.
Ron highlights a practical challenge for law firms in implementing a sales commission model: The current pricing and profitability models do not account for it. Therefore a restructuring of how profit is defined or an increase in price would be required. Price increases are not an option, so the only real choice is redefining and/or redistributing costs related to profit.
Here is one possible model for addressing this challenge: Firms could hold back a portion of revenues from the traditional compensation channel and pay those out to partners who close on new business. Ron suggests a 10% level; however that may be too high IMHO, at least in the short-run. Current law firm financials are not structured to accommodate such a large portion of revenue towards a sales commission. So a gradual transition, ramping up the holdback portion over time makes sense.
Another challenge is the delay between getting work and getting paid. New client business secured on January 1st, with work beginning immediately, will not pay a full $100k (from Ron’s example) until June or even later. Paying commissions before revenue is realized will create other unintended consequences.
But these challenges should not stop a firm from experimenting with commission options. Numerous industries face the same or similar challenges and they find ways to reward the sales function with commissions. So many effective models exist and can easily be copied and modified for a law firm environment,
This approach implies a shifting of comp away from service partners towards rainmakers. Many firms are actually facing this problem as an issue already. So the sales commission approach would be a “two-birds, one-stone” solution.
Getting to the bottom-line, I think Ron’s idea definitely has merit. The legal industry should be rewarding the various types of behavior every company does, including the sales function. At least they should be if they want to motivate and incentivize profitable behavior.
Also to Ron’s question – current definitions of “profit” are already in need of revision for firms. Adjusting to a profit-margin business model presents the opportunity to address all of the issues noted above, and many more.