BRAINARD, BENNIS & FARRELL DECISION REPORT

IIM NAGPUR

LOVISH GARG

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Letter of Transmittal

BRAINARD, BENNIS & FARRELL

To:

Mr. Richard Kincaid

From:

Lovish Garg

Management Trainee

Date: June,1995

Subject: Report on method for splitting of partnership profits

Please find the attached decision report containing the decision on how to share the profit among the partners of the firm and the rationale behind it.

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Executive Summary

Brainard, Bennis and Farrell, an 83- lawyer firm, was founded in 1963 by three partners to deliver outstanding legal services by engaging truly superior legal minds in a common ‘harmonious place’, which was chosen outside of New York City in Stamford, Connecticut.

The current compensation system in place didn’t manage to keep all the partners happy, as the younger partners were unhappy as they weren’t rewarded much for their efforts. So, the issue for the compensation committee is to resolve the issue of performance versus seniority and to implement an optimum compensation system that would be beneficial for all the partners.

Thus, we have four options in place to implement:

1. Deploying a seniority based compensation system.2. Deploying a performance based compensation system.3. Using present system.4. Deploying a new hybrid compensation system.

To evaluate this issue, three criteria were taken into consideration,(a) Likely impact on younger partners.(b) Likely impact on senior partners.(c) Likely impact on the company.

The recommendation based on evaluation of these criteria is to implement a hybrid system of compensation to maintain the culture and market spread of the company intact.

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Table of Contents

PARTICULARS PAGE NO.

Situation Analysis 5

Problem Statement 6

Options Available 6

Criteria for Evaluation 6

Evaluation of Options 6-7

Recommendation 7

Action Plan 8

Exhibits 9 - 10

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Situation Analysis

Brainard, Bennis and Farrell, an 83- lawyer firm, was founded in 1963 by three partners to deliver outstanding legal services by engaging truly superior legal minds in a common ‘harmonious place’, which was chosen outside of New York City in Stamford, Connecticut. The compensation system was at ease in the early days of the company with only 3 major partners, but as the company grew in size(Exhibit 1) it started facing difficulties with a declining net income per partner from $339,000 in 1993 to $330,000 in 1994.

With the joining of new employees, there was a visible cultural split in the company, which also meant a shift in the viewpoint of the younger partner who wanted to be rewarded for their efforts, as they were only awarded 10 points with present compensation system. Along with them Litigation Division also demanded a shift towards performance based compensation system. This system resulted in getting more business, increasing productivity and also increase in the billing efficiency of the Company.

The seniority based compensation system ensured that the company didn’t sacrificed on its culture of professionalism, quality and colleagueship, and also gave the sense of economic security to the partners as they grew older and older as extra points were being awarded to them in addition to the hours worked by them and also the origination credits being allocated to them for the old clients. Thus, the current system favoured both the younger and senior partners, but due to flattening of economy and other cost factors company did not have enough money to keep everyone happy, thus the company faces a risk of losing the young employees to the competitors which offer a better compensation scheme.

Thus, the company now addresses the major issue of seniority versus performance, where one brings them new business while other maintains the professionalism and the quality of service being offered by the company. Thus, to reach to an optimal balance between the two systems with the given economy conditions and allocating different weights to different criteria.

A hybrid system which takes into account both the younger and senior partners can be designed which allocates 60% (Exhibit 2) of the points on the basis of performance and rest on the basis of the level of seniority in the company (Exhibit 3).

*Source – All the income and statistical figures from the case

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Problem Statement

To determine the optimum compensation system for Brainard, Bennis & Farrell and to make the partners agree to it.

Options Available

1. Deploying a seniority based compensation system.2. Deploying a performance based compensation system.3. Using present system.4. Deploying a new hybrid compensation system.

Criteria for Evaluation

(a) Likely impact on younger partners.(b) Likely impact on senior partners.(c) Likely impact on the company.

Evaluation of the Options

1. Deploying a seniority based compensation system.a. Likely impact on younger partners: Younger partners would never accept such

a system and would look to move to other company which would offer them a better compensation system

b. Likely impact on senior partners: Senior partners would gleefully accept this system as it offers them better pay with less effort and also a major benefit of economic security in their old age.

c. Likely impact on the company: The Company would be able to control expectations, but it would lose out on important new business and thus would reduce their market reach from the referrals.

2. Deploying a performance based compensation system.a. Likely impact on younger partners: Younger partners would readily accept

such a system as it rewards them for their efforts and also motivates them to work more.

b. Likely impact on senior partners: Senior partners would never want to have such a system in place as they would not be able to bring new service and

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would lead them think that their earlier contribution towards the company has been forgotten completely.

c. Likely impact on the company: The Company would have to compromise with their culture and also it would difficult for them to assign weights to different parameters, which could also discourage partners to explore new fields of work.

3. Using present system.a. Likely impact on younger partners: They would not be very happy with the

present system in place as they think that the rewards of their efforts are being exploited by the senior partners who don’t make much of an effort in bringing new clients.

b. Likely impact on senior partners: They would be satisfied with the present system in place as they will feel that they are being rewarded for their earlier contributions towards the company.

c. Likely impact on the company: The Company is better off with this system only if it continues to make profits, they face a risk of losing its younger partners to the competitor firms and also destroying the culture of the company with a possible rift among the partners.

4. Deploying a new hybrid compensation system.a. Likely impact on younger partners: Younger partners would be satisfied with

the new system as about 60% of the points would be allocated on the basis of previous year performance.

b. Likely impact on senior partners: They would be equally satisfied with the new system as 40% points are allocated to the level of seniority thus ensuring them a hefty amount of money.

c. Likely impact on the company: The Company would be best under this situation as it keeps its younger partners intact in the company without compromising on the culture of the firm and it would also help them earn more profits with a perfect mixture of old and new clients, allowing them a bigger referral market.

Recommendation

Brainard, Bennis and Farrell should bring in new hybrid compensation system, because it benefits all the partners of the firm, by offering nearly equal weightage to both the performance and the seniority, and the firm as they manage to maintain the culture and the profits simultaneously.

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Action Plan

Deploy the hybrid system of compensation for splitting the company’s profits among the partners. The points allocated to the partners will now be a factor of both previous year’s performance and the years of service done towards the company.

The points will have a 60% component of performance and rest for the level of seniority, along with the currently worked number of hours, individual realization etc. The senior partners along with 40% points on seniority will also earn the origination credit from the clients they managed to bring to the company in the earlier years as part of the performance parameters. This system should work well within the given economic conditions in the country, along with the escalating costs and the stiff competition.

Word Count: 1098 words

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Exhibit 1: Table displaying the number of partners in different practices

Area of Practice Number of professionalsCorporate Law 24Litigation 23Tax 13Real Estate 10Bankruptcy 4Trusts and Estates 3

Exhibit 2: Points allocated in hybrid compensation system

Sales

Seniority Making Profits/special contributionParameters

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Exhibit 3: Performance Parameters

1. Billable hours worked2. Non-billable hours worked3. Billed hours4. Individual realization5. Fees billed to clients for which individual is responsible lawyer6. Fees collected from clients7. Time value of work done by all lawyers on this partner’s clients8. Accrued profit on clients of responsible lawyer9. Origination credits10. Months to bill11. Months to collect

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