Ch 6 The Payment of Salary is Adequate Compensation for Nonlawyers

The Payment of Salary Is Adequate Compensation for Nonlawyers

Widespread property ownership [is] rooted in American democratic tradition...[further], employee share ownership programs offer highly significant potential to improve an employer's competitiveness, profitably, and overall performance, as well as to improve employee attitudes and well-being.

Some have argued that they see no reason or need for nonlawyers to acquire ownership interest in law firms because firms are allowed to employ nonlawyers and pay them as generous a salary as they please, and that this compensation is largely adequate to retain them as employees, without any “operational need for them to acquire ownership interests.”[1] Others have argued that US firms “have found ways to provide incentive compensation to their nonlawyer employees that they believe are consistent with the Model Rules,”[2] and, in this light, a change to the Model Rules is not justified. Stated more colorfully:

If you want to benefit staff, give them bonuses based on either their performance or the performance of the firm or both. Do not sell them ownership. For Heaven’s sake, how daft do we have to be to permanently and irreversibly harm our independence because some nitwit could not think of bonuses as a means to reward staff? Trust me, the staff receiving the bonus will be delighted.[3]

Nothing in this argumentation appears to take into account extensive research on the topic of employee ownership. The research dates back several decades,[4] and demonstrates that employee ownership can provide extensive benefits for an employer, especially if it is structured appropriately and implemented under the right circumstances.[5] The benefits include, in particular, significantly increased productivity and return on assets[6] (in one study, by 14.8% and 2.5%, respectively).[7] Further, for many small and medium-sized businesses, the offer of share ownership is considered important for attracting and retaining good employees.[8]

According to the American Management Association, employee ownership:

  • Improves organizational performance,
  • Improves overall employee productivity,
  • Increases firm profitability and revenue,
  • Increases firm value,
  • Provides diversification and an exit strategy / succession plan for principals
  • Increases optimism among employees that they will be financially prepared for retirement,
  • Increases employee job satisfaction,
  • Increases employee trust in the firm and its management.[9]

Two studies, both from the UK, are of particular interest:

The first study, published in 2014, looked at 49 employee-owned businesses (EOBs) and 204 non-EOBs in the UK over the period 2005 to 2011. These years corresponded to a general period of economic growth, followed by recession and prolonged “adverse economic conditions.”[10] The study concluded that during a period of economic growth EOBs and non-EOBs are on par for profitability, but that EOBs:

  • deliver higher employee sales contribution,
  • show superior financial performance in knowledge and skill-intensive industries, and
  • add more value to output and human capital than non-EOBs.[11]

The study further concluded that during a period of economic crisis, EOBs “far withstood the recession better than non-EOBs — not only at the onset of the downturn but even as the recession deepened.”[12] They demonstrated this resilience with better financial performance, less sales variability, and increased hiring. The study explained these results in part as follows:

[During a period of economic crisis, non-EOBs] are unable to maintain both top-line financial performance and employment levels while the EOBs seem to be better at doing this. The contrast can be attributed to the ownership culture of EOBs, which supports high employee engagement to deliver superior performance. For instance, EOBs are thus more likely to empower their front-line employees and to use feedback from them to pursue customer-oriented growth.

EOBs support higher employment levels than non-EOBs. This is in line with findings that suggest that EOBs view employees as their biggest asset, and employee commitment as their central advantage. The increase in employee numbers in 2008-09 and 2009-10 points to the long-term orientation of EOBs and their ability to plan ahead for a time when the economy begins to look up. Research suggests that on account of preserving their social capital and knowledge base, they would be well positioned to bounce back strongly as the recession ends […][13]

The second study, published in 2015, was sponsored by: (i) Fieldfisher, a UK-based law firm, (ii) the Chartered Management Institute and, (iii) the eaga Trust, a UK-based employee ownership organization. The study compares the survey responses of 1019 people (managers and non-managers) working at 15 employee-owned companies[14] to the responses of a cross-sector control group of approximately 50,000 people.[15] The study’s findings include:

  • A strong suggestion that the culture, values and ethics of employee-owned companies are significantly stronger than those with other forms of ownership: “[W]hen employees own their organisations, the culture is more human, less fearful and less bureaucratic…When people at work operate in a culture of fear and bureaucracy, customer focus and entrepreneurship suffer. This translates into lower revenues and profits and higher costs.”
  • As regards organizational hierarchy, the structure is much flatter and more collegiate in employee-owned companies: “Everyone has a stake in the company and therefore it is in everyone’s benefit to care and treat colleagues on every level with respect.”
  • A conclusion that the values of employee-owned businesses are stronger than others: “Democratic, visionary, coaching and affiliative leadership styles are the norm here, compared with the coercive and demanding styles of competing forms of ownership.”
  • As regards leadership styles, 90% of people working in employee-owned companies report experiencing “high-performing visionary, democratic and coaching” leadership styles — compared to 58% in the control sample.[16]

In, addition, the study’s researchers asked people in the employee-owned companies questions about the effect of this ownership model on a number of specific cultural features, with the following responses:

  • 95% of the respondents reported that the model has a positive effect on “people’s commitment to the organization” (5% said it has no impact),
  • 91% reported that the model has a positive impact on “the performance of the organization” (7% said it had no impact and 2% said it had a negative impact),
  • 87% reported that the model has a positive impact on “the ability to attract new staff” (12% said it had no impact and 1% said it had a negative impact), and
  • 81% reported that the model has a positive impact on “the way people behave to each other” (16% said it had no impact and 3% said it had a negative impact).[17]

Returning to the US, in their book The Citizen’s Share: Putting Ownership Back into Democracy, Joseph R. Blasi, Richard B. Freeman and Douglas K. Kruse begin by explaining the importance for the Founding Fathers of widespread property ownership.[18] While the likes of George Washington, Thomas Jefferson, James Madison, John Adams, and Alexander Hamilton disagreed on many issues of the time, the importance of widespread property ownership was one issue upon which they agreed, albeit each in his own way. For them, widespread property ownership was fundamental to a sustainable democracy because it gave citizens a stake in preserving the political and economic system, and avoided the concentration of ownership (and consequently, the concentration of wealth and political power) in the hands of a small aristocracy.[19] Adams stated “property monopolized or in possession of a few is a curse to mankind.”[20] Madison argued “the proportion being without property or the hope of acquiring it, cannot be expected to sympathize sufficiently with its rights, to be safe depositories of power over them.”[21] And Jefferson stated “whenever there is in any country uncultivated lands and unemployed poor, it is clear that the laws of property have been so far extended as to violate natural right.”[22]

Of course, for the Founding Fathers, property ownership meant real property. And their belief in the importance of its widespread ownership explains a variety of acts, most notably the ban on primogeniture[23] (which restricted property inheritance to the first born son rather than division among all offspring), the promulgation of the Northwest Ordinance of 1787 (which, rather than selling to the highest bidder, instead offered land for less than $1 per acre in what would later become Ohio, Indiana, Michigan, Illinois, Wisconsin, and part of Minnesota),[24] and the Louisiana Purchase (which vastly increased the amount of property available, albeit at the expense of the Native American population).[25]

And it was not just the Founding Fathers but also those who came later. In particular, the Homestead Act, adopted in 1862 during the Lincoln Administration, gave ownership of 160 acres of undeveloped land west of the Mississippi River to families for a small fee and five-year residency if they built a house and worked the land, or for $1.25 an acre and minimal improvement with a six-month residency.[26] The House Speaker at the time, Galusha Grow, steered the Act through Congress as promoting social and political equality, and as a means to “protect the rights of men.”[27]

Eventually, of course, the land ran out. At the same time, Blasi, Freeman and Kruse explain, manufacturing increasingly drove the economy, together with the exploitation of natural resources such as coal and oil. In the process of rapid industrialization, the nexus of wealth and power moved from land ownership to the ownership of capital, and, in particular, to the ownership of the huge corporate concentrations that developed.[28] Grow, still a member of the House of Representatives at the turn of the 20th century, understood this shift. In his last speech before the House in 1902, he argued that large corporations, in themselves, were not the problem. Instead, the problem was that business and political leaders had not envisioned a way to organize the finances of corporations in a way that encouraged broadened ownership.[29]

Having established the historical roots of widespread property ownership in the US, Blasi, Freeman and Kruse then provide detailed examples and case studies of a number of present-day companies for whom broad-based share ownership, together with a culture of employee participation, are considered important elements in the companies’ economic success. Their examples include small and medium-sized companies as well as large, high-profile companies, both public and private, such as: Google, Proctor & Gamble, Southwest Airlines, Microsoft, Apple, Exxon, Chevron, Amazon.com, IBM, Goldman Sachs, Cargill, Mars, Publix, Fidelity Investments, Bloomberg, S.C. Johnson & Sons, Graybar Electric,[30]

The authors take care to caution that an employee share ownership program alone, especially if it is adopted outside a genuine culture of employee participation as well as basic good management, may very well fail, citing Enron, WorldCom, Lehman Brothers and United Airlines as examples.[31] They also emphasize that because there is no guarantee that shares will increase in value — indeed, their value may very well decrease — the better programs grant (rather than sell) shares in addition to (not in lieu of) market rate wages and other compensation, notably profit sharing, and they facilitate diversified stock holdings.[32]

The authors describe the research of a number of others as well as their own several studies, with respect to employee share ownership. For example, one of the authors’ studies involved over 40,000 employees at 14 large and small corporations, which they compared to a control group using data from the General Social Survey.[33] The study took into account employee share ownership as well as other forms of participatory compensation such as profit sharing and stock options, and, compared, as a general manner, employees with high levels of employee stock ownership, profit sharing and/or stock options (high-capitalist employees) to employees with low or no levels (low-capitalist employees). The results of this study led the authors to conclude the following:

  • More likely to stay with their firms: 9% of high-capitalist employees reported that they were likely to look for a new job, as compared to 15% of low-capitalist employees;[34]
  • Have greater loyalty and pride working for the firm: 58% of high-capitalist employees reported great loyalty to their companies, as compared to 46% of low-capitalist employees;[35]
  • Express greater willingness to work hard: 36% of high-capitalist employees strongly agreed with the statement “I am willing to work harder than I have to in order to help the company I work for succeed,” as compared to 30% of low-capitalist employees;[36] and
  • Make more suggestions: 26% of high-capitalist employees make a suggestion for improvement for their company at least once a month, as compared to 18% of low-capitalist employees.[37]

After presenting the results of these studies, the authors make the following concluding observations:

The statistical evidence that firms in which workers have a property stake are more productive, induce more worker effort and responsibility, spur workers to innovate more, and produce diverse other benefits for workers and the corporation shows that a broad-based capitalist organizational form of capitalism can work. It pays off, at least for those firms and workers that choose it. The impacts are larger when the programs are larger…but the share idea is not simply about workers getting more money in the pocket. It is also about the firm and its employees developing a culture that supports employee participation and cooperation between management and employees over the long term. The corporations and workers that do best combine shares and workplace practices in the context of a participative ownership culture. Our analysis found that giving workers more responsibility, having more teams and problem-solving groups, having a less hierarchical workplace where supervision involved more coaching than control, paying workers at or above the market rate for their fixed wages, and providing workers with greater training were important parts of this culture.[38]

In sum, not only is widespread property ownership rooted in American democratic tradition, but, in addition, extensive research done over a number of years demonstrates that employee share ownership programs offer highly significant potential to improve an employer’s competitiveness, profitably and overall performance, as well as to improve employee attitudes and well-being. There are many reasons why an employer would want to offer ownership interests to one or more of its employees, and many reasons why the employer (and its employees) would benefit from doing so. There is nothing about law firms that make these reasons less pertinent for them. Seen in this context, arguments that there is no need for nonlawyers to acquire ownership interest in law firms because “firms are allowed to employ nonlawyers and pay them as generous a salary as they please,” because there is no “operational need” for nonlawyers to acquire ownership interests, or because firms “have found ways to provide incentive compensation to their nonlawyer employees that they believe are consistent with the Model Rules,” are, at best, highly uninformed.

Stories

Oliver Jackson, Director of Strategy and Growth, Roberts Jackson: Jackson argues that share ownership serves to align all the company’s Board members, lawyers and nonlawyers alike, and motivates them to assure the success of the company.

Andrew Grech, Group Managing Director, Slater and Gordon: Grech explains that any member of the firm’s staff may become a shareholder and that equity allows the firm to reward its employees for achieving long term results.[39]

Ursula Hogben, Practice Leader and General Counsel, LegalVision: Hogben explains that for LegalVision, the ability to offer shares to all team members — not just lawyers — is crucial because it allows the company to bring in high-quality people and it motivates them to work for the company’s success.

Adrian Powell, Partner, Proelium Law: Powell explains that in partnering with nonlawyer Rich Stephens rather than paying him for work as an employee or a consultant, he will get the best from Stephens. As a partner, Stephens owns the issues and the success and that’s a hugely important motivator.

David Simon, Chair, Triton Global: Simon describes Triton’s employee share ownership program as a very important way to inspire and motivate its employees. Triton is so enthusiastic about its share ownership program, it became a member of the UK’s Employee Ownership Association.

Jenny Beck, Partner, Stephensons Solicitors LLP: Beck explains how having different kinds of people around the partnership table has led to the development of new client services.

Robert Camp, Stephens Scown LLP: Camp explains that Stephens Scown became an ABS as part of its focus on a high level of customer service. More specifically, client service is dependent upon staff engagement, and employee ownership is an important component of staff engagement. Further, in the opinion of the firm’s professional indemnity insurers, having employees more engaged in the business and having a stake in the outcome means that they will take risk more seriously.

Martin Powell, OmniaLegal Limited: Powell explains that OmniaLegal became an ABS in part in order to involve a person with non-legal expertise as an owner. Law firms can benefit greatly from a fresh approach and attitude, Powell argues, and notably from people who have experience with providing high quality customer care. However, Powell continues, you can’t get the best out of those people without offering them management authority as well as the rewards of ownership.

 Notes

[1] New Jersey State Bar Association, Comment Submitted to ABA Commission on Ethics 20/20, 1. See also Illinois State Bar Association, “Issues Paper Regarding Alternative Business Structures: Request for Comments,” 2016, 3, http://www.americanbar.org/content/dam/aba/images/office_president/illinois_state_bar_association_abs.pdf; Mark R. Antonelli, “For Comment: Issues Paper Regarding Alternative Business Structures,” April 27, 2016, 2, http://www.americanbar.org/content/dam/aba/images/office_president/mark_r_antonelli_abs.pdf.

[2] Bruce A. Mann, “Comments on Proposed Amendments of Rules 1.5 and 5.4.”

[3] Bradley Wright, December 30, 2014 (6:28 pm), comment on Mitch Kowalski, “Anti-ABS Arguments Continue to Be Based on Emotion.”

[4] See, for example: Jon L. Pierce and Candace A. Furo, “Employee Ownership: Implications for Management,” Organizational Dynamics, 18 (1990): 32-43; Rhokeun Park, Douglas Kruse and James Sesil, “Does Employee Ownership Enhance Firm Survival?,” in Employee Participation, Firm Performance and Survival, ed. Virginie Perotin and Andrew Robinson (Advances in the Economic Analysis of Participatory and Labor-Managed Firms, v.8) (Bingley, Washington: Emerald Group Publishing Limited, 2004) 3-33; Steven F. Freeman, “Effects of ESOP Adoption and Employee Ownership: Thirty Years of Research and Experience,” Organizational Dynamics Programs Working Paper #07-01, January 4, 2007, http://repository.upenn.edu/cgi/viewcontent.cgi?article=1001&context=od_working_papers.

[5] For a brief description of some of the relevant circumstances, see “When Workers are Owners: The Received Wisdom that Employee Ownership Is a Good Thing Comes with Caveats,” The Economist, August 22, 2015, http://www.economist.com/news/business/21661657-received-wisdom-employee-ownership-good-thing-comes-caveats-when-workers-are; See also E. Han Kim and Paige Ouimet, “Broad-Based Employee Stock Ownership: Motives and Outcomes,” The Journal of Finance, 69 (2014): 1273—1319, https://ssrn.com/abstract=1823745.

[6] National Center for Employee Ownership, “Research on Employee Ownership, Corporate Performance, and Employee Compensation,” http://www.nceo.org/articles/research-employee-ownership-corporate-performance.

[7] National Center for Employee Ownership, “Key Studies on Employee Ownership and Corporate Performance,” accessed August 20, 2015, http://www.nceo.org/articles/studies-employee-ownership-corporate-performance.

[8] National Center for Employee Ownership, “A Conceptual Guide to Employee Ownership for Very Small Businesses,” http://www.nceo.org/articles/employee-ownership-very-small-businesses.

[9] Jerry L. Ripperger, “How Employee Ownership Benefits Executives, Companies, and Employees,” July 21, 2014, http://www.amanet.org/training/articles/How-Employee-Ownership-Benefits-Executives-Companies-and-Employees.aspx.

[10] Joseph Lampe et. al., “Does Employee Ownership Confer Long-Term Resilience? A Follow-Up Study to ‘Model Growth: Do Employee Owned Businesses Provide Sustainable Advantage?’” January 14, 2014, 2, http://www.cassknowledge.com/sites/default/files/article-attachments/Employee-Ownership-Report-January-14-2014.pdf.

[11] Joseph Lampel and Ajay Bhalla, “How Employee-Owned Businesses Deliver Sustainable Performance in the UK?” January 28, 2015, 10, http://www.boeckler.de/pdf/v_2015_01_28_29_lampel_bhalla.pdf.

[12] Lampel et. al., “Does Employee Ownership Confer Long-Term Resilience?” 8.

[13] Ibid.

[14] Roger Steare et. al, “The MoralDNA of Employee-Owned Companies: Ownership, Ethics and Performance,” September 2015, 6, https://www.managers.org.uk/~/media/Files/MoralDNA/The_MoralDNA_of_Employee-Owned_Companies.pdf.

[15] Ibid., 10.

[16] Ibid., 7.

[17] Ibid., 17.

[18] Joseph R. Blasi, Richard B. Freeman, and Douglas Kruse, The Citizen’s Share: Putting Ownership Back into Democracy (New Haven: Yale University Press, 2013), 1-56.

[19] Ibid., 26-27.

[20] Ibid., 46.

[21] Ibid., 52.

[22] Ibid., 49.

[23] Ibid., 33-34.

[24] Ibid., 30.

[25] Ibid., 30-33.

[26] Ibid., 39.

[27] Ibid., 38.

[28] Ibid., 42.

[29] Ibid., 42-43.

[30] Ibid., 57-101.

[31] Ibid., 101-108.

[32] Ibid.

[33] Ibid., 174-177.

[34] Ibid., 177-178.

[35] Ibid., 178-179.

[36] Ibid., 179.

[37] Ibid., 179-181.

[38] Ibid., 191-192.

[39] Grech also explains the firm’s experience with employee ownership in his article with Kristen Morrison, “Slater and Gordon: The Listing Experience,” Georgetown Journal of Legal Ethics 22 (2009): 535-540.

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