Knowledge is power, but is Ignorance bliss?
I started thinking about this question after reading an article by Mark Herrmann about compensation of partners at professional services firms.
There is a lot of discussion about the advantages and disadvantages of various kinds of pay structures ranging from equal percentages to eat-what-you-kill systems. But Mark points out that one structure is noticeably missing from the conversation: black-box models of compensation.
Under a black-box compensation structure, the managing partner (or small committee) sets compensation for each partner in the firm. No specific formula is used. Partners are forbidden to discuss compensation with each other. Each partner is told what he will earn in the coming year, either as an absolute dollar amount or a projected draw amount, assuming the firm hits 100% of its cost and revenue targets. That's it. Nothing more, nothing less.
The black-box structure is fundamentally different from other pay structures that allocate profits based on percentages:
1. Equal partnerships: all partners share in profits equally or equally within defined groups of partners (e.g., senior partners and junior partners). This structure emphasizes overall performance of the firm, encourages collaboration and collegiality and provides greater level of income security for individual partners. However, there is a lack of incentives. This structure can create resentment among partners and may result in increased turnover.
2. Lock-step system: each partner is awarded an increasing share of profits based solely on seniority. This system fosters overall firm stability, encourages collaboration and collegiality and provides a greater sense of security for individual partners. This system also suffers from a lack of incentives, and can create resentment amongst partners.
3. Modified Hale and Dorr system: incentive structure where profit percentages are allocated by category: "Finder" (originator of client) "Minder" (responsible for client) and "Grinder" (responsible for doing the work). This system rewards individual contributions. Partners' earnings directly tied to performance, which may result in less resentment amongst partners. The downside is that there are no rewards built in for non-billable work which can lead to reduced willingness to engage in firm management, training, mentoring, recruiting and practice group development.
4. Simple unit formula: compensation is based on points awarded for seniority, production, client generation, and non-billable activities; points are then converted into percentages. This system is simple, and compensation is determined objectively. It may create less resentment amongst partners and can lead to increased willingness to engage in non-billable activities. However, it can lead to client and project hoarding. The seniority component can create resentment by younger partners toward older partners and may result in exodus of younger partners.
5. 50/50 objective/subjective: half of compensation is based on objective criteria (hours billed, revenue generated, client generation statistics) and half of compensation is based on subjective criteria (client handling ability, potential for client development, etc.). This system ties pay to performance while rewarding firm management, mentoring, attempts at client generation not immediately realized. However, there is a lack of transparency and the system may be viewed as open to manipulation.
6. Team building: majority of compensation is tied to overall firm performance, large portion tied to department or team performance, very small portion tied to individual performance. This system emphasizes overall performance of the firm and encourages collaboration and collegiality. It also provides a greater level of income security for individual partners. Like some other systems, there is a lack of incentives. This system can create resentment amongst partners and may result in increased turnover.
7. Eat what you kill: rewards each partner solely on individual efforts, recognizes personal production only. This system provides strong incentives for performance, training and retaining profitable employees. However, there are no rewards built in for non-billable work, which can lead to reduced willingness to engage in firm management, training, mentoring, recruiting and practice group development. It also provides less income security for individual performance and can lead to a lack of collaboration and collegiality.
While it has many of the same advantages and disadvantages of other structures, the black-box structure is different at its core. All of the above systems have some means of comparison - whether everyone is compared against one another and automatically found to be equal, as in the equal partnership, or whether everyone is compared against all others based solely on individual performance. In the black-box system, there is no explicit basis for comparison. And because there is no explicit basis for comparison, there is no objective ground for any complaint.
Is a black-box model worthy of being included in the discussion? Or is it missing from the conversation because it's so outlandish in this day and age of transparency? Is it even worth discussing?
I don't have the answer. I'm just asking the question in hopes of moving the conversation forward...
Stephanie R. Thomas is an economic and statistical consultant specializing in EEO issues and employment litigation risk management. Since 1999, she's been working with businesses and government agencies providing expert quantitative analysis. Stephanie's articles on examining compensation systems for internal equity have appeared in professional journals and she has appeared on NPR to discuss the gender wage gap. Stephanie is the founder of Thomas Econometrics Inc. and is the host of The Proactive Employer. Follow her on Twitter at proactivemployr.
Interesting comments on partnership distribution approaches, Stephanie. In this context, I prefer the term "systems" to "structures", since "structure" implies a pattern of relationships (usually hierarchical) while "system" means a set of elements with components, structures, and relationships of interconnected behaviors.
Regardless, your 7 groups are excellent summaries of the most probable overtly disclosed profit distribution methods. The "black box" approach would seem to be no more than a HIDDEN approach where the principles, procedures, systems, structures and other details of the decision-making protocols are kept secret. Thus, it could be any of the above, a combination or none of them at all. It could even be a unique variant like "compensation by consanguinity" (distributions based on the degree of blood relationship, where mom and pop get the most, kids second, grandtads third, cousins next..., etc.).
"Black box" simply means, "something else and secret." It could encompass everything from seniority to dartboard, from pure subjectivity to a different but arbitrary metric; as long as it remains undisclosed, it remains undefined. What is unknown must remain unclassified or simply called "other."
Posted by: E. James (Jim) Brennan | 08/22/2012 at 01:31 PM