In this article, first published by Law360, Partners Andrew Pavlovic and Corinne Staves discuss the challenges law firms face in determining partner remuneration amid heightened regulatory scrutiny on workplace culture.
Many law firms are now in the process of finalising their annual accounts ahead of the January 31 2025 deadline, meaning that tricky decisions around partner remuneration need to be finalised. Those decisions take place in the context of an increased regulatory focus on workplace culture, with a particular emphasis on the role that partners play in promoting and instilling the right culture in firms, both through their own conduct and, where necessary, calling out the conduct of others.
The Solicitors Regulation Authority rules on conduct for firms and guidance on the risks of failing to protect and support colleagues, both last amended in May 2023, make clear that a failure to promote the right behaviours, or call out and address the wrong ones, could result in regulatory action being taken against both individuals and firms.
As a result of the greater attention paid to the role of partners, firms are more than ever having to grapple with how they can reinforce the right behaviours when making decisions as to partner promotion or remuneration, in a way that is objective and fair and does not leave themselves open to claims or complaints.
Regulatory Backdrop
Thematic Review
In February 2022, the SRA published its Workplace Culture Thematic Review. While making clear that the SRA does not prescribe the working practices that firms should adopt, the review sets out what it considers a good workplace culture to look like. It contains a number of examples of checklists, good practice and action points for firms to consider.
A key theme throughout the review is the role that partners play in setting the tone in firms, be that in relation to their interactions with colleagues, or through creating a safe and inclusive environment where individuals feel they can speak up. This might be if they make a mistake or are subject to unwanted behaviour, for example.
New Rules for Code of Conduct
The review was followed by the introduction of new rules into the codes of conduct for firms and individuals in relation to the treatment of colleagues.
The new rules require all lawyers to treat colleagues fairly and with respect, but crucially require managers, i.e., partners in a law firm to challenge those who do not meet that standard.
SRA Guidance on Workplace Environments
The SRA’s Guidance on Workplace Environments, updated in May 2023 following the introduction of the new rules, makes clear that regulatory action may be taken against a partner who repeatedly fails to challenge or address behaviour in a prompt or effective way.
Action may be taken against firms where abuses of authority by senior staff have been left unchecked by the firm, or where incidents had not been brought to light sooner because of the firm’s culture.
Visits to Firms
Finally, as part of their ongoing review into workforce culture, the SRA conducted several visits to firms with relationship managers in late 2023 and early 2024, asking, among other things, how firms measure individual performance and assess so-called success.
Measuring Partner Contribution
Leaving aside the regulatory obligations, creating or contributing to a supportive environment leads to a happier workforce, higher rates of retention — a particular consideration for law firms in this current market, reduced staff absences due to stress or sickness, and a lower risk of negligence claims.
However, while the benefits of a positive work environment are obvious, measuring an individual partner’s contribution to that environment is invariably more difficult than measuring their individual financial performance and the performance of their team.
While many firms may take into account factors such as adhering to the firm’s culture and values or a commitment to high ethical standards and regulatory compliance when considering promotion or assessing remuneration, how in practice can such factors be measured?
Some firms may consider it sufficient that the relevant partner has attended all the required training sessions and has not been the subject of any complaints.
However, most firms will consider this to be the minimum requirement and not one that is deserving of recognition — and arguably should be deserving of criticism if the partner does not discharge the bare minimum.
Firms will often give credit for those taking on key risk roles, such as the compliance officers for legal practice, finance, administration and money laundering reporting, or those overseeing risk and competency training programs.
These roles require a significant investment of time and, where the relevant individual is also fee-earning, are likely to have an impact on their financial performance.
Wider issues could be taken into account, such as turnover of staff in the partner’s department, the number of times that the partner has contacted the human resources or risk and compliance team with queries — the assumption being that no contact at all could be a red flag, and the number of chargeable hours recorded in the partner’s team, including time spent past working hours and at weekends.
However, high turnover and a lack of contact with HR or risk and compliance may not be indicative of any particular issues, especially if a partner is working in an area that is low risk and runs a stable team. It can also be hard to judge in large team with a number of partners.
An exceptionally high number of chargeable hours recorded by the partner’s team may be a red flag from a cultural or risk perspective, however this could be seen as counterintuitive or contradictory where one of the key indicators of a partner’s effectiveness is likely to be financial performance.
Credit could be given for specific acts that demonstrate awareness of staff policies and regulatory obligations, such as where a partner has successfully challenged behaviour, be that through challenging the behaviour in the moment or through raising issues with HR or risk and compliance after the event.
Firms might however be wary of greatly incentivising reporting behaviours too strongly in case it prompts a wave of potentially unnecessary reports, all of which require proper scrutiny or investigation by the firm.
360 Reviews
In order to look beyond the data, 360 reviews with associates and support staff could be undertaken, in an attempt to measure the partner’s attitude to colleagues and commitment to the firm’s culture.
However, somewhat ironically, obtaining quality feedback may be more difficult in an environment where, for cultural reasons, individuals feel unable to speak freely, meaning issues may remain undetected.
Furthermore, if there is a concern around the culture in a particular team, the use of 360 reviews could result in disclosable documents being created that would not be protected by privilege.
There are also challenges in reducing reward for those who fail to demonstrate desirable cultural behaviours, or actively promote undesirable behaviours.
For example, allegations of poor behaviour may be serious and may need to be investigated. Allegations are often denied by the accused, so decision-makers must conclude whether to reduce awards of compensation based on allegations that have been denied and where a person is, rightly, innocent until shown otherwise.
Concluding Thoughts
These comments assume of course that the compensation system is flexible enough to vary compensation to address a partner’s contribution, or otherwise, to the business. In some firms, rigid lockstep or parity arrangements can mean that there is no scope to adjust compensation.
Indeed, sometimes the only option is to consider removal or expulsion of the relevant partner and often firms feel that such a sanction is disproportionate for a partner who is falling short on a limited number of nonfinancial metrics.
While the approaches that firms take to measuring contribution to culture are likely to differ, it is crucial that all firms make clear to partners the expectations on them, through training and clear policies.
Firms need to be transparent as to how contribution to culture will be measured, to minimise the risk of complaints from disgruntled partners and implement the system in that way.
This article was first published by Law360 on October 23 2024.
If you have any questions arising from this article, or would like to discuss any of these points in more detail, please contact Partners Andrew Pavlovic or Corinne Staves.
