The Partner Reward Trilogy™: The framework every Managing Partner needs when considering partner compensation challenges

When we first sit down with a Managing Partner to understand their partner compensation challenges, the number of moving parts can make it difficult to know where to start. To bring initial clarity to the discussion, we introduce The Partner Reward Trilogy™ (figure 1), our proven framework to analyze and develop any partner reward system.  It consists of three interrelated components:

• Part 1: Incentive and reward architecture
• Part 2: Contribution and empowerment
• Part 3: Decision-making and governance

Figure 1: The Partner Reward Trilogy™

Our Partner Remuneration Handbook, the only comprehensive guide on partner compensation, explains The Partner Reward Trilogy™ in greater depth. For now, here’s a simple breakdown.

Part 1: Incentive and reward architecture

A partnership’s incentive and reward architecture explains the financial structure and underlying mindset of its partner compensation system. It expresses the core of the financial deal struck among the partners and – based on the firm’s profitability – determines individual partner compensation outcomes. 

Most of our initial discussions with a senior leadership team revolve around competitiveness and relative value. After the firm’s overall profitability, the incentive and reward architecture is the most important driver for the competitiveness of a partner’s profit-share when compared to profit-shares earned by partners in the firm’s competitor group. 

Second, the firm’s incentive and reward architecture is the most fundamental expression of how the firm’s partners wish to resolve two competing tensions that exist in any partnership:

• Partner equality – “We are all equal business partners with equal say, risk and reward”.
• Individual contribution – “Partners who contribute more to this partnership deserve higher profit-share”.

While there are as many compensation systems as there are partnerships, Figure 2 identifies the seven fundamental archetypes on which most partner reward architectures are modelled.

Figure 2: The 7 fundamental partner reward archetypes

Each archetype can be implemented in many ways, for example equity and non-equity classes, goodwill and sweat equity considerations, profit pools and bonus pools, tiers and waterfalls, etc. We will explore these in more detail in a future post.

Our initial discussion with a senior leadership team will explore how the firm has implemented its archetype and where the biggest challenges or opportunities are. These determine how we address the other two components of The Partner Reward Trilogy™.

Part 2: Contribution and empowerment

Partners in leadership roles of the best firms conduct constructive dialogues about how their partners contribute to the firm’s future and to its immediate business outcomes.

The larger a partnership becomes, the more important it is to get right what we refer to as the “contribution dialogue”. The quality of this dialogue not only has a direct impact on business results but also provides the necessary context for reviewing an individual partner’s contribution to the business.

Contribution and empowerment consist of a sound partner contribution framework and a rational process that allows this contribution dialogue to occur as effectively and efficiently as possible. 

A sound partner contribution framework explains what a partner is expected to contribute to the firm. Ideally it reflects the firm’s strategic priorities and culture and focuses on outcomes not inputs.  This framework must help the firm’s leadership agree strategic, operational and financial objectives with individual partners across the firm; it is necessarily general and not specifically tailored to each partner. 

The shape and components of a partner contribution framework depends on the firm’s financial reward approach. For example, in eat-what-you-kill firms, partner revenue of some type is the primary partner contribution; its framework will be quite directive and include detailed principles and examples how, for example, origination credits are to be shared among partners.  In a holistic meritocracy, partner revenue is just one of many factors that will matter.  Here the framework will be more principles-based and contain several measures around which objectives are agreed with individual partners.

In future articles, we will discuss how to put together a sound contribution framework and ensure that partner measures used, align with business outcomes.

A partner contribution management process first anchors the firm’s strategic, operational and financial goals to the contributions of individual partners. Second, it provides for a periodic evaluation of that partner’s contributions against these goals or measured directly against the criteria expressed in the partner contribution framework. This process – no matter how light or how intensive – is important because any disconnect between firm goals and partner contribution will not make for a successful partnership.

Our initial discussion with a senior leadership team surfaces how the firm manages the contributions of its partners and how that leadership approach empowers - or stifles - partners’ professional and personal ambitions.

A well-designed partner contribution management process clarifies how individual strengths contribute to the firm’s objectives, creates the conditions for candid and ongoing dialogue and provides partners with a degree of psychological security. In that form, it becomes a mechanism for aligning personal ambition with firm priorities, grounded in continuity of discussion rather than a once-a-year evaluation.

Poor contribution management is a bureaucratic annual appraisal that partners approach defensively, aware they are being judged, and which ultimately suppresses rather than reinforces intrinsic motivation.

Part 3: Decision-making and governance

The third element of ties a partner’s contribution outcomes (element 2 above) to the firm’s reward architecture (element 1 above).

Decision-making and governance includes factors such as:

• The remit of the Partner Remuneration Committee and its members
• The decision-making process and calendar it follows
• The transparency partners receive as to compensation outcomes and committee inputs and decision-making.

The size and the complexity of the firm drive the extent of partner compensation governance and the formality of the committee’s decision-making processes.  For example, the partner compensation committee of a global professional services firm will operate various subcommittees, each with members who have been selected and appointed through a finely-tuned political process.  External non-executive directors increasingly serve on the committee, and the committee will operate to an annual calendar and conduct regular effectiveness audits. 

How credit allocation disputes are resolved before a reward round, how qualitative partner information is aggregated and prepared to ease the committee’s cognitive load, how members are inducted into the committee and held accountable, and how the firm conducts its integrity checks at the end of a reward round are examples of a maturely operating partner compensation committee.

All these factors speak to the integrity of how the firm’s partner compensation system operates and the trust that partners place in the fairness of their compensation outcomes.

Evolving your partner compensation system

A partner compensation system that is well-accepted by a substantial majority of partners is the cornerstone of any successful partnership.

The Partner Reward Trilogy™ is a simple approach that allows you to establish or evaluate your firm’s partner compensation system in a way that advances internal equity while driving external competitiveness in line with the times.

Look out for future posts where we will discuss each element in greater depth and share practical aspects of implementation. 

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