Assessment of partner performance in any professional services firm is inextricably linked with a firm’s remuneration model. In firms which operate lockstep remuneration systems (where financial reward is dependent on seniority), rigorous performance assessment and management is crucial to avoid underperforming partners being effectively “carried” by productive partners, as this often causes discord within partnerships. In contrast, “eat what you kill” remuneration models where financial reward is contingent on performance, by their nature, reward high performance and penalise underperformers.
In practice, remuneration models tend to fall somewhere between the two extremes, for example, modified locksteps with elements of performance-related rewards. Regardless of the remuneration model adopted, consistent and meaningful evaluation of contribution and robust performance management is vital to ensure the continued success of a firm, both financially and strategically.
Key partner performance indicators (KPIs) and evaluation process
Setting clear and measurable KPIs that are aligned with the firm’s strategy and culture ensures that partner contribution and performance can be assessed against the firm’s behavioural, financial, client, staff and management expectations.
It is also best practice to adopt a transparent and structured performance evaluation process so that partners are aware of how, when and by whom performance will be evaluated.
As KPIs and evaluation processes are likely to evolve with the business, we recommend recording these in a separate policy or partner handbook which can be amended from time to time by the partnership board, rather than codified in the partnership/LLP agreement.
The evaluators and decision-making
In large accountancy firms, partner performance evaluation is typically carried out by “remuneration committees” which are often constituted (at least in part) of well-respected partners who are independent of executive management (e.g. elected by the partnership at large). Some firms also appoint independent non-executives who can provide a helpful external perspective. This can be particularly helpful for smaller firms who wish to add an impartial perspective.
The partnership/LLP agreement should clearly set out the roles and responsibilities of the remuneration committee (or the relevant decision-maker(s)), including how to resolve deadlocked decisions.
Who ultimately makes partner reward decisions should also be clarified; for example, is it the remuneration committee or the partnership board based on recommendations by the remuneration committee?
Responsibility for more complex decisions regarding underperforming partners commonly lies with the partnership board; again, the partnership/LLP the agreement should make this clear.
Managing underperformance
The partnership/LLP agreement should set out the process for dealing with material and/or consistent partner underperformance, as well as the potential consequences of underperformance.
Firms typically include a range of options enabling them to deal with underperformance, for example:
- reduction of equity points;
- reduction of fixed share;
- de-equitisation; and
- compulsory retirement.
Ensuring the partnership/LLP agreement is unambiguously drafted with a clear process for imposing sanctions (which is applied consistently in practice) is vital to avoid challenges on procedural grounds.
Keeping records
Firms can often be constrained by the historic lack of performance evaluation and non-existent paper trail necessary to evidence underperformance. This is entirely avoidable by documenting and regularly applying a performance evaluation process.
Partners are occasionally afforded grace periods to remedy their underperformance before any sanction is applied; consider how performance can be improved and whether additional support is required to help the partner. Always document any such plans so that the firm has contemporaneous evidence to support its actions, should any sanction be challenged by the partner concerned.
Discrimination
Firms should be alive to potential discrimination claims when managing underperforming partners. For example, consider whether there are any underlying health issues which might be detrimentally impacting performance and seek specialist employment and partnership advice before taking action.
This piece was co-authored by Zulon Begum, Partner and Sophie Rothwell, Associate at CM Murray LLP.