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.
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.
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.
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.