How to Deal With Nonproductive Partners in a Law Firm

THE NEWSLETTER FOR LEGAL OFFICE MANAGERS
LAW OFFICE ADMINISTRATOR
Volume XI / Number 7 JULY 2002
(Reprinted with permission of Ardmore Publishing Company)

How To Deal With – And How To Avoid – Nonproductive Partners
Not sure what to do with that underperforming part­ner? Many law firms are on the same sinking ship.

In fact, the problem of nonproductive partners is “right up there with compensation systems as one of the thorniest issues firms have to deal with,” says legal management consultant Bob Henderson of RJH Consulting.

With any group of partners, large or small, there is variation in client origination and productivity. That’s a fact of life firms have to accept;’ says Henderson, who is himself a former managing partner.

But the chronically underperforming partner is an issue that has to be addressed head-on.

Corporation Vs. Kill-And-Eat
The solution depends on the ownership arrangement or whether the firm is a professional corporation or a partnership.

A professional corporation is the easier structure to work within, Henderson says, because the partners are actually shareholders. “They may refer to themselves as partners, but they are shareholders in a corpora­tion.”

And for its shareholders, the corporation can draw up an agreement “that spells out the circumstances under which they can be terminated;’ and those cir­cumstances can include underperformance.

By contrast, the partnership structure leaves much of that to subjectivity. There, the partners often follow a nonobjective compensation system such as an equal division of the profits or a tiered system based on seniority.

The theory of a nonobjective system is that every­body will exert relatively equal effort because every­body shares relatively equally in the profits. But in actuality, he says, that type of system allows people to underperform. It’s difficult to motivate the nonproductive partners because they have no incentive to improve. It’s also difficult to oust a partner for poor perfor­mance.

For the partnership arrangement, Henderson’s advice is to set up an eat-what-you-kill compensation system whereby the partners’ pay is based on specific measurable elements such as fee production, client origination, and client retention.

Following that type of compensation formula, the partner who doesn’t produce doesn’t get paid, “and the problem of nonperformance pretty much takes care of itself.” Everybody’s contribution is reflected in the paycheck.

An Additional Boot Provision
The kill-and-eat system won’t solve every problem, however. It can still happen that a partner’s perfor­mance is so bad that just providing office space and staff support for that person is an imposition on the finances.

For that reason, the partnership agreement needs to cover expulsion.

Most agreements don’t go that far, Henderson says. They only spell out what happens if a partner becomes disabled or retires. They need to go further than that and name the circumstances under which a partner can be expelled.

Those will include obvious events such as disbarment, fraud, and theft. But add underproduction to the list.

In addition, put in a provision that a partner can be expelled without cause by a certain percentage of the part­ner vote – perhaps 70% to 80%. While that option is “the last alternative,” the firm may need it at some point, so it should be in the agreement.

How To Put It Into Words
Beyond the paperwork, there remains the issue of how to confront the underperformer.

How the other partners approach the issue depends to a great extent on their own personal style and their relationship with that individual, Henderson says. But what they must do is present the facts. Go in with the data showing the lack of production. He gives this example:

For the last X years, your fee production has been significantly and consistently below that of the other partners. (Show data). It’s not compen­sated by other factors such as client origination and contributions to management. It’s at the point where we need to do something about it.

Then put the onus on the partner Ask:

How do you think we should handle this?

The partner may actually come up with the only logical solution -— a reduction in compensation. If not, the firm has to break the news that a reduction is nec­essary and in an amount comparable to what the part­ner is not producing. Then put the decision in writing so there’s no misunderstanding on either side.

Be prepared for a plea for time to build up the clients and fee production, Henderson says. Someone who is “all of a sudden presented with the facts” is prone to promise great things, but after a long history of poor performance, the old habits are not likely to change.

If the situation is grave, the most drastic course of action is for the other partners vote to break away from the partnership without the nonproductive partners and form a new partnership.

Henderson adds that taking any of those actions requires strong leadership because it’s unpleasant to do so. But unless the issue is addressed, the nonperformers have free rein “to languish for years without being challenged.”

Plan a Unified Response
Once a partner is asked to leave, the firm faces the additional challenge of what to say about the depar­ture.

The partners have to “come up with some unified position that is not defamatory or derogatory,” Hen­derson says, lest the firm be accused of slander or even libel.

An effective and safe statement is we’ve decided to go in different directions.” Leave it at that.

On the other side of the coin is what the departing partner might say about the firm. There’s little the firm can do to prevent bad PR, he says. Even if the original partnership agreement states that a dismissed partner cannot make derogatory remarks about the firm, such a provision would be difficult if not impos­sible to enforce.

Two Ways To Sidestep The Issue
Henderson adds that better than having to deal with a partner disaster is preventing underperformance in the first place.

One way is to prevent the nonperforming associates from becoming partners. His advice is to set definite and stringent criteria that the associates must meet to qualify for partnership. “It shouldn’t be a year thing where they put in the time and become partners.” An underperforming associate just moves on to become an underperforming partner.

Also, he says, anticipate that as the partners get older “they don’t want to work as hard.” Make it pos­sible for them to cut back without pulling down the finances.

Do that with a “slow-down provision” in the part­nership agreement. Allow them to reduce their billable hours in exchange for a reduction in compensation. The criteria for taking advantage of the provision might be that the partner must have served X number of years and that the other partners have to approve the arrangement.