Podcast: Evolving Partner Remuneration Committee governance

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

This podcast is for RemCom chairs and members to help them get clarity about their roles and responsibilities. It's a pleasure to be back with Ray d'Cruz, podcast host and CEO of Performance Leader.

This podcast covers:

• When in a firm's evolution a Rem Com is necessary or desirable

• The role of the Rem Com Chair, of elected partners, managements, experts, etc.

• The importance of a year-round committee calendar

• Why pre-action and post-action reviews are so important before and after each partner reward round

• Effective and efficient decision making and communication

Learn more about Performance Leader's partner contribution management.

This podcast is reproduced in full with permission from Performance Leader.

Interview Transcript

Ray: [00:35] 

Today, I am joined by Michael Roch. Michael has been a global thought leader in partner compensation for the past 15 years. He's advised boards, executives and remuneration committees across the globe on a range of compensation issues. Michael has published extensively on the subject and is my co-author in the upcoming Partner Remuneration Handbook to be published by Globe Law and Business. Michael is a qualified lawyer and accountant, and he now leads the Performance Leader Partner Compensation Advisory Practice.

Ray: [01:09]

Michael, thank you for joining us on the Performance Leader's podcast.

Michael: [01:19]

Hello, nice to be with you again.

Ray: [01:22] 

So, Michael, we're coming up to remuneration time in a lot of partnerships and a really important feature of remuneration for a lot of firms is the remuneration committee or RemCom. Can we start off perhaps by talking about when in the evolution of a firm, as the firm matures, a RemCom becomes desirable?

Michael: [01:45]

Absolutely, Ray, I think a RemCom makes sense when three things come together. First is just the size of partners. So how many partners do we have in the business? I'm a fairly small partnership. Let's say less than 12 partners. I've seen Rem Coms with small partnerships, but it's pretty rare. Large partnerships, you know, more than 50, more than 100partners, yes, you will see a RemCom simply because there are many data points to be pulled together. And partners perceive it more fair that there is a dedicated group of trusted partners who will look at the compensation of the individuals. The other part into the equation is complexity. So a 50 partner partnership that's sitting in one office or in one location might not see necessarily the need for a RemCom, but a 50 partner partnership with, you know, five offices might say, look, there's different angles, different aspects that you want to consider as we decide on the compensation of our partners. I'm assuming now in all of these that there's a single profit pool when I'm talking about these different offices. And then the third element really has to do a bit with maturity. And part of the move to a more mature organization is to then involve partners in critical decisions. And partner pay is one of those critical decisions.

Ray: [03:11]  

Michael, from the work we've done together, I realize that the remit of the RemCom is something that you see a little bit differently to a lot of other people. RemCom is often associated as this short, sharp, intense burst for six weeks and then that's it. But you've got a very different vision for how a RemCom should work and what its remit should be. Can you talk us through that?

Michael: [03:37]

Yeah, absolutely. You know, a lot of firms, you know, just put together the RemCom, then there is a task to be done, which is to take a lot of data points, come to some outcomes, and then theRemCom sort of disbands. And I think there is a couple of problems with that approach. When you have new members on that RemCom, then you give them no time to initiate and to learn about partner compensation, to learn about the various inputs, to learn about the relativities It's much more important that the internal relativities from partner to partner are right, than the specific numeric amount that the partner gets paid. The second problem really is that if you take the approach that it's just there to get to an outcome, then you're missing an opportunity to let the RemCom actually drive reward policy and I think especially in mature firms, there is an advantage if I've got a very competent RemCom, who is trusted by the partners, who really are experts at partner compensation. And if you focus just on the task of getting to a new points table, then you're missing that opportunity.

The other opportunity that you're missing is, if RemCom just operates to make decisions, then has no chance to really engage with benchmarks, to engage with external reports, to engage with things that a resort of adjacent to reward policy, for example, diversity and inclusion, reports of gender gaps and things of that sort, which, you know, might not make a difference in terms of, you know, what's the performance of an individual partner. But they do make a difference in terms of how you decide your final point allocation. So, if on the other end, if you do want to come, that considers all of these things and really does a high quality job similar to a large private company or to a large public company, then if you don't give RemCom the time to do that throughout the year, you're really putting them under even more stress than it already is to get to final outcome.

Ray: [05:50]

Moving on, Michael, to the roles and responsibilities, you talk about a 4+1 RemCom model. Can you just give us a bit of an overview of that 4+1 model?

Michael: [06:03]

Sure. Now, I'm assuming with this, it's a fairly large firm, very diverse firm. And I've thought about 4+1 in the following context. The four consists of your elected members, those that either the board has elected, or the partners have elected to sit on the board. Second is the chair. Third is any management representative on RemCom. And forth, is your non-executive or your external members meaning people outside the firm who might serve in that committee. And your +1, is the people who don't actually serve on the committee, and that's the role of management and how management interacts with RemCom.

Ray: [06:47] Well, let's start with the RemCom chair. Can you talk us through what a good or effective RemCom chair is doing for this group?

Michael: [06:56] Yes, I think an effective RemCom chair, first and foremost ensures that his or her RemCom is operating as one team, meaning that they have some kind of self-identity, meaning that they are comfortable working with each other, But it's very much a leadership role ensuring that the RemCom serves as one team. And secondly, I think most important is the chair really has the power to drive the agenda. So, it's up to the chair whether RemCom gets together just for the week or the month to decide on partners pay or whether the RemCom meets throughout the year to discuss policy and other topics. And I think last is that the chair is sort of the first contact point person for the partners with respect to the committee's work. And those are the three, I think, big topics for a RemCom chair.

Ray: [07:57]

The second group we talked about with a partner elected members, can you tell us a bit more about how you see their role on this committee?

Michael: [08:05]

Yeah, absolutely. So, the biggest proof point of trust that a partner can put in another partner is to say, look, you partner, I trust you, that you will get this partnership to good outcomes in terms of how profits are shared. That's a massive statement of trust and it's important for elected members to not betray that trust. The role of an elected member is to really wear the firm's hat And it doesn't matter whether I've been lobbied by partners in my practice group or by partners in my office. But my job as a RemCom member is to ensure that the outcome that I've achieved is a fair outcome, given all the inputs that I've been given.

The second big part of the role is to want to do a good job. It is not just a task that I do. By wanting to do a good job, I mean developing an understanding of the Rem policy of partner compensation generally, how the firm's culture ought to impact the reward outcomes, especially in difficult situations and when we make difficult decisions. I've got to be able to understand what are some of my own biases that I might bring to this? How do keep those biases in the box? I'm here to do a professionally good job as a RemCom member.

Ray: [09:35]

And that might also mean letting go of personally held views with those personally held views are at odds with the compensation ethos of policy.

Michael: [09:48]

Well, that's right. That's a really good point, Ray. I might not like the remuneration policy the way it's currently in place, but I have to apply the policy that is in place. What I then do after this round, in three months’ time, when I propose changes to the policy, that's a different thing.

Ray: [10:12] The two other members of the four that you've described, management representatives and the non-executive external members. Can you give us a little bit more about those role holders?

Michael: [10:24]

Yeah, the management representatives, it really depends on your governance. But often I've got the chair or the managing partner or someone also sitting on the Remuneration committee The difference between a management representative and an elected member is that the management representative will have context to the numbers, to the inputs that a normal member, an elected member, coming to the committee doesn't usually have. So the job is to provide context. If it's the CFO, it's to provide context to the numbers that goes beyond the numbers. If it is the CHRO or the CTO - the chief talent officer - then it's to ensure that the committee isn't myopically focused on the financial inputs. But, you know, the role of a management representative is to provide that context, to fill in the gaps that the black and white stuff doesn't tell the individual members.

Ray: [11:20]

And non-executive external members, they've got a broader context role, again

Michael: [11:25]

Yeah, that's right. If I have a mature partnership that has external members of the board who then also serve onRemCom, that already puts me in a fairly large firm context that usually doesn't happen in small firms. The non exec don't have the context of the day to day, by definition right, they're external members, and in part that's a good thing. So the part of their role is to keep the discussion honest. But more importantly, when it comes to shaping policy, the NED can have a wonderful role in shaping policy, evolving, helping to evolve the policy between rounds, and also help on some implementation practicalities in terms of improving reporting to RemCom and things of that sort.

Ray: [12:11]

The final part of that model is the +1, which is what you describe as the role of management. Can you talk us through that +1 group?

Michael: [12:20]

Yes, so it's management that doesn't serve on Rem Com, right? It's not my management member on RemCom, but it's the people who provide the inputs, for example. And here, I think the biggest issue that I often see between management and the RemCom is that RemCom is grossly under-resourced, right? RemCom is reliant on management's inputs: it's reliant on good reports, on good summaries, on dedicated folks to help make sure that RemCom has what it needs. So it's mainly around availability. Leaders need to be available. Numbers need to be available. If there is something that doesn't make sense in the numbers, you know, where do the differences come from it's just to provide that support to RemCom so that RemCom can do an effective job with reasonable efficiency.

Ray: [13:19]

I think it's certainly our experience that a lot of firms overlook the internal expertise that HR has in running these large processes, and therefore miss out on some of the efficiencies that expert may be able to bring the committee.

Michael: [13:37

I think HR. has a very big role to play, and it depends both on the maturity of the firm and on the maturity of the HR function, how big that role is. In a mature HR function, there is a group of folks who are very comfortable with partnership issues, who know the partnership very well and who are comfortable supporting RemCom. In some firms HR isn't that mature, but a mature age or function has a big role to play to ensure that it can do its job in a good sort of way.

Ray: [14:10]

Decision making is at the core of what a goodRemCom is there to do. Let's start with heuristics and why they matter toRemComs.

Michael: [14:23]

Yeah, I mean I mean heuristics are simple rules that our mind applies more or less consciously or unconsciously when it's overwhelmed with a bunch of data and information to try and make sense of that information. So heuristics are things that we as humans just apply, whether we want to or not. And the question is, when I have many data points for many partners that I'm trying to get to a sound outcome on, what shortcuts are sensible to take and what shortcuts are not so sensible to take. So the sensible shortcuts translate very quickly into decision aids for the committee and the shortcuts that are not so sensible For example, a typical Rem Com is faced with a plethora of financial information with rows and rows of data for each partner about revenues and lock up and all kinds of different things.RemCom is also inundated with text based information on a self-assessment forms, 360 feedback, things of that sort. It's just RemCom has to digest a lot of information, especially if that information isn't well prepared by management or if the policy says, look, we don't want management to prepare anything, we want to see the raw data because otherwise we can't do a good job in getting to an outcome that makes sense. We can debate whether that's the right thing or not, but many policies say, look, RemCom gets the raw data. So how do we get to good decisions a bit more efficiently? And there we start with some decision aids. So, for example, for a partnership with, I don't know, 150partners, we start clustering the financial information into deciles. I'm a huge fan of a decile analysis because it immediately begins to cluster partners into 10 groups. And then I can see, well, you know, what's the shape of those10 groups? You know, do I have, you know, one or two partners maybe on the top two deciles only, that tells me something. Do I have a big, big bracket somewhere in the middle? Do I have a big bracket at the bottom? I don't know. But it gives me an immediate sense of the shape of the information. And then I can deep dive into those deciles to see, which are results that maybe surprised me, But I don't need to delve deeper into numbers for some other partners where the clustering, you know, broadly makes sense given the other inputs. On the text side, on the qualitative side, I can ask partners to conclude on their text input, right? If on their self-assessment form, they say many things, they write a lot of pages, etcetera, write a conclusion. What's the conclusion? Did I do the best I could? Did I do better than I thought I was going to do? If I get management's conclusion: this partner could have done a lot better, this partner did more than anybody could ever ask of that partner. What I can then do is I can just look at the conclusions. And if the conclusions match up between partner and management, then I don't have to go to the detail. It's a nice writing job, but I don't have to go to detail. If I see a big difference partner saying, look, I think I done as much as I could and management says you haven't started, then I can start to question what is in there. So I can get to and an outcome more efficiently without sacrificing the quality of the analysis that I do, and I think that's what decision aides generally will help me help me do.

Ray: [18:09]

Before we move off decision making, just one issue to cover off is this issue of bias. And if a person is susceptible, we all are, as are groups of people. So can you maybe highlight one or two of the biases that you think RemComs need to be particularly alert toward in this process? 

Michael: [18:36]

Yes, I think the availability is one big issue. So our brain processes information that's in front of us. And often what's in front of us is a lot of financial information. And the qualitative information is sort of somewhere else. It sits in other things besides the financial data sheets. So what do we do? We immediately focus on the data sheet because that seems to be tangible. That seems to be something that we can process. Better way is to include your financial information, or preferably just the summaries of the financial information and the conclusions from the qualitative inputs, have that be on one data sheet and use that as the starting point for the analysis, for the decision making. And what that helps to do is it helps you get rid of this, availability bias that we often have. The second one, I think, is the confirmation bias. So the confirmation bias basically explains the tendency to favour information that conforms to our existing belief and discounting evidence that doesn't conform. And here especially when I have a partner in front of me who I know reasonably well because a partner might be in my practice, I tend to ignore the stuff I don't believe in. So, for example, if I have diversity and inclusion as being one of the big metrics on my scoresheet, and I think this partner doesn't do anything in terms of diversity and inclusion. But on the scoresheet I see, you know, tons of involved revenues from, you know, minority partners or tons of referrals to female partners. I need to start paying attention to that. Or if I see team structures, you know, hours leverage that's a very diverse picture, it's like, well, gee, this partner actually is doing a lot in terms of diversity If I don't see it day to day, sometimes I miss it in the data. So the confirmation bias is, I think, one that we need to pay attention to. And the third one, and the big one, I think, is the halo effect on this person that's very attractive, very frightfully well-spoken, comes from the right background. I always tend to give that person a bit of a break compared to the person who sometimes rubs me the wrong way, but is actually a star performer in the client's views. Sometimes I don't see that person quite as well. So those are the three that I would typically watch out for as being the most important ones.

Ray: [21:11]

An example that illustrates all three coming together, possibly at once, came up in the recent podcast we had withMark Rigotti, the former global head of HSF, where he talked about the collaboration point system that HSF have put in place and how one of the outcomes of that was to shine a light on people who are excellent collaborators, but you might not have realized, so they might be deeply introverted people. And, you know, rule of thumb often is that while the person is an extroverted person and they're good at building business, they must be a good collaborator. And what this metric helped that firm do was recognize that some of the best pockets of collaboration were not where they thought they were. And so being able to counter some of these biases with really intelligent, qualitative or quantitative inputs becomes quite important.

Michael: [22:17]

I think that's a great point that you're making. And it goes the other way around to highlighting collaboration of folks who are not the obvious collaborators is one big aspect. The other aspect is to not assume that somebody who was just because they have a big book of business are actually great collaborators or that we don't define collaboration just in terms of how much work does this person spread around.

Ray: [22:45]

Talk us through the preparation that you think an effective RemCom needs to undertake in order to be ready to sit down and make decisions.

Michael: [22:56]

That's a great question. So this is in the context of my belief that a great RemCom meets throughout the year, that there is an ongoing calendar that I have throughout the year, not just, you know, in the hot phase when I'm deciding to partner's pay. But even around that I have a new committee coming together, I essentially want to achieve three things One, I want to have a proper kickoff, you know, treated like a project and kick it off properly, with welcoming new members, getting them comfortable, refresh there collection of my partners about what changes to the policy we agreed from last year, refresh the recollection on any governance changes that we have introduced, any new tools that we've introduced to the decision making process and then seeing what's the calendar for this round? Any adjustments, anything that we need to be mindful of. We then look at, you know, the context. You've got the results that you're trying to match partners points into or vice versa. And the question is, you know, what kind of year did we have that we have a great year? Did we have an awful year?

Ray: [24:11]

Particularly relevant this year with Covid sending some practices soaring and some into the ground...

Michael: [24:18]

Exactly. And it could be as important assaying, well, gee, we don't have any guidance from the policy. What happens when practices have great years or poor years? How will we deal with this year? What challenges do we expect from this round? For example, you know, the three partners who always take the most time in our deliberations? You know, what's going on with those partners? Just run a proper kickoff to both get the new members of the committee, you know, get their heads into their role, but also to get the continually serving members, the people who have served last year, also get them back into the room and lock arms as a team

Ray: [25:06]

One of the challenges that RemComs have is around communicating reward outcomes or results to partners. And we know sometimes this is because they can be a disconnect between RemCom and the partner, or maybe there's a disconnect between RemCom, management and the partner. Can you enlighten us a little bit around what you think a good approach to the communication is?

Michael: [25:36]

Yeah, that's a great question. I think there's two aspects to it. The first aspect is what transparency do we provide as a partnership? And we are very closed system where we prohibit partners from discussing their points and nobody knows what the point levels are for the other partners, or we are fairly open partnership where not only everybody knows what everybody else is paid, but also what maybe some of the inputs were. That will drive how I communicate as a RemCom. So assuming we're somewhere in the middle that, yes, there is some transparency about, what other partners are paid and what some of the inputs are, I think there's three levels which are important in terms of communication. The first is what gets communicated to all partners. How do we present and discuss the outcomes of the committee to the partnership? And it's not helpful to just publish a points table, saying, here it is, you know, provide your comments. You know, it's usually more helpful to explain a little bit to say, look, you know, we've had three or four challenges that were consistent that we saw across the partnership. So the communication to the partners at large is is one aspect. The second one is how do we lock arms with leadership to communicate individual results to partners? And there are typically for most partners, you know, there won't be a big change from last year, the contribution wasn't extraordinary, it wasn't super different from last year. Not much better, not much worse. It might just be a written communication or a simple conversation with one of the RemCom members with the partner. For other partners, it might be, that we have to have a conversation with management first to say, well, look, you know, we really had to take a lot of points off this partner for these and these are all good reasons. Ideally, of course, the partner knows that it's coming because ideally you have conversations with management throughout the year with a partner about how it's going. So ideally, it's not a surprise. But even if it is not a surprise, you know, having an aligned communication.

Ray: [27:53]

We see a really strong role for management to be then coming in and supporting the partner to set clear objectives for the coming year, to talk about what sort of support that partner needs in order to shift that performance. So whether it's a department head, practice group leader, managing partner, that loop has to be closed in order for that partner then to feel like they're going to have the support in the forthcoming period.

Michael: [28:18]

Yeah, that's right. I mean ideally the discussion around contribution happens throughout the year and happens a little bit outside of RemCom, huh? RemCom can just take a decision about financial outcomes. It shouldn't be RemCom's job to then, you know, work with a partner every month to see how we can get that partner on a path that is productive for the business. That's management's job. That's why, you know, we've got partners in leadership roles. But the alignment between RemCom and management in that context is hugely important. I've seen it often where RemCom has a completely different view about a partner compared to management. And, you know, it's not very helpful. You've got to align the two if you want to have effective communication to the partner, because if RemCom sends a different message compared to management, it's just like a child with mom and dad, right? Dad says yes, mom says no, what does a child do? Of course a child does what it wants. Same principle. And I don't mean that in any pejorative way to pretend that partners are children by no means. But Rem Com and management need to align when we have positive or negative messages to give to our partners in terms of comp. 

Ray: [29:31]

Final thing I want to cover off with you, Michael, is what happens when the process closes. We know that everyone's exhausted and probably they want to run a million miles and we know that their work has been piling up if they're their client facing as well. But you have a process that you like RemComs to go through at the conclusion. 

Michael: [29:55]

Yes, that's right, and I think it's actually part of the job to do an after action review. It's just like any client project, right? The client project without a kickoff is in the project and a client project without an after action review, internally or externally with the client isn't the project. I think at least RemCom wants to get together and say, you know, what have we done? How rigorous has been our discussion? Have we been willing to take unpopular decisions? What are the changes to the policy that we want to introduce for next year? How can we run this process in a better, more efficient way? It's satisfying when you've got a really intensive round, you've gone through many meetings to get to outcomes which were hard fought for. So, yeah, very short form after action review that you then can work on throughout the year is the ideal way and it will make you more efficient over time as well, which is what we all want. But we want to spend less time in the Rem round rather than more about the after action review is the way to get there.

Ray: [31:01]

Michael, as always, some fantastic advice from you, an excellent primer for anyone who is about to embark on the RemCom process and hopefully also a really important message that you've given everyone about how the RemCom isn't just for a few weeks or a month, but can be optimized if it does its work all through the year. So thank you very much for joining us today.

Michael: [31:28]

All right. Thank you very much. I mean, look at the rim in this way. Right. Could be just a task. But actually, it is one of the most powerful roles that you can have in a firm in terms of shaping the future. Why? Because your innovation is so much part of how we behave, how we interpret cultural norms. I've got an enormous power to shape the future of the firm, as I RemCom member. I think it's hugely important and it's hugely exciting, especially if I look at the RemCom in a broader way, it's actually a fantastically empowering role that a partner can take on and that partners receiving a lot of trust from the partnership. I think it's a fantastic committee.

Ray: [32:19]

Well, said Michael, and good luck to all of you who are about to embark on the process.