Compensation systems are typically a strategic afterthought, seen as the means by which to allocate the spoils of a successful strategy. They're viewed as affecting the level of grousing among partners, but not a firm's performance. The data, however, indicates the reverse is true. Profitability growth has varied markedly by compensation system over the past decade, while partner satisfaction has been consistent across all systems. The choice of compensation system is thus best thought of as a critical strategy decision, with second-order implications that leaders need to think through and manage adroitly.

Let's start with the data. It comes from the biennial Major, Lindsey & Africa Partner Compensation Surveys of 2012 through 2018 and comprises 4,266 data points for U.S.-based equity partners. Firm profitability, a direct counterpart of partner compensation, has been on differing trajectories depending on the system—growing strongly at lockstep and open-system firms (those non-lockstep firms in which partners know or can easily learn what their colleagues earn), while plateauing at closed-system firms (those non-lockstep firms in which partners don't see each other's salaries). Partner hours and billing rates vary modestly across the different systems, but average originations diverge strongly, with those at closed-system firms being both appreciably lower and on a weaker trajectory.

Infographic design by Roberto Jiménez/ALM

Should more closed-system firms go open? Well, probably not. Just as for lockstep, being closed has distinct appeal to a segment of partners, particularly those already at the firm, who would see little advantage in being just another open firm.

So what levers might leaders at closed-system firms look to pull? On improving profitability, tactics could include less focus on billed hours and more focus on revenues sourced or managed and on leverage. Firms may consider going partially open—letting partners know ranges of compensation but not how much each individual makes. The data shows firms with such systems do not incur the closed-system profitability shortfall. Closed-system firm leaders could also contemplate the notion that visibility on compensation outcomes is entirely separate from clarity on how compensation is determined. Explaining the influence of originations and leverage on compensation may motivate some partners to evolve to more profitable ways of practicing.

Hugh A. Simons is formerly a senior partner and executive committee member at The Boston Consulting Group and chief operating officer and policy committee member at Ropes & Gray. Contact him at [email protected].