Compensation: The Best Practices

Organizations continually work at getting it right, which can only happen if the compensation program consistently produces high-quality decisions that can be demonstrated with analysis and are generally believed to be proportional to performance by those affected by the decisions (perception). Further, the decisions should align well with strategy and culture. And finally, compensation decisions should be structured to defend the firm against market poaching (the lateral market). Firms that lack a clear understanding and agreement on these matters will surely have trouble getting the compensation job done right.

Thus we define best practices in compensation not in a particular program or process, but rather in the quality of the decisions that demonstrate:

  1. Internal consistency—Pay Proportional to Performance®.
  2. Strategy linkage—Recognizing smart, informed risk-taking efforts and results appropriately.
  3. Cultural alignment—Supporting the group’s agreed-upon values and desired work environment.
  4. External competitiveness—Effectively managing the departure risk under market compensation creates.

One can assess the quality of decisions with the following questions:

  1. Would an independent observer look at the basket of contributions, their relative importance, individuals’ total contributions, and the corresponding pay decisions and reasonably conclude that those who contributed more to the organization’s success were remunerated proportionally more than others?
  2. Is the message of what is important from a strategic business perspective clear and aligned with how pay is determined? Are smart risks rewarded, even if unsuccessful? Are efforts and results each appropriately considered?
  3. Are firm values and the desired work environment considered? Will a person’s behavior affect compensation in an appropriate and meaningful way?
  4. Are the pay decisions competitive with what is available in the market, or at least what is available in other similarly situated organizations? If this cannot be accomplished across all partners, is it at least being done to effectively manage departure risk of stars and rising stars?

A second area of best practice is communications. It is simply not sufficient to believe compensation decisions will stand on their own merit and be interpreted by the recipients in the same way as firm leaders intended. We have tested for this and found even compensation decisions that are positive may not be interpreted correctly by the recipient, particularly if the individual’s expectations differed from the decision. The following questions can assist in assessing the communication effort:

  1. Are the communications candid and constructive?
  2. Are they bi-directional? The partner compensation process tends to be high touch, with partners providing input in advance of decisions and receiving feedback after decisions.
  3. Do you discuss how a decision was reached and how an individual can increase his or her compensation in the future? Are the right people involved in that conversation? Many firms fail here.

Design the Best and Most Competitive Compensation Programs
This post was adapted from the Law Practice Division’s publication Compensation Plans for Law Firms, Sixth Edition. In this book, author James Cotterman provides complete and systematic guidance on how to establish a fair and competitive compensation program for your firm.

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