Managing Professional Firms: How Partner Compensation Supports Strategic Choices

Abstract

This article presents a study about professional firms’ partner compensation system based on the ‘pie-splitting’ research conducted by David Maister in 1987 among American law firms. Greater internal demands from professionals and higher quality of services required by clients induce professional firm leaders to reflect about their managerial structure, internal processes and human capital development (DeLong, Gabarro & Lees, 2007). On one side, we find partners’ ambitions and associates’ development needs that often are not being met; on the other side, we have clients expecting a higher level of customization, being helped in areas where firms may have little or no expertise; moreover, new types of relationship are emerging moving from a professional-client toward a firm-client relationship. A key topic to be addressed in order to better understand strategic dilemmas of professional firms is partner compensation. In the literature, the most important issue seems to be how to equitably reward partners considering external and internal criteria. Partners’ performance should be compensated balancing different criteria such as competences, seniority, values, reputation, volume of business (Jarrett-Kerr, 2006; Millard, 2003) and comparing partners in relation to each other. It is also important that a professional service firm’s compensation system identifies and rewards the key behaviours that are aligned to the strategy of their firm (Millard, 2003). The aim of the study is to help professional firms’ managers in defining the criteria for partners compensation in order to support internal and external strategy of their firm. The authors will refer to the study of compensation practices among law firms conducted by David Maister. He identified seven archetypal partners of a standard firm and provided quantitative and descriptive information on each. Those who participated in the study were asked to indicate what the compensation would be for each archetype in their firm, relative to the compensation of an average partner. The goal of this research is to expand Maister’s study to the Italian professional firms and verify whether the same results gained by Maister will be obtained in a different context. The sample has been defined following a dimensional criterion and the top 100 Italian professional law firms have been selected to be included in the survey. In particular, on one side, the authors intend to identify the skills and behaviours mostly rewarded in professional firms and to test whether there are differences in the criteria that firms consider in splitting the partnership pie; on the other side, the authors would like to test whether the compensation system applied by a professional firm is designed in a way that is supports the firm’s strategic decisions.