Some Thoughts And Observations On A Peer Evaluation System Tied to Partner Compensation

1. People affected by the system must feel that it is equitable;

2. The system must recognize individual contributions to the firm's overall success (e.g., business development, quality assurance production, management, associate training);

3. The system should encourage specialization;

4. The system should be reasonably flexible and subject to revision to meet changing needs of the partners.

Over the years our consultants have developed substantial experience with peer evaluation systems and have found them to be very effective. The following paragraphs describe how a typical system might operate:

1. Factors to be included in evaluating partner performance are selected by the firm. Each factor is carefully defined and assigned a relative weight. For example, work performed may be given a weight of 10 while business origination and perpetuation is given a weight of 9 and participation in management carries a weight of 7.

2. The firm produces objective data on various performance factors such as hours recorded, billings, receipts, profitability and business origination. However, this data is produced primarily for the management of the firm rather than for income distribution purposes.

3. Periodically, the partners rate each other on the performance factors on a scale of 1 to 10, or some other scale. Just prior to these ratings, each partner produces a memo to his partners in which he sets forth his accomplishments during the past year. These memos are limited in length by agreement, usually one to two pages.

   After the ratings are completed, each partner's average score for each factor is computed, the relative weights are applied to the various factors and a "total score" is calculated for each partner. In rating each other, the partners can rely on the management information which is produced by the firm to any degree they wish. They also can factor in their own observations and subjective views.

4. The total scores of the partners can be used for compensation purposes in several ways:

      a.     To allocate part of the income of the firm.  Another part
             may be allocated based on seniority or may be divided
             equally.
   
      b.     To divide a bonus pool.
   
      c.     To adjust a partner's place on the firm's income ladder
             in a lockstep compensation system.
   

(Editor's Note: We have provided an illustration of a lockstep progression income distribution plan tied to objective performance criteria. The illustration described below incorporates the two tier system described in the previous issue, which is not repeated herein.)

Performance Rating And Compensation Point Adjustments

Press here to download this chart.

In the above example the total weights selected for all eight attributes would have to equal 56.

Performance Rating

We recommend the ratings be compiled by a trusted, competent outside expert to assure independent confidentiality. Each partner, on a completely confidential basis, would be given the following report: 1) His or her average score for each of the rated attributes; 2) the average scores for all partners for each of the rated attributes; 3) his or her relative overall score based on a weighted compilation of the performance factors. This score would be in relation to the median overall score for all partners which would be pegged at 100.

Partners whose relative scores are above or below designated deviations from the median would be candidates for an adjustment in income points for the following year. Partners with relative scores within the designated deviations would not be candidates for adjustment. The deviation thresholds which would trigger adjustments would be agreed to after an initial trial run of the performance evaluation system, say at mid year.

Note: we strongly recommend a trial run of the new performance evaluation system at least for the first year. The critical importance is that the trial run will show each partner how his or her performance is perceived. Each partner then has the remainder of the year to improve performance before the final performance evaluation takes place.

The actual compensation point adjustment would be determined by the firm's Compensation Committee. Suggested guidelines for such adjustments would be provided to the Committee. It is the consultants belief that the system of adjustment should not be purely mechanical, so that all subjective as well as objective factors can be considered and reflected in the adjustments, if necessary. Any bonus or penalty points would be in effect for one year only.

In addition to adjusting income points for the following year, if you have a three Tier compensation system with the Tier III compensation being equally divided, the results of the performance evaluation also might be used to adjust any Tier III income distribution to partners whose scores fell below designated minimum levels. For example, it might be decided to reduce Tier III income if a partner's relative performance score fell below 90. The amount of the reduction might be at the rate of 20% of Tier III income for each point that a partner's performance fell below 90. Thus, partners with performance scores of 85 or less would not receive any Tier III income.

A formalized peer evaluation system can afford any firm an excel- lent opportunity to improve the performance of its attorneys. When individuals are made aware of those areas in their professional conduct which are perceived by their colleagues to be less than adequate, they typically will strive to improve their performance. To assist in that process, any firm would be well advised to make available and support the educational resources necessary for improvement. Those resources may include in-house or outside workshops, seminars or training sessions. If such programs are made available to all professional staff with participation being strongly encouraged, the long-term benefits will far outweigh any short-term cost.