Patterns of Profit‐sharing in Professional Firms

Abstract

In recent years the traditional method of distributing profits on the basis of seniority in professional firms has come under attack because of its poor incentive properties. Using data on large law firms, this paper examines the extent to which new forms of profit‐sharing based on individual performance have been introduced and whether these are associated with the more systematic control of the core of professional staff and more ‘business‐like’ methods of managing, as has been argued in the American literature. The results suggest profit‐sharing innovations are limited in scope and only loosely associated with wider changes in partnership management. Explanations for the persistence of traditional methods of sharing are developed from the data and it is argued that existing accounts present an over‐rational model of change in which too much emphasis has been placed on the importance of individual incentives to achieve performance. Profit‐sharing policies are driven by concerns to sustain cooperation and professional values about the appropriate way to distribute rewards.