Yes, you can – and should – reward partners for innovation
At a recent managing partners’ conference, I heard a familiar tune:
“I cannot allocate money to partners who innovate because there won’t be enough profit left to pay my rainmakers.”
It sounds sensible. It is also misguided.
In this article, we explore:
- Why rewarding innovation is not optional for most firms
- Efforts or outcomes: recognizing innovation without finding new money
- When not to reward innovation
2026: who is not investing in AI?
In Q4 2025, a LexisNexis report noted that roughly two-thirds of law firms now use AI-driven tools to deliver legal work faster and more efficiently. I expect this number to reach 95% or higher by the end of 2026. Clients assume firms will deploy technology to improve speed, quality and cost. Innovation has shifted from being a differentiator to being the minimum standard for credible service delivery. What was once experimental is now expected.
When innovation becomes baseline, relying on unpaid partner effort becomes risky. Firms now need partners to redesign processes, train teams and embed new ways of working. Treating innovation as discretionary work sends a clear message about priorities and it is rarely the one partners want.
The risk of waiting for a down-cycle
Further, in Q4 2025, the Financial Times’ Lex column reported strong, broad-based performance across major Wall Street banks. Global M&A exceeded $1 trillion in Q3 alone, advisory and underwriting fees rose sharply year on year and forward earnings expectations remain robust.
Market conditions matter. It’s tempting for partners to focus on the “here and now”. Yet when things are good is exactly the time to invest, modernize and prepare for the next cycle.
Firms that fail doing so during good times are often forced scramble when conditions tighten.
Young talent cares about the firm you’re building
Innovating how services are delivered is about more than putting in some technology – it upends the firm’s operating model and often implies a massive change program for any firm. Innovation is about market share in the short-term and future-proofing the firm for the next generation.
Firms that reward only origination and chargeable output implicitly signal that long-term value creation is someone else’s problem. Yet younger partners increasingly judge professional firms not just by the profits they generate today but by what they are building for tomorrow.
Delaying much-needed investments can maximize the bottom line for now, yet can also erode engagement and weaken much needed competencies to deal with future disruption of emerging, next generation leaders.
Rewarding innovation is not just about putting in some technology. It is about signaling what kind of partnership the firm wants to be.
Professional services firms typically operate with net margins between 15% and 45% depending on sector and geography. Compared with some manufacturing or retail industries with net margins of 5% or lower, most professional services firms enjoy exceptional levels of profitability.
There is room to reward innovation.
The question is not whether money exists. It is whether your firm chooses to allocate a portion of existing profit to activities that protect future competitiveness rather than assuming innovation will take care of itself.
Firms do not need to find new money that doesn’t exist to reward partners who are innovation leaders. Yet they need to agree how much innovation is worth.
Make innovation part of what it means to contribute as a partner
If expectations are unclear, innovation will always lose to billable work.
The best firms hard-code innovation within the firm’s partner contribution framework, not as an informal expectation, as “other discretionary factors” or a side agreement.
Once innovation becomes a hard expectation, several things happen:
- Partners’ innovation contributions become visible to leadership
- Partners understand that innovation is expected, not volunteered
- Compensation decisions are easier to explain and defend to the rest of the partnership
Contribution frameworks are designed to support informed judgment about partner contribution, not just mechanical measurement of some KPIs. This distinction matters. Firms operating rigid formula-based systems such as pure tenure-based models or “eat-what-you-kill” approaches will struggle to recognize innovation – they are simply not built around an effective evaluation process.
By contrast, managed lockstep and most holistic meritocratic models already rely on evaluation process to reward partners. In these systems, innovation can be incorporated explicitly into what is expected and into the objectives-and-review process. Doing so makes innovation visible for contribution management purposes and partner compensation decisions.
For example, a partner may be asked to lead the development of an in-house AI agent. That role may involve coordinating several other partners, working with internal technology and knowledge teams and overseeing rollout across the firm. In the short term, that partner’s billable hours, originations or utilization may decline. A modern partner contribution framework allows leadership to recognize that trade-off, rather than allowing innovation to remain invisible or be implicitly penalized through the reduction in billable outcomes.
This single step has more impact than any tactical incentive. It shifts innovation from volunteering favor to a contribution.
Create an explicit profit allocation for innovation
Setting aside a small, clearly defined portion of the annual profit pool for innovation contributions reinforces innovation’s importance. This allocation needn’t be large to be effective.
What matters is that:
- The allocation exists
- It is transparent to the partners
- It is applied consistently
In practice, this may take the form of a separate innovation allocation, initially representing, for example, 3% - 5% of the annual profit pool. The specific percentage is less important than the signal it sends: the firm is deliberately setting aside money to recognize partners who have delivered meaningful innovation results or who are driving the firm’s innovation agenda.
The allocation should be focused rather than diffuse. Its purpose is not to make small awards to a large proportion of the partnership, but to make meaningful awards to a limited number of partners - typically 5% - 10% percent – who have genuinely moved the needle. Concentrating the allocation in this way avoids innovation becoming symbolic.
Where innovation has been delivered through collective effort, the allocation can recognize those partners who led, coordinated or orchestrated an initiative.
A financial implication reinforces that innovation means real work and real value to the partnership. Applied in this way, the innovation allocation introduces clarity of value and translates recognized contribution into tangible reward, without destabilizing the wider compensation model.
Recognise both effort and outcomes
Another common objection I hear is: “Partners who innovate will eventually see it in their numbers anyway.”
This misunderstands how innovation works.
Innovation requires experimentation, trial and error, short-term inefficiency and learning cycles that do not immediately produce revenue. If firms reward only final outcomes, partners quickly learn that experimentation carries personal risk with shared upside.
Recognising dedicated effort alongside measurable impact is essential if innovation is to be continuous rather than accidental.
When not to reward innovation
The above assumes that the firm operates a cohesive partnership with a sound strategy for the firm that relies on long-term value creation and brand. Partners believe they are the firm’s stewards for the next generation.
The above does not apply in what I call “partnerships of convenience”. These are partnerships that are little more than the collective of their individual partners. In these firms, individual partners tend to acquire and serve their own clients, require little collaboration with other partners and “own” their own pool of professional resources.
In these situations, it could make more sense for each partner to drive the innovation that suits their clients; allocating a pool of money for innovation that benefits the entire partnership for the long-term would not make much sense.
The bottom line
Innovation is not discretionary. It is how firms remain competitive, retain talent and protect margins in the long-term. Sufficient profit to reward innovation exists. What is required is clarity of expectation, clarity of value and transparency of compensation outcomes.
Firms that want innovation to count as real partner contribution must ensure their remuneration system can support it. The best partner compensation systems drive strategy execution, foster collaboration and recognize that each partner’s contribution is unique.
If your firm is considering how to best recognize innovation as part of its approach to partner compensation, our Partner Remuneration System Diagnostic™ is a good starting point for an evidence-based way to evaluate whether your partner compensation system is future-proof.
MHPR Advisors’ Partner Remuneration System Diagnostic™ helps firms identify specific, practical actions to strengthen partner reward across six critical drivers:
- Strategic foundations
- Financial outcomes
- Partner contribution management
- Measures and key performance indicators (KPIs)
- Compensation decision-making efficacy
- Enablement and underlying infrastructure
For firms serious about embedding innovation into partnership rather than relying on goodwill this provides a clear, evidence-based starting point.
