A working knowledge of the psychological theory of equity can be a great help to managing partners at this time of the year. Psychology equity was first described by John Adams in 1965, yet very few professional services firms seem to use his well-founded ideas to maximum effect in motivating their partners.
In plain English, psychology equity means fairness. The core idea is that partners – in fact all people – value fair treatment. Fair treatment causes them to be motivated and to strive to achieve equity across all partners and the firm as a whole.
Psychology equity in a partnership is based on the ratio of inputs to outcomes.
Inputs are the contributions made by the partners to the firm and outcomes are their share of the pie. Contributions include hours worked, additional roles played, mentoring and – of course – fees introduced, fees generated and asset management. Most firms espouse a balanced scorecard approach to contribution but, in reality and especially in tough economic times, monetary contributions
make up the most important KPIs. Outcomes are almost entirely money related, that is, the individual’s share of profit.A partner’s share of this pie is based on their base entitlement (regular draw or salary), the number of equity points (or shares or units) they own and any bonus payment.
Equity theory in professional services firms
Three propositions of equity theory apply perfectly in professional services firms
1.Individual partners seek to maximise their outcomes, i.e. share of profit.
2.When a partner feels they are in an inequitable situation, they become distressed. This occurs when a partner believes they are making a greater contribution than others, but not receiving a commensurate outcome in comparison.
3.When this tension reaches a threshold the distressed partner takes one or more of the following courses of action. They seek to increase their share of the profit, or to reduce the reward of those they perceive as under-contributing, or they push for an increase in the contribution of these partners. In other words, they seek to restore equity.
These equity-restoring activities can take destructive forms such as “corridoring”, client hugging and white-anting. Or they can be constructive in pushing the firm and its partners to improve its performance management and reward systems.
July is the season of appeals and low morale
A firm that feels fair at the top is healthier throughout. And a firm where the partners are fighting over the pie, however much they believe these tensions are private, struggles to maximise the discretionary effort of its people all through the ranks.
Every managing partner can learn more from psychology equity to split their pie more fairly. All win.
George Beaton is a director of Beaton Capital and Beaton Research + Consulting, firms dedicated to professional services.