The ongoing debate over open vs. closed compensation systems is not an open and shut case. Both systems have their virtues and vices — particularly when it comes to a firm’s approach to bringing in lateral partners.
Under a Closed System, where partners do not know how others are compensated, there is a greater focus on individual performance and partners are less likely to compare themselves with colleagues. The firm can more readily reward partners who are excelling without concerns that others may then feel slighted, causing discord in the ranks.
This system also gives the firm more flexibility in its offers to lateral partners with the freedom to make special arrangements for particularly strong candidates. Closed systems are most effective when there is a high level of trust in leadership. However, some laterals may be concerned that a select few wield ultimate authority indicating that overall decision making is outside the reach of the majority of partners. Further, should partners fail to meet performance expectations, the laterals may see that same authority modify that compensation package.
Open Systems, the predominate system among law firms, provide greater transparency and accountability. The lateral partner knows just what the financial path and system of rewards will be and can layer this into a decision. The key for this system to be effective is that the majority of partners must accept it. Nevertheless, in an open system there is the risk that the focus may be on peer compensation with the potential for internal disagreements that ultimately impact productivity. This type of environment could factor into a lateral’s decision.
There are many paths for firms to attract and retain lateral partners, and decisions often turn on the firm’s overall culture and how critical the need is to bring in fresh talent. In any circumstance, do not overlook the potential impact of your compensation system on a lateral’s decision.
About the Author
John Fitzgerald is an audit partner at Berdon LLP and has been with the firm since 1991. Fitzgerald works with closely held businesses in the real estate, hospitality, distribution, and manufacturing sectors and is one of the firm's key advisors to law practices. He consults on maximizing opportunities in purchases, sales, and acquisitions; obtaining financing and refinancing; preserving and transferring wealth; and on improving operations. Contact him at firstname.lastname@example.org.