It is vital to the ongoing success of professional services firms that partner performance is actively and effectively monitored and managed. Getting it right is likely to lead to increased partner satisfaction, retention levels and firm profitability. Getting it wrong could give rise to disgruntled partners, avoidable departures, exposure to the risk of claims and an adverse impact on the firm’s reputation in the market.
In this alert, Senior Associate Wonu Sanda and Partner and General Counsel Beth Hale highlight the key points to consider when dealing with partner performance and provide some practical tips on how firms can implement and navigate a partner performance evaluation and management process effectively, whilst minimising the risks to the firm.
The guardrails: remuneration models
A professional services firm’s remuneration model is often inextricably linked with its assessment of partner performance. An “eat what you kill” remuneration system, where a partner’s financial reward is in direct proportion to the fee revenue they individually generate for the firm, by its very nature rewards productive partners and penalises underperformers. However, eat what you kill can notoriously contribute to individualistic and non-collegiate behaviours.
On the other end of the spectrum, in a pure lockstep partnership (where financial reward is dependent on seniority and longevity), rigorous partner performance assessment and management is an imperative. Without robust procedures, the danger is that underperforming partners coast along insulated by the protective cocoon of lockstep, whilst high-performing partners become increasingly disgruntled at having to “carry” underperformers, potentially leading to discord within the partnership.
In reality, the remuneration models of most professional services firms will be a modified lockstep with an element of performance related reward, falling between the two extremes above. Whichever remuneration model a firm has adopted, consistent and meaningful evaluation of contribution and robust performance management is key to ensuring the continued success of the firm. This is even more important, post #MeToo, when many firms are rightly keen to encourage appropriate partner behaviours and ensure that they are being incentivised and rewarded.
The signals: key performance indicators (KPIs) and evaluation
In order to assess contribution and performance effectively, there must be expectations or KPIs against which partners will be evaluated. When setting and agreeing partner KPIs, firms should have regard to the following:
- What partner performance KPIs will be measured and how? Some common KPIs include financial, client, practice, staff, management and conduct expectations. The KPIs may also focus on both individual and team-based metrics. Financial metrics are of course easier to quantify, but firms should also consider a more nuanced scrutiny of the reality behind the numbers where the numbers may not tell the whole story.
- In relation to conduct expectations, what types of behaviours does the firm want to encourage and reward and how do these align with the firm’s strategy and values? How will those ‘soft skills’ and behaviours be monitored and measured? For example, firms are increasingly using “360 degree” appraisals (anonymous feedback from multiple sources, including direct reports and support staff), upward feedback, group, department or practice leader feedback, and client surveys to assess leadership, technical and client service performance.
- Consider whether to give partners the opportunity to provide self-evaluations and the opportunity to respond to any negative feedback, which is becoming more common. Where there are performance and/or behavioural issues to be addressed, partners should be given frank and honest feedback and, if necessary and appropriate, remedial measures/objectives should be communicated to them.
- Establish an outline process of how, when and by whom (e.g., the firm’s remuneration committee) performance will be evaluated so that both management and individual partners have a “roadmap” to navigate the process. A clear process will also provide some comfort that partners will be assessed in a consistent manner, thereby avoiding perceptions of unfairness.
- Equally, it is important to ensure regular communication and messaging of the KPIs to partners, so they are clear about what is expected of them.
- As KPIs and performance metrics and evaluation processes are liable to change and evolve with the needs of the business, it is best practice to keep these in a separate policy or in a partner handbook which can be easily amended by the partnership board (or whichever office holder or committee has the delegated authority to do so) from time to time, rather than “hard-wired” into the firm’s partnership or LLP agreement (which would require a partner resolution to amend).
The inspectors: evaluators and decision-making
In many professional services partnerships, the performance appraisal and partner contribution processes are administered or moderated by a “remuneration committee” of some form. The constitution and selection of such a committee is important to engendering trust and confidence in the process. Thought should be given to the periodic rotation of such committees. The tenure needs to be long enough to observe annual performance over a reasonable period but not so long that members risk becoming stale or being seen as “institutionalised”.
Some firms also appoint non-executives to their remuneration committee who provide a useful external perspective. Independent non-executives are particularly helpful in smaller partnerships where partners inevitably end up evaluating each other.
The firm’s partnership/LLP agreement should clearly set out the role and responsibilities of the remuneration committee, including how any deadlocked decisions are resolved (e.g. does the chair have a casting vote?). The partnership/LLP agreement should also be clear as to who ultimately makes remuneration decisions – for example, is it the remuneration committee itself or the partnership board, based on the recommendations of the remuneration committee?
Decisions regarding underperforming partners, as opposed to the appraisal of partners (discussed further below), commonly falls to the partnership board and again, this should be made clear in the firm’s partnership/LLP agreement.
The obstructions: managing underperformance
As with clarity around partner expectations, performance metrics and process, firms should also be transparent about the potential consequences of material and/or consistent underperformance and ensure that they have the ability to address underperformance under the terms of their partnership or LLP agreement.
Many firms will include a range of options enabling them to deal with underperformance, such as the ability to:
- Reduce or freeze a partner’s equity points (this will often be subject to a “collar” (e.g. a partner’s points cannot be reduced by more than 10% per year);
- Reduce or freeze a partner’s annual fixed share (again this can often be subject to a collar);
- De-equitise a partner; and
- ultimately compulsorily retire a partner on notice (expulsion without notice is unlikely to be appropriate for cases of underperformance).
Incorporating unambiguous provisions in the partnership/LLP agreement, which set out a clear and simple process on how and by whom any decision to apply a sanction is to be taken, is vital to avoid any challenges on procedural grounds.
Firms of course have the option to take the route of giving the partner a gentle tap on the shoulder and seeking to agree an amicable exit. But they should ensure that before any approach is made, a paper trail is in place to back up any performance concerns and minimise the risk of resistance and legal claims from the partner.
The checkpoints: keeping a paper trail…
One of the common challenges faced by firms is where there has been consistent or gradual declining underperformance for several years. However, the partner has not been appraised and/or performance managed over that period or, if they have been appraised, their underperformance has not been properly documented. This is often because the evaluators have (perhaps understandably) opted to avoid those difficult conversations.
When things finally come to a head and management wish to take action against the partner on performance grounds, they find themselves constrained by the historic lack of a paper trail evidencing underperformance. In these circumstances, it is easier for a partner to query the legitimacy of the concerns now being raised.
It is therefore crucial that performance evaluation and management processes are applied regularly and consistently in practice. Where performance issues are identified, the firm should:
- Communicate them to the partner and document them as they arise so that, if necessary, the firm has contemporaneous evidence to back up its actions in the event that any sanction applied by the firm is later challenged
- Liaise with the partner to explore any underlying issues that could be affecting performance, for example a disability, in respect of which the firm may have a duty to make reasonable adjustments (see below).
- Consider allowing the partner a grace period to remedy the underperformance before any sanction is applied. The firm should explain, agree (if possible) and record any performance targets and expectations required, as well as the possible outcomes of failure to improve. The partner’s progress should be kept under review with regular check ins with senior management.
- It may be appropriate to consider offering additional support (e.g. coaching and/or business development support and/or additional resources) to help the partner to meet the set targets and expectations.
The potholes: discrimination and whistleblowing issues
Another key challenge for firms to navigate when managing partner performance are discrimination and whistleblowing issues.
For example, a contributing factor to underperformance (and probably the most commonly seen) could be that the partner (or family member) is experiencing health issues – these can be especially hard to identify when they are mental health issues. Where a partner has or may have a disability, the firm should be cautious about activating the performance management process without detailed advance consideration. The focus should turn to what the disability (or suspected disability) is and what reasonable adjustments could be implemented to enable the partner to work effectively, and thereby improve their performance.
Similarly, allegations of discrimination or whistleblowing detriment can arise if a partner considers they are being singled out for performance management because they have ‘blown the whistle’ on wrongdoing or because of a protected characteristic.
In all cases which may involve discrimination and/or whistleblowing issues, it is important for firms to tread carefully and seek specialist partnership and discrimination/whistleblowing advice before applying any performance management process or sanction against the relevant partner, to avoid any potential pitfalls.
If you have any queries arising from this alert, or if you are a firm or partner and require specific legal advice in relation to partner performance management , please contact Senior Associate Wonu Sanda or Partner and General Counsel Beth Hale, both of whom specialise in partnership issues for partnerships, limited liability partnerships, partners and members.
CM Murray LLP is ranked in Tier 1 and Band 1 for Partnership Law in Legal 500 and Chambers & Partners, and is described as “One of the legal world’s strongest offerings in this area” (Legal 500). Chambers & Partners describe Beth Hale as “absolutely excellent”, “fantastically knowledgeable and always able to see the bigger picture” and “very responsive.”
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