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.

 

 

 

 

Law Firm Recruiting, Lateral Hiring

Most law firms need more talent to implement a transition plan successfully. Prospective recruiting and lateral hiring strategies are often needed. A well-communicated plan with incentives for those who actively recruit has the potential to transform a firm immediately.

The goals of the recruiting process are as follows:

  1. Attract good fit laterals;
  2. Attract good fit new graduates; and
  3. Manage expectations.

To accomplish these goals, an expedited recruiting process and system of rewards are necessary.

Recruiting Process:

Lateral hires with business

Ensuring that the recruiting process is thorough and moves quickly are two key factors. Most good laterals have several opportunities and the firm that can evaluate a transaction quickly and offer a transparent economic deal has an edge.

Firms must efficiently address the following questions when considering a potential lateral hire:

  • 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. Smart laterals will want to see current compensation levels of current partners with similar levels of profitability.

New Lawyers and lateral without business

In some instances, attracting the right lawyers to service the firm’s current clients can match the impact of a lateral hire with business. Often these contributions are overlooked because they happen over time and with less fanfare.  Many firms also only hire when someone leaves, and there is an immediate need. When this occurs, and no suitable replacement is available, law firms are often forced to rely on lesser talented or lesser trained lawyers to service client work. Eventually, a permanent decline in the capability of the firm can result. To guard against these risks we recommend the following:

  • Hiring in advance of need;
  • Accept that not everyone is in the right role and upgrade; and
  • Appropriately delegate at the partner level to create opportunities.

Recruiting in advance of need requires an honest evaluation of the firm’s current staffing capacity and capability.  It also requires a budgeting process that allows for a level of prospective hiring.

Compensation and Incentives:

At the equity partner level, most firms consider recruiting a responsibility of partnership and do not compensate for recruiting successes. The benefits of the right lateral hires and new lawyers are often significant. Additionally, those who recruit another attorney to join the firm are more inclined to also stay with the firm.

For these reasons, we recommend that firms consider compensating for all recruiting contributions at every level.  The value of attracting quality lawyers to the firm include:

  • Profitability contributions;
  • Creating competition to drive lawyer performance;
  • Longevity;
  • Capability increases; and
  • Reputational benefits.

Recognizing that recruiting successes can provide substantial economic and cultural benefits improves the chances of creating a high- performance firm.  Favorable market perceptions regarding the trajectory of the firm are invaluable.

For more insight into developing a strong law firm recruiting process, visit PerformLaw’s Law Firm Best Practices blog: Click here.

Associate Development, Leadership, Law Firms

Attorney development can happen at any age, but starting the process early in a lawyer’s career provides greater opportunity to identify future leaders. The goals of an attorney development system include:

  • Identifying and encouraging model lawyers;
  • Nurturing those best suited to serve client needs;
  • Enabling lawyers to reach their full potential; and
  • Early identification of those who would perform better in another role.

To achieve these goals, we recommend a systematic approach to attorney development built on setting expectations, capacity planning, compensation, and progress measurement. More specifically, developing the best lawyers requires several policies, systems, and guidelines that include:

  • Hiring criteria;
  • Model associate guidelines and expectations;
  • Evaluation and or feedback process;
  • Practice planning process;
  • Client and senior lawyer staffing alignment;
  • Compensation and Incentives for billable contributions;
  • Compensation and incentives for supervision and training;
  • Compensation and incentives for targeted recruiting;
  • Origination and origination sharing policies; and
  • A transition compensation structure.

At the attorney level, effective capacity planning requires a balanced approach to time investments. 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 strategic approach to staffing (aligning client work with training needs) although challenging, can materially speed up attorney development. Client collaboration is necessary, and creating incentives for using junior staffing to can make strategic staffing possible.

A quality attorney development system that includes the essential elements, systems and processes enhances a firm’s ability to operate more profitably and can ready lawyers for future leadership and management positions.

To read more about developing an effective associate development program for your law firm, click here.