A Telephone Interview with David H. Maister
Stephen P. Gallagher and Amy Travison

The interview first appeared in the 
New York State Bar Association's State Bar News, December 2002

David H. Maister is widely acknowledged as one of the Worlds's leading authorities on the management of professional service firms. For two decades he has advised firms around the world in a broad spectrum of professions, covering all strategic and managerial issues. He is the author of the best-selling books, Managing the Professional Service Firm (1993), True Professionalism (1997), The Trusted Advisor, (co-author, 2000) and Practice What You Preach (2001). We are pleased to add this interview to the Law Practice Management online community at www.lpmforum.com.

___________________________

Stephen Gallagher: I’d like to start by asking you if you think law firms should use compensation as an incentive to improve performance. I thought I heard you say before that using compensation in this way is a cop-out or a crutch. I believe you said that, "throwing money at employees is just an excuse for not providing proper management.” I think you said that, “firms that are using compensation to reward performance are missing the big picture." I’d like to get a better understanding of your “big picture. 

David Maister: I do believe that using compensation to reward performance is a wonderful way of avoiding issues, and lawyers will do remarkable things to avoid issues. You used a word a moment ago, that was very important and that was "incentive". A compensation system is and must be a reward system in the sense of rewarding those that have done well. A lot of research and a lot of my own consulting experience shows that any time you try to use compensation as an incentive, it will backfire. There are two ways to assess a compensation scheme. Are the dollars going to the right people and what is the system doing to create desired behaviors? 

I believe the real issue you are looking to address here is "What do you do when you are in the middle of a recession?" Right! The answer is that you have to turn to things to get people to act in ways that will work against the recession. In other words, the only way out of a recession is to do something about it. If your business is down, you’re not going to cut your business manager’s salary, I hope!  She is an employee and I am an equity holder and if I share in the upside, it’s only logical that I should share in the downside. It makes tremendous sense to me to say that if there is pain to go around to be shared by the equity holders but not the employees. 

There are thousands of compensation systems; in fact virtually any system will get the right dollars to the right people. It’s not actually very complicated. You don’t need anything very scientific or formulated or complex to say who deserves more and who deserves less - that’s usually obvious.  Where firms go wrong is they try to use it to affect behavior. In other words, firms try to design a system that has incentives built into it. This is what I contend always backfires.

Alfie Kohn wrote a wonderful book, Punished by Rewards, where he convincingly argues against competition as being a healthy approach to any social behavior. Kohn puts a lot of evidence on the table to prove this conclusion that all incentive schemes backfire, and the reasons they backfire is not very obvious. I contend that the minute you tell a bright person what three things will be rewarded, you give them permission to ignore the ninety-seven other things they should be doing to make the firm work. Lawyers are quite bright people.

People do like specificity. Every year my business manager, Julie comes to me to find out what three things she has to do to get a good bonus. Every year I say to her, "Gee! I don’t know, and if I knew I certainly wouldn’t tell you." The system I operate under is that I will pay Julie as well as I can. I will be generous and I will be fair, but I will never reduce the compensation system to a formula based upon a limited number of things. That is exactly what happens in many law firms, where everyone knows that the compensation system is driven by billings and client origination, which gives you the needed permission to be an ugly human being and no one can do anything about it.

Raising Performance Standards

If you want to raise performance, what you must do is manage, and that is one-on-one. Talk to people and help them raise the game, encourage them, excite their enthusiasm, and deal with their issues. If you don’t have the guts or the power to manage, or you just don’t want to do it, then you will be forced to do what many law firms are doing. They leave their people alone for the year and throw a number at them at the end of the year.  I really don't want to be unkind, but what I am trying to do is make a business or managerial point. The number you come up with might be a valid number in the sense of rewarding the right people, but that system is not a method designed to raise performance.

Since the economy is stagnant and times are tough, people should be asking, how we can manage our way out of the recession. Too many firms are just looking to change their compensation system, which is totally the wrong approach. Firms that neglect their responsibilities to manage their people can never come up with enough money to keep their stars from jumping ship. If you are still dependent upon performance appraisals as part of the compensation system, I report to you that performance appraisals are entirely useless as a method of raising performance. 

Lets look at my personal experience with Julie, my business manager. Julie is basically terrific, but when she made a few mistakes I preferred to put it off until her performance evaluation until the end of the year - when it influenced her pay, which was not a system designed to make her receptive to critique. When given the criticism at the time when it will influence her pay, she is more apt to fight you on it. Even if she knows it is constructive criticism, she can not concedes even a point, because it will affect her pay raise. She can’t afford that, so she is no longer open to constructive feedback. It so happens that she is a very smart person and could reconstruct history and prove that everything I had to say ended up being my fault and not hers. Obviously, my goal is not to pay Julie less. My goal is to get Julie to perform at such a level that I can’t afford not to pay her more. That’s the win-win that is in everyone’s interest.

So my focus now is no longer on the performance review. I ask a totally different question. How do I get Julie willing to improve and contribute more? The answer should be fairly clear. As her manager, I must have the guts - at the moment I see something that could be done better - to speak with Julie about changing her performance. I better have the courage to go into her at a time when it has nothing to do with pay and say, "Jules, I think this could be done differently. I think you can achieve more. Can we talk about this?"  When it has nothing to do with pay, Julie is enough of a professional to say, "Sure let’s talk about it."

The focus of compensation systems as a method of influencing behavior is done entirely wrong.  If you’re like me, you are uncomfortable giving people critiques face-to-face in real time. It is easy to turn to the compensation system to allow you to avoid these difficult management issues. You either throw money at them or you reduce money which leads to another cheap shot, if they under-perform, the response is to tell them how ugly they are, tell them what’s wrong with them, and cut their pay as a method of energizing them.  JOKE!!!!  Absolutely the worst thing to do is to cut someone’s pay to improve performance, it is absolutely useless.

In a typical law firm management committees spend many months on compensation decisions. If the compensation committee spent as much time talking to their partners during the year as they do sitting in a smoke filled room making compensation decisions, they would make more money.

Most compensation schemes in law firms are basically saying, “if you succeed I will pay you.” This is a wonderful system for someone who is already a natural superstar and knows how to win, but in a sense unneeded for the superstar. It doesn’t add anything to the success of the firm because the superstar is going to win anyway. For someone who is not a superstar - and doesn’t know how to win, doesn’t know how to develop business, doesn’t know how to delegate, doesn’t know how to get organized - then just saying, I will pay you if you do it, is not exactly a tactic that is going to work.

Stephen: Many firms in today's difficult business environment are organized into practice groups or profit centers, so if the firm wants to change its compensation scheme, what can they do to begin to get away from "incentive pay"? While they strategize to change their approach to compensation and performance review, what can firms do to keep their key people from jumping ship? Competing firms can always come up with more money to attract your best people away. So, if you have convinced the firm to change its compensation scheme, what can firms do to get started down this new path?

David: This is the reason that Patrick McKenna and I wrote the latest book ("First Among Equals," http://www.firstamongequals.com/).  If you are organized in groups, they key is the role of the group leader and there is one very simple system that actually would create a hugely forward.  If you said to the group leaders, your performance appraisal and your pay will be based on how well your group succeeds and your own individual numbers are deemed irrelevant, we care how much your group bills, not you, then it should be fairly clear to your readers that you have set the system up for the group leader to become an effective coach.  You’ve created the right incentive for the group leader to say ok it is my job to help the other people succeed because I can only get paid if the team becomes an effective functional unit and anyone in trouble gets helped because I am going to help that person to succeed in order to get paid.  That is obvious, and is what exists in virtually every other industry and profession in the world except law firms.  It is still the case in most law firms that we form groups and then we say to the team leader, we want you to manage the group, but by the way you will still be assessed on your personal numbers, which is completely nonsensical, its designed to have no management in the system.  Another way of saying this is to say law firms are very good at demanding the people succeed, but are pathetically useless in helping people succeed.  All they know is that if you succeed I will pay you, that is about the limit of their managerial intelligence. The partner’s don’t want to be managed, so what I’m saying is that it is not the dumb executive committees, it’s a whole subculture that says, “leave me alone, tell me precisely what I’m paid for, and then give me the freedom to do what I want.”  I’m not saying this is immoral, or distasteful, I’m just saying it’s not a system designed to obtain the maximum performance.

Alfie Kohn has a wonderful phrase in his book, Punish by Rewards,  “pay people well and then do everything you can do get them to forget about the money.  My last book, Practice What you Preach, was a statistically based book, and I was able to prove the following.  If you want to make the most money, then it is clear that the closest thing to making the money is the next step - which is to provide outstanding value to the marketplace. 

The next thing I was able to prove is that in order to provide outstanding value, you must be able to energize, excite and enthuse your people. You cannot provide superior value with good citizens; you can only provide superior value by people who are turned on. 

Third thing I was able to prove was that creating energized, excited and enthused people had nothing to do with systems, nothing to do with strategies, nothing to do with processes, and nothing to do with pay schemes.  It had everything to do with the character and skill of the individual managers. You can take the same group of partners, the same market conditions and if you put in someone who knows how to manage, the energized people first, and then you can create superior financial reserves. 

If you take the same people in the same market conditions and put in a bad manager and those people will accomplish less because they will go into compliance mode. Something very important here is that money is the outcome not a cause. They way you make the most money is by focusing on the things that create the money, which is client service energy and team work.  You can get the money by managing the money or as one of my research people said, chasing money is not what makes you the money.

So if you want more money you have to spend more time managing the causes of it, that’s not what most law firm management committees do, they manage the money. They spend their time looking at billable hours and accounts receivables and origination credits. It’s like playing a game with your eye firmly fixed on the scoreboard and if you don’t like what’s on the scoreboard you turn around to the players and say, “I will pay you more if the scoreboard changes.” The question to management should be, "Do you know how to change the performance?"

Amy Travison: This all sounds logical, but not being familiar with law firm management like you are, what are they doing?

David:  Not everybody realizes this, but the most profitable law firms in this country have lock-step compensation systems. Everyone gets a relatively fixed share of law firm profits and that changes as you get more seniority - if you survive. The clause, if you survive, is critical because if you’ve got a system which does not have a personal performance component in it, than what do you have to do if someone is under-performing? In a lock-step system you have only two choices. You either work with that person and help them improve to get to the level to deserve their relatively fixed share of lock-step, which forces you to manage; or if you cannot restore them to full share, you have to ask them to leave. What I am reporting to you is the firms that have that form of intolerant lock-step, i.e., we don’t pay on individual performance, we pay roughly the same share to everyone with roughly the same seniority, but you better deserve it or you are out of here. The virtue of that system is that it forces you to manage.

The disadvantage of pay for performance systems is that they provide a wonderful excuse not to manage. If someone’s performance is down, instead of management seeing that there is an obligation to go help that person, management has a wonderful cop-out of saying we’ve cut his pay, we’ve done out job.  I hope it is clear why a well-run lock-step system will result in higher incomes. An example is Skadden Arps, one of the best-managed firms in the country.

Stephen:  So what you’re saying is that when you bring someone in, you have a commitment to help him or her perform well and if not, they will not successful? 

David: Right

Stephen:  Now if the economy is down, do you think all those partners will be happy with the lock step? 

David: This is where it becomes an element of hysterical culture.  If you lived for the last 20 years in a system, which is based upon individual pay, then by definition you will have no institutional loyalty. The system has said to you for the last 20 years, the heck with the firm. You will be paid on what you do. We neither require of you to have any loyalty, nor do we give you any loyalty because if your numbers are down, we cut your pay.  So, the individual pay system is designed to minimize firm cohesion and thereby create the sort of jumping ship that you have described.

If however you have lived for the last 20 years where we have all been in the same boat together. We have probably all risen and fallen together, based upon sharing in firm-wide results. I’m not so idealistic as to say that no one will leave, but I will report to you that the probability that the people stay together through the recession is measurably higher, because they have lived through 20 years and they are all in it together. 

The reason why there is so much jumping ship going on in law firms is that for the last 20 years the firm has gone out of its way to say, you are on your own, never forget that. That’s the message that every partner in the majority of law firms get from their firms. So, the compensation system is the thing driving mobility. 

Stephen:  So the term, you eat what you kill, is really pulling these firms apart?

David: It is saying, forget the rest of your partners. Hence the other virtue that if you are prepared to make it a well-managed intolerant lock-step firm, it will provides the incentive to manage. If you have a managed lock step you get many fewer departures. 

Stephen:  Do you have a feel for how many firms are in a lock-step system?

David: Not many, which is why I am carrying on my lone crusade because you can see it most clearly over in the UK.  The UK and the Netherlands had two unfortunate traditions unfortunately in combination.  There was always a strong tradition of lock step in continental Europe and in the UK.  That is where it all started, but unfortunately they also had a tradition of being tolerant. Collegiality in Europe means you leave me alone about my flaws and I will leave you alone about yours. The combination of these two is disastrous. That means, everyone gets a fixed share regardless of how individual's performed. So, firms starting 15 years ago realize that they had to jump one of two ways. They either had to start managing or they had to start dropping the lock step and introduce pay for performance, so they could afford to pay themselves. The bad news, of course, is that the one thing that lawyers hate most in the world is to manage, so instead of doing the sensible thing, which would be in going toward an intolerant lock-step, they decided to go the other way and remained tolerant pay for performance.

I’m simply saying that lawyers think that pay schemes can accomplish things that they cannot. You cannot manage an organization simply through a pay scheme.  It is limited in what it can accomplish.

Let me give you another silly little story about Alfie Kohn’s book, because he says all incentive systems backfire. This is a non-business example, but it is. The trouble with pay schemes is they divert attention from the performers to the pay. There was a scientific experiment that was done with proper science; you know double blind experiments and such.  They gave some toys to two groups of kids to play with, one group was just given the toys to play with and the other group was paid to play with the toys with sweets and candy. After a while they stopped paying and the children who were playing with the toys for the fun of it continued to play on, and the kids that were no longer being paid to play with the toys immediately stopped. The attention had been diverted from the thing itself to doing it only for the money. The minute you create a culture, "it’s about the money… stupid," you do whatever it is less well instead of for the meaning, challenge or excitement. 

If you really want to get the money or the performance, then you have to help them find the meaning and the challenge in what they do for a living. If you have to resort to doing it for the money, you are going to breed a cynicism about their work, which will result in inferior performance and eventually, higher turnover.


Back