law-firm-compensation-small-mid-sized-firmsThere are a lot of small and mid-sized law firms that rely on relatively few clients.  These client relationships are typically consolidated among an even smaller subset of top performing lawyers. It is not unusual for us to  encounter a firm of twenty lawyers serving less than 20 or 30 clients that are managed by three or four partners. We have also worked with firms of more than 50 lawyers working for 6 or 7 groups of clients controlled by as many partners. In these instances, the loss of a client or a partner is potentially a destabilizing event.

Compensation Challenges

Compensation in these environments can present real challenges. Many of these firms, despite their longevity and history, are one or two client losses away from instability. This insecurity can permeate the thinking of law firm partners, causing them to have a short-term approach to organizational development and compensation.

Dominant Instincts

The dominant instincts present in many of the top performers in these firms include the following:

  • Business development is a priority;
  • Business development carries the highest reward;
  • Personal billable contributions are important but secondary to attracting new work;
  • Attorneys must maximize compensation while they have the clients;
  • Disruptions in client relationships can cause more stress than the legal work;
  • Others don’t appreciate the effort it takes to develop, keep and grow a client base;
  • As attorneys, we feel threatened all the time; and
  • With so many incomes reliant on relatively few books of business, it is difficult to relax.

Top Performer Power

As a means of survival, a firm’s culture often bends around the immediate needs of a small but powerful group. As a result, unintended consequences can occur. For example, top performers may appreciate that another partner is succeeding, and even might take less short-term compensation to support their growth, but also might not like the potential shift in the future balance of power.

Small entrepreneurial firms that were created by a few high energy producers can pay better than market compensation for many years. By staying lean and making only long-term investments that support the practices of the top performers, these firms can generate high profits. Managed properly, the partners in these firms can amass a nice retirement, and some even become wealthy. In many ways, partners in these firms accomplished what they set out to do when they took the risk of starting the firm.

Law Firm Transition Process

At some point, however, small firm partners reach retirement age or their practice starts to diminish and many begin to focus on transitioning the firm or creating a more viable institution. Because of their immediate profit generation focus, these firms generally do not have the infrastructure or the necessary junior partners who are capable of perpetuating the firm.  And when there is a transition path, splitting the origination portion of the compensation pool becomes a challenge. If the compensations issues are not addressed, any attempt to transition or transform a firm may be derailed.

Forward-thinking partners start the transition or transformation processes well in advance of retirement or foreseeable client losses. A transformation process starts when the current partners who make up the power structure of the firm desire to change or transform the firm’s strategic vision and operating model. Since most clients buy first from lawyers and then from firms, it is easy to understand why most  firms find it difficult to transform from a collection of individuals to a branded offering . Most successful small and mid-sized firms focus compensation on keeping originators happy first, followed by high producing lawyers and those with unique skills sets, with everyone else falling to the third tier.

Stability Factors

Organizational development that includes advanced compensation concepts comes from stability.  This requires time and means that high producers must embrace the transformation. A firm can find itself in between what is good for current profits and what is best for the long term. Highly productive partners (enabling partners) are called on to invest more income into a strategic initiative than under-performing or new partners. As the new partners or previously under-performing partners become more successful and demand more in the compensation formula, the enabling partners’ incomes can decline, and their prior strategic investments of current income are potentially lost forever.

Analysis and Tools

One way to deal with this is to use a rolling average of results in the compensation formula. For example, a firm that uses a 3-year rolling average of results can allow productive partners to participate in the future uptick in earnings resulting from a successful strategic plan implementation. Some of our clients refer to this as a “slow up/slow down” approach. The slow up/slow down approach is not without issues. Declining partners can “hide” in the formula for a couple of years. While these declining partners deferred income in previous years, it often creates tension when nonperforming partners draw a disproportionate share of current year earnings.

Recognition of where a firm is in their life cycle is also essential. A compensation plan for a young firm that has not fully passed through their start-up phase is likely to differ from a firm that is approaching the transition stage. In our experience, there are several best practices that support stability at all stages, but variations of the application of these best practices is often required. For example, moving from a one-year results approach to a rolling two or three-year results approach.  Another example includes the level of profits apportioned to objective, equity, and subjective pools.

Putting It All Together

Properly designing and administering small and mid-sized law firm compensation systems requires a process-oriented approach, experience, analysis and tools, and an understanding of the factors that contribute to stability. A sense of the firm’s economic, political, and market factors contributes to the development of an effective compensation plan. The capability, capacity and commitment of the firm’s revenue-generating staff to achieve strategic goals and produce a market competitive profit are equally important.

Read more about developing a more effective compensation system at your law firm.

 

CLICK HERE

 

law firm, transition planning, succession plans, retirementWith an estimated 65% of equity partners approaching retirement age over the next decade, most attorneys currently working in a law firm will be affected by the challenge of transition planning. While this statistic is notable, most law firms pay little attention to partners’ plans for retirement.

Without careful planning, the investment and hard work you have put into your firm could end up benefiting your competitors. In this post, we review 10 key steps to prevent this negative possibility by developing a transition plan that works.

 

1. Prepare work-life timelines for all attorneys who are within 10 years of retirement age.

Work-life timelines provide a planning horizon for a firm. Law firms should prepare work-life timelines for all attorneys who are within ten years of retirement age. It is our experience that most attorneys seriously consider retirement between age 68 and 70.

Preparing work-life timelines in advance forces aging partners to consider their successors. Introducing replacement lawyers into a client account at least three years before a partner’s retirement can significantly improve client
retention probability.

Most small and mid-sized firms have a non-interventionist policy regarding partner and client relationship. It’s hard to insert a successor lawyer into a client account without the full support of the retiring partner and key members the account team. Since we have found firms to achieve more success with incentives rather than penalties, we recommend approaches that encourage retiring partner cooperation.

2. Be strategic with staffing.

Smart competitors will seize any possible opening in a client relationship. A firm that is ready for these challenges has a definite advantage. Strategic client staffing ensures that younger lawyers build the essential relationships among the
firm’s current clients, which will make competitive challenges more difficult.

This staffing approach seeks to align case assignments with skill development or client transition objectives. For example, assigning a senior associate who needs trial experience to cases that are going to trial, or working a successor lawyer into a client’s most important matters.

Senior partners should evaluate their client staffing assignments at least three years before any planned transition. If no existing resources are available, we recommend a targeted recruiting process.

 

3. Focus on attorney development.

When a law firm focuses on developing its attorneys, it can better determine who is best suited to serve a client’s needs and identify those would perform better in another role. In addition to billable expectations, developing a quality lawyer
requires time commitments in the following areas:

• Client service fundamentals;
• Personal development;
• Marketing competence;
• Training and mentoring contributions;
• Professional profile and peer recognition;
• Skill development;
• Leverage and supervision;
• Recruiting; and
• Basic law firm economics.

A quality attorney development system enhances a firm’s ability to operate more profitability and can also ready lawyers for future leadership and management positions.

4. Develop an efficient recruiting process.

Most good laterals have several opportunities. The firm that can evaluate a candidate quickly and offer a transparent economic deal has an edge.

When considering potential lateral hires, firms should be able to efficiently address questions involving:
• Opportunity costs and benefits;
• Impact on revenue and cost and profit per hour;
• Compensation, and equity slotting if appropriate; and
• Impact on cash flow and current year earnings.

Creating a streamlined process that can simulate compensation post admission (equity is essential) is ideal. Smart laterals want to see current compensation levels of current partners with similar levels of profitability. Having all data readily available will help a law firm to secure the best candidates.

5. Ensure attorney compensation is market competitive

In addition to promoting profitable behaviors, a market sensitive compensation plan can produce a very competitive firm, one that is ready to support a transition process for their most successful attorneys.

A data-driven compensation plan that pays at competitive market levels can reconcile the perceived and actual value of a lawyer’s economic contributions. There is no better gauge of value than what a competent competitor will pay. Accomplishing this level of acceptance will remove a large obstacle inherent in the practice transition process.

With a market-based compensation system, a transition compensation feature, and a process for the orderly transition of ownership interests, firms can will significantly increase their ability to pass from one generation to the next.

6. Be objective with buyout pay decisions

Many personal reasons motivate people to continue working rather than retiring. One significant factor for this is the lack of of remuneration for a senior partner’s income generating asset. Removing the economic disincentives for senior partner retirements increases the chances of a successful transition.

Using an objective process-oriented approach to arrive at a buyout price and structure removes much of the emotion from the negotiation. Firms that have the data to complete the recommended analyses can set expectations early in the
process and create a model for future buyouts.

The keys to setting transition compensation include an objective process oriented approach; setting expectations early in the process; and a model to ensure consistency.

7. Be disciplined in policy development and implementation.

If law firms wish to ensure client business continuity, a disciplined approach to policy development and implementation is necessary. Policy development is essential for promoting consistency and building trust among partners, associates and staff. Firms should identify areas that may impact a smooth retirement process and create policies to ensure
the provisions accomplish the firm’s objectives. Policies can cover areas such as :
• Associate progression criteria
• Partnership admission criteria
• Mandatory retirement with/ without a transition
• Transition period incentives and requirements
• Origination sharing policy
• Basis for transferring equity between partners
• New partner and lateral partner equity policy
• Capital requirements tied to ownership
• A valuation approach to firm assets
• Post retirement compensation

8. Understand the costs associated with transition planning.

A law firm transition plan can span over several years, requiring substantial investments from the remaining partners. Quantifying the potential impact on the firm’s profits and, ultimately, the income of the partners, informs plan development.

For example what are the costs associated with transition compensation? And how will remaining partners be affected? What are the projected profits of particular client work post-transition? What effects will potential changes in staffing have on client work post-transition?

Healthy firms that have the right information can expedite the process and answer these questions. Understanding these costs and adequately preparing for contingencies will add credibility to a firm’s practice transition process.

9. Know the firm’s actual value.

As any other business, a law firm can have market value to the remaining partners. Determining its actual value can help a firm to make informed decisions involving transition planning. Valuing a law firm can seem complicated, but mainly, it comes down to three elements:

  • Book Value of Equity
  • Platform Value (going concern value)
  • Value of any transitioned business

Book Value of Equity is a simple calculation the includes subtracting total liabilities from total assets. Determining platform value (going concern value) requires a careful analysis and comparison with the benefits and costs of starting a new firm. Finally, when paying retiring partners for the clients that a firm retains, firms should have individual agreements between retiring partners and those benefiting from the transitioned client relationships.

10. Continuously build the firm’s going concern value

A firm’s going-concern value includes is the value of the the firm’s various systems, processes, procedures, trained staff, reputation and any unique distinctions. Building going concern value requires modernizing the firm’s business processes to the point that they become a platform. This platform can transcend the reputation and referral network of the senior partners.

To build going concern value, firms should adopt cloud-based technologies and software applications to provide needed structure. Such applications include; Client case management software;Cloud-based email and Office; Automated Forms and Electronic Signature Application; Integrated Document Management with Secure
Email Transfer; CRM Software; Marketing Automation Software.

This technology will promote efficiency, provide a competitive advantage and bind clients to the firm.

 

law firm, transition planning, succession plans, retirementCLICK HERE to Download “10 Key Steps to Law Firm Transition Planning” as an eBook

 

Law Firm Best PracticesCLICK HERE to Receive More Information About PerformLaw’s Transition Planning Services and to See if We Can Help Your Law Firm

The topic of transition planning is not the most enjoyable or easy topic around law firms. But it is critical, especially with a significant number of equity partners set to retire over the next decade. So why is transition planning so difficult for law firms?

The list of challenges to transition planning is a long one. Our eBook “Is It Possible to Transition a Small Law Firm” highlights 12 of the most significant ones we have found in working with small and mid-sized law firms. Some of these obstacles include:

  • Compensation Issues
  • Poor Firm Profitability
  • Inadequate Time
  • Greed and Selfishness
  • Client Reluctance
  • + 8 more obstacles

The only way to survive these challenges is to prepare for them and begin to address them now.  This eBook describes some of these challenges and outlines ways to mange and overcome them.  Of most importance, the book calls out to law firms to start the transition planning process early, to start it NOW.

Download the eBook Here:

Law Firm Transition PLanningWho is PerformLaw?

PerformLaw is a management consultancy based in New Orleans, LA. PeformLaw regularly assists law firm clients with transition planning, marketing and business development, contracted business services, compensation, lateral vetting, performance and process improvements,  and practice planning. For a complete list of services and helpful resources, please visit performlaw.com.

 

PerformLaw law firm consultant

Law Firm Associate Development ProgramWhile the practice of law continues to undergo many changes, one thing will not change. Law firms will always need energy, experience and skill to survive. Smart firms understand that developing this type of firm starts with actually hiring the right attorneys.  And it continues with effective training, evaluation programs and compensation. Law firms with strong associate development programs will develop and retain their leaders and will be better positioned to handle future challenges.

 

Establishing a great associate development program involves a committed effort, the right systems and the right people. The infographic below lays out the necessary components of an effective associate development program. The links to the articles below can help law firms to put this plan into action.

Besides experience and skill, associate, staff, and even income partner performance are a reflection of the law firm’s management effectiveness. Attorney and staff performance are based on a variety of legal and non-legal activities, which can be described as behaviors that require motivation.  Such motivation can be categorized as extrinsic or intrinsic, both of which should be fostered by the firm’s leadership style.

While incentives like compensation and bonuses are obvious management tools to drive extrinsic motivation, it requires a more thoughtful approach to support intrinsic motivation among the members of a legal organization. Intrinsic rewards are positive emotions triggered by the activity itself, in other words, behavior for the enjoyment of the activity. Ultimately, these rewards satisfy needs for self-esteem and self-actualization. Since intrinsic motivation is not controlled by external factors but the self, it is a lot more powerful.

Practicing law, researching legal documents, managing the office, running accounting software, etc. are all behaviors that require motivation. Assuming an individual has the necessary skill set to perform a job, the level of motivation determines the performance. Since intrinsic motivation cannot be controlled externally, it is important to combine supportive workplace conditions with a suitable leadership style. Focusing especially on law firm staff and young attorneys we propose the following management principles to establish a work environment supportive of intrinsic motivation:

  • Competence – an individual’s awareness of their capabilities
  • Value – a sense of meaningfulness
  • Empowerment – autonomy over work performed
  • Personalization – individualized work approach
  • Team orientation – strengthening relationships

By integrating these principles into attorney and staff management, the firm leadership establishes a work environment that fosters intrinsic motivation.

law firm compensation plan, bonus, subjective, objectiveIn determining attorney compensation,  bonus considerations can be either subjective or objective in nature.

 

Subjective bonuses should be considered when intangible value is created or the achievement is not economically measurable. Typical areas of work that fall under this bonus category are:

  • Quality of professional work
  • Work ethic
  • Client relations and service
  • Personal development
  • Business development competence
  • Professional recognition
  • Training contributions
  • Adding to the reputation of the firm

Such awards are not tied to a specific economic contribution but encourage continuous development among lawyers. The value is seen in increased capability and value to clients as well as personal growth. For this bonus category, it is important to adjust expectations towards long-term rather than short-term benefits.

Objective bonuses are defined as rewards for meeting or exceeding levels of billable hours, billings, collections or profitability. Unlike subjective awards this bonus type requires consistency in its methodology to incent attorneys. Certain measurements like profitability bonuses with rather long-term benefits are harder to calculate and therefore require a thorough explanation to the team members.

The use of profitability models requires a certain level of transparency and information sharing concerning cost structures. The benefits of sharing profitability information include:

  • Helps manage expectations;
  • Can pressure firm management to operate efficiently;
  • Helps ensure that compensation is competitive;
  • Incents improved billing and collection realization, cost management and revenue maximization (rates and other billing approaches);
  • Improved business acumen and maturity at all levels;
  • Supports building a profitable practice;
  • Better prepare lawyers for eventual partnership; and
  • Mitigates the tendency to focus on billable hours to the exclusion of all else.

Through comprehensive guidelines and accountable management, a firm can ensure that lawyers do not feel unfairly treated based on available profitability information.

In some situations, firms may prefer alternative compensation plans that differ from typical salary and bonus approach. Typically, these plans include fee sharing, profit sharing, hourly compensation and completion/task- based compensation. In any case, compensation policies and pay plans should be based on a comprehensive approach that includes written guidelines, rules, context and philosophy, and transparency, while anticipating strategic needs of firm.


READ OTHER RECENT ARTICLES ABOUT COMPENSATION SYSTEMS THAT WORK ON OUR “BEST PRACTICES” BLOG: 

Bonus_win_law_firm_Communication.jpg Determining Attorney Bonuses: Subjective and Objective Considerations
Roadmap_Compensation_Pay_lawyers.jpg Well Developed Compensation Policies and Pay Plans for Lawyers
Set_Salary_Bonus.jpg Setting and Adjusting Base Salaries

 

Data Driven Compensation Law FirmCompensation issues are a main reason that clients and prospective clients contact us. Our clients view business generation as a means of survival and want to reward heavily for it.  The partners who make up our client law firms understand the transient nature of client relationships and want to realize a high return for their efforts during periods of success. Many partners took considerable risks to create new opportunities and expect fair compensation to parallel their success.

Understanding these dynamics,  the most successful law firms focus on creating an environment where driven attorneys can thrive and see a direct benefit from their efforts. Compensation is a significant determinant in holding a successful firm together. Employing a system that encourages profitable behaviors and pays based on those contributions is essential. It is not that hard, but many just can’t get this part right.

We base our preference for a contributed profit approach to compensation on the following factors:

  • Heavily incents the right behaviors;
  • Enables transparency;
  • Promotes accountability and empowerment; and
  • Is field tested; our most successful firms have thrived and grown using these systems.

Data driven systems help our clients resist unconsciously falling victim to all of the weak arguments that enable unprofitable behaviors. We also understand that it is hard to address partner performance issues.  But pretending they do not exist, hiding them with a non-existent or inadequate measurement systems, or simply hoping things will improve only leads to larger failures.

Measuring legal client profitability for the last 15 years has taught us many valuable lessons that could take up several pages, but here is an example of the power of a single report set.

Practice Profitability With matter Level Detail

 

This example includes a practice profitability report with matter level detail. Initially, we can review profitability at the timekeeper level. Starting with actual hours billed (not billable hours in WIP) and the amount charged to the client for these hours (revenue credit) we can quickly determine an average rate for each timekeeper.

Nothing new here, but averages can be misleading.  We recommend looking to the matter profitability to ensure that the average rate is a good measure of a timekeeper’s performance. For example, reviewing Client 1’s result indicates that P2’s average rate is below the mean of all client matters for all clients.

Further, Client 1 accounts for only 20% of P2’s total revenue, which makes a review of additional clients and matters necessary. In this instance, assume that we are trying to determine if P2’s average rate has any predictive value or is it the result of a unique client or file result that is not likely to repeat. This same process can provide the same information for all timekeepers supporting P2’s practice.

Moving past the revenue metrics, we move to timekeeper payroll cost, which is a constant throughout all clients and matters. Peer comparisons of payroll costs and benefits can provide insight into timekeeper pay levels and production efficiency. In the same way, peer comparisons of overhead costs can provide insights into cost efficiency.   Collectively, these data form a basis for analyzing pricing and staffing mix appropriateness.

Quickly reviewing staffing and overhead costs, staffing mix, rate realization, and billing rates are all possible with these data. Presenting AR Write off information at the matter level can reveal collection inconsistencies among timekeepers and matters. Enabling partners to quickly understand the impact of production, billing rate, write-downs, staffing mix cost and overhead costs will result in a more financially competent firm.

Unprofitable or struggling partners who have some business can use these data to understand and improve results. As most lawyers are afraid of upsetting a client relationship, the resist making necessary changes to improve profitability. Without compensation consequences, they have no real incentive to improve their results. I use the work consequences deliberately because struggling partners likely need better results just to stay at their existing compensation levels.

High integrity data-driven systems make all information available to all partners, which fosters transparency. Trained partners using quality data allow firms to work with truths rather than debilitating perceptions.

For example, partners often believe differently about the effect of cost on large books of business. We are also frequently asked if the partners with the most business should always receive the most compensation. Profit driven systems are not concerned with regulating how a particular partner or group ethically creates their profits. All profit dollars are valued the same in these systems.

A good origination sharing policy also facilitates collaboration. A system that allows for sharing at the matter level is ideal for partners who collaborate on a file by file basis. See the following report sample and please refer to our law firm best practice blog for more information regarding origination sharing.

Data Driven Law Firm Compensation
Notice the Originating attorney percentage in the top right of the report and also see the allocations of origination profits in the four columns to the right of Client Net Income column. In this example, the originating partner has decided to share 10% of the profit on this client and matter with another attorney.

Compensation systems built on profitability raise the level of partner consciousness in the following areas:

  • Production
  • Billing Rates and Pricing
  • Realization
  • Payroll Costs
  • Overhead Costs
  • Staffing mix
  • Write-Offs

When every partner has a working knowledge of the impact of each of these elements on profitability, a high-performance culture can result.

For more information on implementing Data Driven Compensation Systems, please see our law firm best practice blog (CLICK HERE) and see our resources page (CLICK HERE) for client profitability seminar materials. See also our post on rewarding for training and leveraging (CLICK HERE).

 

Law_Firm_Marketing_Planning_InfograpicMarketing is necessary for the longevity of a legal practice. A structured marketing plan will steer lawyers in the right direction of targeted clients and will make sure any time and money invested in marketing is well spent.

In developing the actual plan, lawyers must consider the impact of various factors such as:  the firm’s priorities regarding workload increases, client types and billing arrangements; funding and marketing support availability; and the timeframe for the implementation of the marketing plan.

 Based on these considerations, we suggest a planning workflow consisting of five steps:

  1. Goal definition,
  2. Status analysis,
  3. Market segmentation & target client definition,
  4. Activity planning and
  5. Implementation

Having marketing goals that are specific and measurable is key to developing a worthwhile marketing plan. Not only does precise goal definition give lawyers a better understanding of the level of engagement needed, but it also helps them to analyze and improve the actual performance of their marketing plan.

A status analysis in the form of a SWOT analysis creates a clear picture of a lawyer’s strengths and weaknesses concerning their current marketability. Additionally, it allows for the identification of marketing and business opportunities, as well as threats to business growth. The next step, segmentation and target client definition, serves as the foundation of the activity plan.  In defining their core practice services and characterizing their ideal clients based on demographic, geographic, psychographic and behavioral traits, lawyers can create a more effective platform for selecting the best marketing tactics for a target audience.

The objective of the activity planning and implementation stages is to develop an activity portfolio that delivers the most effective marketing message to the target audience defined in the previous step. For the purpose of this exercise, we divide legal marketing activities into three categories:

  • Relationship building activities (organizational involvement/memberships, client and referral source entertainment)
  • Content development and delivery activities (content marketing (blogging, social media, newsletter), speaking engagements, publishing)
  • Contact database management (app- or software-based contact management system)

After a weekly or monthly split of the marketing hours between these categories is determined, the implementation can be guided by a marketing & budget calendar to manage the frequency, cost and required support for the activities.

law firm, base salary, lawyer, compensation

Setting and adjusting base salaries requires law firms to consider many factors. While initial base salaries for lawyers are often driven by external market factors, we encourage law firms to consider qualitative factors such as work quality, work ethic, and client service when determining the capability and progression of their lawyers.

To ensure that a law firm develops a market-competitive and fair compensation system that rewards the firm’s valued behaviors, we recommend a balanced approach. Within this approach, we advise firms to evaluate base salaries separate from objective rewards for economic performance. Economic contributions would be considered as one criterion among a range of qualitative criteria that are based on the firm’s culture, experience, strategic needs, client needs and financial model.

Each lawyer receives a score on a factor-based rating table. Since the importance of each factor will vary from firm to firm, it is important for each firm to clearly communicate performance expectation guidelines. In addition to setting base salary, firms can also use this rating assessment, to determine bonuses for economic and other specific qualitative contributions.

When setting compensation for more senior lawyers (8+ years), law firms should also apply profitability methods.

While there is no magic formula for setting and adjusting base salary, effective systems will encourage and reward the behaviors that ultimately contribute to the long-term success of a law firm.


READ OUR DETAILED POST “Setting and Adjusting Base Salaries“, which includes helpful tables and graphics, on our Law Firm Best Practices blog.

 

compensation, attorney, law firm

When should attorneys receive a bonus? And when does a salary increase make more sense?  From our view, bonus payments represent compensation for contributions that are not necessarily repeatable.  For example, an attorney worked on a large case and generated significant income for the firm. Unless the attorney became more marketable in the process, the current year financial results might not repeat. Without producing the same results in the future, the higher base salary would be difficult to cover.

If law firms can align salaries with such factors as a growth in marketable skills, the ability to serve clients, and a more diverse practice,  they can remove some of the risk associated with paying higher base salaries.  For example, a lawyer who adds a new practice area to her market offerings can increase her ability to remain profitable, making her higher base salary less risky.

Attorneys can experience higher percentage increases in base salaries early in their careers. These increases are primarily a result from economic improvements relating to increases in billing realization, an ability to handle more workload, and less frequently, billing rate increases.  As mentioned earlier, adding skills can lead to a higher value to clients and can help justify higher base salaries.  As attorneys progress through different levels of expertise, (which typically include novice, intermediate, advanced, and expert), they increase their ability to generate more income.

EXISTING MARKET FACTORS

However, prevailing market factors can limit an attorney’s capacity to create the income and resulting profit needed to support base salary increases. Some of these factors include:

  • Clients rarely agree to an annual increasing rate scale commensurate with experience;
  • Lawyers can struggle with adding noticeable increases in marketable skills sets;
  • The provided legal services can have limited value to clients;
  • The supply of available lawyers;
  • New technology;
  • Increased litigation management and client scrutiny; and
  • Alternatives to providing traditional legal services.

Since these existing market factors can often constrain base salaries, additional compensation becomes more reliant on economic contributions.

BONUS CONSIDERATIONS

Law firms can minimize market limitations and risks with a bonus approach. Bonuses usually rely on the accomplishment of certain factors such as billable hour targets or profitability contributions. The at-risk component of compensation typically increases as an attorney matures, and at the equity member level, all compensation is at risk. Again, well-run firms can offer certainty in the process for determining compensation, but the results depend on profits.

Consider the following chart of a 10-year equity membership track that portrays a typical relationship between compensation, economic contributions, subjective contributions, and experience level.  All law firms compensate differently, but the basic relationship between a new lawyer’s compensation (which is largely guaranteed) and an equity member’s compensation (none of which is really guaranteed) is as depicted. Equity members are paid from profits. If a firm has no profits, there is no income to allocate.

attorney compensation, law firm, infographic

The economic and subjective contributions include the most common elements we encounter. Many firms, however, do not formally recognize training and supervision or billing management as discrete economic contributions. Some firms recognize training contributions subjectively, and billing management can earn some credit in an origination sharing system.

We recommend that our clients create a similar guideline for their firms and share it with all of the lawyers. We also recommend for firms to  explain the compensation and progression process to their lawyers, provide them with the necessary profitability information, and help them learn the  business of law.  Excellent tools that support a process-oriented approach include practice plans, mentoring programs, and ad hoc feedback.

RESISTANCE

When we implement a structured approach to compensation and progression, we sometimes encounter resistance from some of the lawyers. At the partner level things such as confidentiality, competitive fears, and concerns relating to an irresponsible use of the firm’s important financial data is not uncommon. We appreciate these concerns, but firms who struggle to share information run the risk of fomenting a back channel information system (rumor mill) that disseminates inaccurate information.

At the non-owner level, providing more transparency, guidelines, financial information, and profitability reporting can result in a level of accountability that can make some uncomfortable and even intimidated. If a firm has trust issues, the process may initially seem contrived. It is our experience, however, that as lawyers progress in a transparent environment, they either become comfortable and thrive or they decide to move on. Lawyers who are fortunate enough to work for a firm that shares information about the underlying economics of the practice can learn to practice more successfully.