The philosophy of how a firm’s compensation system is set up ranges from, “This is how it’s always been so why change it?” to a well thought-out conversation with buy-in from all partners and outside counsel.
For some firms, a strictly formula-based system works best and in others (particularly smaller firms) the MP decides compensation for all partners. However, the most common system for the nearly 600 firms participating in the 2023 IPA Practice Management Survey was a compensation committee, at 46%.
Similar to the $20-million threshold when a firm chooses to go from an open compensation system to a closed system, at $20 million in net revenue, firms are much more likely to appoint a compensation committee to decide partner compensation at the firm.
For firms under $20 million, 28% of firms utilize a compensation committee while the rest are split among formula-based (29%), MP decides (17%) and partner group decides (15%).
For firms over $20 million, 73% use a compensation committee to decide partner compensation for the firm.
“Formulas show the numbers, but that’s not the whole story,” said consultant Carl George, founder of Carl George Advisory, in a July 2021 interview about compensation committees. Building a big book of business, or “playing to the formula,” may not be in the best long-term interest of the firm, he said. “If you are only formula-based, there’s a good chance that all partners will not be in alignment with the vision. Also, the MP can’t possibly know all aspects of a partner’s work. Hearing perspectives from other comp committee members provides a fuller picture and a fairer process.”
