5 ways to improve this year’s partner reward round

Author: Michael Roch,Lead author, The Partner Remuneration Handbook (2022)

For most professional services firms, the first financial quarter means preparing for partner reward rounds. While some partners enjoy the responsibility of serving on a Remuneration Committee (‘RemCom’) and relish the respect that goes with it, most view the process of deciding on how partners should share in the firm’s profits with trepidation.

Here are five ways you can improve this year’s partner reward round – even if your firm doesn’t operate a formal Partner RemCom – for a more efficient process that is less stressful for the RemCom partners and could lead to better outcomes: 

1. Properly initiate new RemCom members;

2. Conduct a Before-Action-Review;

3. Insist on pre-filtering of partner contribution information;

4. Follow the ‘80-15-5’ rule; and,

5. Invest in cognitive bias training for better decision-making.

1. Properly initiate new remcom members

In most professional partnerships, new RemCom members receive very little induction, education or guidance. The prevailing view is that partners simply ‘know what to do’ because they too are subject to the firm’s partner reward system.

Yet we know that most partners who serve on their firm’s RemCom for the first time are wholly unprepared for the important role they are to play. This only adds to the tremendous amount of stress that RemCom members experience.

At a minimum, the induction should include the following topics:

• RemCom’s remit: On what, exactly, is RemCom deciding? For example – a bonus allocation, a gateway pass of a few partners or an annual wholesale recalibration of the equity ladder?

• Reward round schedule: While this is also covered in the Before-Action-Review (below), an explanation of mandatory timelines and review points is helpful to new members.

• Role of each RemCom member: RemCom members wear ‘the firm’s hat’ – meaning that a member looks to achieve a fair outcome for all partners. The role of a member is not to advocate for themselves, their team, office or division. Developing a deep understanding of the firm’s partner reward policy and self-awareness of cognitive biases and conflicts is also part of the role.

• Training on KPIs: An explanation of the inputs RemCom receives in the form of KPIs and qualitative information is important. For example, even though ‘matter partner billings’ may seem clear, it is helpful to explain what each measure does or does not cover. In this example, MPB usually is a pure production measure that, without more, provides a limited picture of business generation.

• Training on decision tools: RemComs invariably use decision-making tools. This could be a gigantic spreadsheet or a more sophisticated reward decision-making tool. Don’t assume partners know how to read or apply the tools available to them. Provide a short training on how the committee uses each tool.
  
  The Chair is responsible for conducting new member training to set the right tone of conduct from the beginning. This should not be outsourced to the Chief Financial Officer or Chief People Officer.

2.  Conduct a before-action-review

Many RemComs go straight to discussing partner groups in their first meetings. Yet without adequate preparation, frustration is pre-programmed.

Use this seven-point agenda for a RemCom Before-Action-Review:

• People: The Chair introduces new RemCom members.

• The firm in review: RemCom members need to discuss the context within which they will make their decisions. Was last year a great/good/bad year? What were the firm’s main events? Will this year be a great/good/bad year? What were the biggest changes to the business last year? What potential challenges/risks do we see based on past experiences?

• RemCom’s goals for this year: This is a time for reflection: How does this context impact our work as RemCom? What do we want partners to say about this year’s round?

• Policy changes: The Chair outlines key debrief outcomes from last year’s round. It’s also the Chair’s role to align partners on the key changes to the partner reward policy since the last round. This is critical to ensure that all RemCom members have the same understanding of what the policy now says and no longer says.

• Input changes: RemCom should review and discuss any changes to the inputs that they will receive for this year’s round and discuss the impact on their work this year.

• Reflect on learnings: We encourage an open discussion on how RemCom members have invested in themselves since the last round to recognize cognitive biases when they see them. Everyone is human and people will make mistakes, yet a discussion on biases at the beginning can have a mutually supportive effect on all partners before they embark on their tasks.

• Timeline: Finally, the Chair explains the timeline of this year’s round. RemComs of large partnerships may also fine-tune any allocation of sub-teams.

3. Insist on pre-filtering of partner contribution information 

Many firms provide far too much information to their RemComs than members can make sense of. Think of spreadsheets upon spreadsheets with dozens of columns of financial data, wordy self-assessments, review notes from partners, 360 outputs that weren’t designed for reward purposes, client inputs, and engagement surveys. Often, these are further supplemented by individual partner interviews or review sessions with team leads or business unit leaders. This is far too much information.

RemCom members will focus on those bits of information that they can easily comprehend and base 95% of their decision-making on that. Some simple financial metric, which never shows the complete picture, is usually relied on as the primary proxy for partner contribution. This is fine if you’re operating a formula-based eat-what-you-kill system, yet any partner reward system that attempts to evaluate a holistic picture of partner performance will struggle to arrive at a fair reward recommendation.

There is a two-part solution to this challenge.

First, management must pre-structure the plethora of inputs in a way that RemCom members can more easily make sense of many data points. The larger the partnership, the more the data needs to be clustered. What the clusters look like depends on the structure and business model of the partnership. Examples include clusters by service line or office, clusters by reward position (tiers) or clusters by where partners are in their life-cycle (e.g. entry-level partners versus partners anticipating retirement).

Second, infrastructure plays an important role here. For small partnerships, this can all be managed with spreadsheets and similar tools. The more partners being evaluated and the more multi-dimensional their partner contribution expectations, then a dedicated platform may be a better solution.

4. Follow the ‘80-15-5’ rule

Spend time at the outset setting aside the exceptions: partners who are grossly under-contributing or those who are clear performance outliers. Deal with these 5% last.

The second group to set aside is partners in special roles. These invariably include the managing partner, some partners in other formal senior leadership roles and those who have special deals, which could include partners charged with opening a new office and getting that business off the ground. RemCom members also fall into this group.

First, tackle a preliminary reward outcome for the partners who remain (likely 80% of all partners). This will be much easier without the distraction of the first two groups of partners.

Only then consider partners in the first two groups; sometimes it is convenient to consider them together because invariably the performance outliers also have a special leadership role in the firm.

The simple act of setting aside exceptions at the beginning will allow a much more careful balancing of internal relativities.

5. Invest in cognitive bias training for better decision-making 

Most partnerships invest far too little in ensuring that cognitive biases don’t enter into decision-making around partner reward. Many are concerned that RemComs make decisions that are ‘objective’ or at least based on ‘objective’ information. Yet this obsession with objectivity can become misguided: the most difficult decisions by any RemCom will always end up being a highly subjective judgment call, balancing what is fair for the partnership with what is fair for a particular partner.

More important is that RemCom members make ‘good’ decisions, with ‘good’ being defined as an absence of cognitive bias as far as possible. This is because it is the fear of bias that drives partners to demand ‘objective’ decisions.

In The Partner Remuneration Handbook (Globe 2022), my co-author Ray D’Cruz and I discuss the eight most common cognitive biases that RemCom members experience.

Confirmation bias (our tendency to favour information that conforms to our existing beliefs and discount evidence that does not) and recency bias (our tendency to pay the most attention to the most recent input received) are the two most prevalent.

To avoid these and other biases, it is up to the Chair to ensure RemCom members receive regular training throughout the year on recognizing biases when they arise. Only then can all members call out – in a supportive and learning-oriented way – when the discussion begins to be infused by a cognitive bias.

I encourage you to implement just one of the above five suggestions for your next partner reward round. Email me afterwards – I look forward to your observations.

If you’re looking to build or review your partner remuneration structure, our next Blog introduces The Reward Trilogy™, a simple model that allows you to build your firm’s partner reward structure, advancing internal equity and driving external competitiveness.