How to think about partner remuneration using The Reward Trilogy™

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

So, what is the reward trilogy™?

Simply put, The Reward Trilogy™ is a framework to analyse and develop any partner reward system structured around three interrelated components:

• Part 1: Financial reward approach
• Part 2: Contribution management
• Part 3: Reward decision making

Our recently released The Partner Remuneration Handbook, takes a deeper dive into partner compensation, including The Reward Trilogy™. For now, here’s a simple breakdown.

Part 1: Financial reward approach

A firm’s financial reward approach provides the mindset and underlying structure of its partner compensation system. It expresses how the firm’s partners wish to balance two principles that form an inherent tension in any partnership:

• Equality – “we are all equal business partners with equal say, risk and reward”.
• Individual contribution – “I contribute more to this partnership than you, and so I should take more out in terms of profit”.

While there are as many reward systems as there are partnerships, we identify seven fundamental partner reward systems, namely:

• Formula-based systems
• Eat what you kill
• Cost sharing
• Fixed allocation
• Merit systems
• Financial meritocracy
• Value-based meritocracy
• Locksteps systems
• Managed lockstep
• Tenure Lockstep

We will explore these in more detail in later posts.
Each approach can be implemented in different ways, providing the basis for the mechanisms for sharing profits: equity classes, profit pools, bonus pools, profit-sharing waterfalls, etc.
Your principal financial reward approach and the mechanisms for implementing these have a determinative effect on the other two components of The Partner Reward Trilogy™: contribution management and reward decision making.

Part 2: Contribution management

In many cultures, one is either ‘performance managed’ when underperforming or given a last chance before termination. Yet we take a more positive view. Partnerships in particular should be having constructive dialogues about how individuals contribute to business outcomes.

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. The larger a partnership becomes, the more important it is to get the contribution dialogue right.

Contribution management consists of two elements.

• First, a sound partner contribution framework, ideally focusing on outcomes not on inputs, helping the firm’s leadership drive strategic, operational and financial objectives, and reflecting the firm’s culture. How a contribution framework is structured depends on the firm’s financial reward approach. For example, in eat-what-you-kill firms, partner revenue is the primary partner contribution. In a holistic meritocracy, however, partner revenue is just one of many factors that may or may not matter. In future posts, we discuss how to put together a sound contribution framework and ensure that partner measures used align with business outcomes.
• Second, having a process by which a firm anchors its strategic, operational and financial goals to the contributions of individual partners. This is important because any disconnect will not make for a successful partnership. Done poorly, this is a bureaucratic annual ‘partner appraisal’, with a fear of being judged and deflating a partner’s intrinsic motivation to succeed. Done well, this process provides psychological security to partners, while enabling firm leaders to have candid discussions about business objectives and how a partner contributes to these, anchoring them to a partner’s personal and professional ambitions and to prior discussions and commitments.

Part 3: Reward decision making

The process, quality and speed by which the firm ties partner contribution outcomes (element 2 above) to the firm’s financial reward structure (element 1) are key. This is all about decision-making quality and includes:

• Decision-aids for RemCom;
• Avoiding biases;
• Dealing with ultra-high and ultra-low contributing outliers; and,
• Transparency about inputs, reward levels and decision-making.

Formal governance also matters. Small firms, for example, do not need a remuneration committee (RemCom), yet large firms require one. The size of firm also dictates formality of governance, the need for appeals, etc.

A sound RemCom calendar is also important, allowing for before-action and after-action reviews, remuneration policy updates and continuing education (about remuneration) for RemCom members.

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 Reward Trilogy™ is a simple model that allows you to establish or re-evaluate your firm’s partner reward structure, advancing internal equity and driving external competitiveness in line with the times.

We’ve taken you through the basics – look out for future posts where we will discuss each element in more depth as well as practical aspects of implementation.