Ensuring Your Lawyer Pay Plans Work During This Recession

by Joel A. Rose
 

Few lawyer managers would claim that setting compensation for partners and associates is a simple task - especially during this time of economic uncertainty. The easy answer would be to increase the compensation of the most productive lawyers and decrease it for the least productive, based on the firm's definition of the term "productive." However, there is a more thoughtful and prudent solution -- assess your law firm's culture, focus on what's important to the firm at the present time, and proceed in a manner that doesn't tear the firm apart because you've made long-term compensation decisions simply to improve short-term economics.

DOES YOUR FIRM REALLY NEED TO TINKER WITH ITS LAWYER COMPENSATION PLAN?

Not necessarily, especially if you revised the plan after the start of the economic downturn. If you haven't tried to address and/or correct economic concerns by making changes to how you compensate lawyers, switching to an alternative system, dropping or adding factors, or increasing/decreasing emphasis of certain factors - you may want to do so now.

Many law firms have to make changes to grapple with the following outlined conditions:

  • Decline in legal work available to all or certain partners in your firm
  • Reduced client referrals
  • Loss of key attorneys
  • Lack or loss of expertise/reputation in hot or expanding practice areas
  • Undesirable mix of timekeepers/inability of staff to work economically or efficiently
  • Inability to get work out on a timely basis
  • Ineffective business development/client relations
  • Technology/equipment shortcomings
  • Costs that are increasing at a faster pace than revenue

ASSESSING YOUR FIRM'S CURRENT APPROACH

Your answers to the following eleven questions can be used to form the basis for constructive discussions about lawyer compensation.

1. Does your compensation system help the firm address its current needs and priorities? It is key to decide whether your existing compensation system is or is not rewarding and thereby encouraging and motivating your lawyers to do what needs to be done to improve your firm's economics.

CONSIDER: How does your lawyer compensation plan reward performance, loyalty, and seniority? Does it create direction for the firm and motivate partners? Does it emphasize business production, new business, hours, management, and delegation? Remember: If you want the firm to move in a different direction, you will have to compensate lawyers accordingly.

2. Have partners accepted the firm's compensation system, and is it accomplishing its objectives? Be cautious, tensions develop when [the] direction is unclear or only gets lip service.

CONSIDER: How does your lawyer compensation plan address the big tension areas, such as origination and delegation versus working hours; joint business development versus individual rainmaking, and consequential non-billable time versus time devoted to producing client work?

3. Has your firm been successful in overcoming the common impediments to a successful partner compensation system? These include:

  1. Emphasizing one or more factors, usually hours, billing and revenue from personal production, to the exclusion of other factors, i.e., origination of new business from existing or potential clients, cross-selling the firm’s expertise in a different practice area. Considering less than quantifiable criteria.
  2. Changing the compensation criteria every year. Other related problems are criteria that are unclear and annual changes in the management of the compensation committee.
  3. Letting partners "play the numbers" instead of doing what is best for the law firm.
  4. Failing to recognize the importance of time spent on non-billable efforts.
  5. Overprotecting clients or being unwilling to delegate work to the most appropriate or cost-effective attorney.

CONSIDER: Partners should thoroughly discuss all the factors that will go into the compensation plan, and accept the final decisions of the selection process even if they disagree with certain aspects.

4. Has your firm set "reasonable" objectives, targets, and quotas of acceptable performance for partners? These should allow them to be compensated at a stated level for fee-generating activities, in terms of dollars and hours produced. Non-fee-generating activities - such as firm management, marketing, training and supervision of associates, management or practice areas, and so on - should be considered as well. In most successful firms, the criteria generally include:

  1. Business origination/cross-selling to existing clients.
  2. Retention of the business of valued, productive clients.
  3. Seniority, legal abilities, reputation, diligence, timeliness, and quality of work.
  4. Efforts made to market the firm, and successes achieved.
  5. Collection of revenue from billable hours.
  6. Community and bar activities.
  7. Mentoring and training younger members of the firm.
  8. Firm loyalty and compliance with firm policies.
  9. Contributions to firm management and administrative duties.
  10. Pro bono time spent pursuant to and in accordance with firm policy.
  11. Sacrificing oneself for the sake of a client or the betterment of the firm within the period of the evaluation.
  12. Particular accomplishments within the period of the evaluation.

5. Does your law firm have an effective policy to deal with partners whose performance is below par?

CONSIDER: Have partners complete a business plan you will monitor and that will serve as one component of the compensation criteria.

6. If your firm uses a formula approach to compensation, have the following issues been resolved?

  1. How long origination credit should continue and when to transfer it from one partner to another.
  2. If you should share client credits among attorneys who obtained the work and those responsible for completing it.
  3. If your firm adheres to a "rough justice" compensation system, have you ascertained:
  4. Who will determine how much partners receive?
  5. Whether decision makers have all the resources they need to make informed judgments?
  6. Whether appeal provisions for aggrieved partners are in place and perceived as appropriate?

8. Does your firm's compensation plan provide adequate incentives and rewards for associates who originate business from existing and potential clients?

9. Has the firm addressed crucial management/compensation issues related to:

  1. The scope of your managing partner or management committee's responsibility and accountability for other attorneys serving in a management role?
  2. Which decisions to reserve for partners?
  3. The level of independent judgment your managing partner/management committee can and should exercise?

10. To what extent should partners responsible for coordinating practice areas and for firm management interact and be held accountable for:

  1. Practice-area profitability?
  2. The redirection of firm efforts into certain practice areas?
  3. The creation of incentives for training, business development, production of legal work, client retention, quality assurance of work product, review of work product, systematizing practice areas, and so on?

11. Has your firm properly budgeted time for attorneys who take on the role of managing partner, participate in executive or administrative committees, or coordinate a practice area? Consider, too, how this "committee time" relates to an attorney's expected productivity time when compensation decisions are made.

AVOID THE EXTREMES OF GIVING UP ON YOUR COMPENSATION PLAN TOO QUICKLY OR STAYING WITH ONE TOO LONG

Remember, even the best plan won't solve every problem. It may be time to consider other simple management practices to help address and correct a host of economics issues. The following are suggestions made by the author:

1. Improve education and training in business development/client relationship practices as well as timekeeping, billing, and collection practices.

2. Turn to lateral hires in areas of need, reduce hiring, speed reviews, and terminate under-performing junior lawyers.

3. Use more contract associates or delegate to legal assistants.

4. Consider changing the firm's partnership admissions practices.

5. Take steps to terminate or force the withdrawal/retirement or unproductive and senior partners.

6. Examine the impact of continued increases or decreases in support staff and/or support services.

When considering various types of compensation plans, partners are cautioned that the lawyer compensation practices of other firms may not be satisfactory for their own offices. The fact that certain plans are in use does not indicate that they may be suitable elsewhere or even that they work well for the offices that use them.

Ensuring Your Lawyer Pay Plans Work During This Recession

Few lawyer managers would claim that setting compensation for partners and associates is a simple task - especially during this time of economic uncertainty. The easy answer would be to increase the compensation of the most productive lawyers and decrease it for the least productive, based on the firm's definition of the term "productive." However, there is a more thoughtful and prudent solution -- assess your law firm's culture, focus on what's important to the firm at the present time, and proceed in a manner that doesn't tear the firm apart because you've made long-term compensation decisions simply to improve short-term economics.

DOES YOUR FIRM REALLY NEED TO TINKER WITH ITS LAWYER COMPENSATION PLAN?

Not necessarily, especially if you revised the plan after the start of the economic downturn. If you haven't tried to address and/or correct economic concerns by making changes to how you compensate lawyers, switching to an alternative system, dropping or adding factors, or increasing/decreasing emphasis of certain factors - you may want to do so now.

Many law firms have to make changes to grapple with the following outlined conditions:

  • Decline in legal work available to all or certain partners in your firm
  • Reduced client referrals
  • Loss of key attorneys
  • Lack or loss of expertise/reputation in hot or expanding practice areas
  • Undesirable mix of timekeepers/inability of staff to work economically or efficiently
  • Inability to get work out on a timely basis
  • Ineffective business development/client relations
  • Technology/equipment shortcomings
  • Costs that are increasing at a faster pace than revenue

ASSESSING YOUR FIRM'S CURRENT APPROACH

Your answers to the following eleven questions can be used to form the basis for constructive discussions about lawyer compensation.

1. Does your compensation system help the firm address its current needs and priorities? It is key to decide whether your existing compensation system is or is not rewarding and thereby encouraging and motivating your lawyers to do what needs to be done to improve your firm's economics.

CONSIDER: How does your lawyer compensation plan reward performance, loyalty, and seniority? Does it create direction for the firm and motivate partners? Does it emphasize business production, new business, hours, management, and delegation? Remember: If you want the firm to move in a different direction, you will have to compensate lawyers accordingly.

2. Have partners accepted the firm's compensation system, and is it accomplishing its objectives? Be cautious, tensions develop when [the] direction is unclear or only gets lip service.

CONSIDER: How does your lawyer compensation plan address the big tension areas, such as origination and delegation versus working hours; joint business development versus individual rainmaking, and consequential non-billable time versus time devoted to producing client work?

3. Has your firm been successful in overcoming the common impediments to a successful partner compensation system? These include:

  1. Emphasizing one or more factors, usually hours, billing and revenue from personal production, to the exclusion of other factors, i.e., origination of new business from existing or potential clients, cross-selling the firm’s expertise in a different practice area. Considering less than quantifiable criteria.
  2. Changing the compensation criteria every year. Other related problems are criteria that are unclear and annual changes in the management of the compensation committee.
  3. Letting partners "play the numbers" instead of doing what is best for the law firm.
  4. Failing to recognize the importance of time spent on non-billable efforts.
  5. Overprotecting clients or being unwilling to delegate work to the most appropriate or cost-effective attorney.

CONSIDER: Partners should thoroughly discuss all the factors that will go into the compensation plan, and accept the final decisions of the selection process even if they disagree with certain aspects.

4. Has your firm set "reasonable" objectives, targets, and quotas of acceptable performance for partners? These should allow them to be compensated at a stated level for fee-generating activities, in terms of dollars and hours produced. Non-fee-generating activities - such as firm management, marketing, training and supervision of associates, management or practice areas, and so on - should be considered as well. In most successful firms, the criteria generally include:

  1. Business origination/cross-selling to existing clients.
  2. Retention of the business of valued, productive clients.
  3. Seniority, legal abilities, reputation, diligence, timeliness, and quality of work.
  4. Efforts made to market the firm, and successes achieved.
  5. Collection of revenue from billable hours.
  6. Community and bar activities.
  7. Mentoring and training younger members of the firm.
  8. Firm loyalty and compliance with firm policies.
  9. Contributions to firm management and administrative duties.
  10. Pro bono time spent pursuant to and in accordance with firm policy.
  11. Sacrificing oneself for the sake of a client or the betterment of the firm within the period of the evaluation.
  12. Particular accomplishments within the period of the evaluation.

5. Does your law firm have an effective policy to deal with partners whose performance is below par?

CONSIDER: Have partners complete a business plan you will monitor and that will serve as one component of the compensation criteria.

6. If your firm uses a formula approach to compensation, have the following issues been resolved?

  1. How long origination credit should continue and when to transfer it from one partner to another.
  2. If you should share client credits among attorneys who obtained the work and those responsible for completing it.

7. If your firm adheres to a "rough justice" compensation system, have you ascertained:

  1. Who will determine how much partners receive?
  2. Whether decision makers have all the resources they need to make informed judgments?
  3. Whether appeal provisions for aggrieved partners are in place and perceived as appropriate?

8. Does your firm's compensation plan provide adequate incentives and rewards for associates who originate business from existing and potential clients?

9. Has the firm addressed crucial management/compensation issues related to:

  1. The scope of your managing partner or management committee's responsibility and accountability for other attorneys serving in a management role?
  2. Which decisions to reserve for partners?
  3. The level of independent judgment your managing partner/management committee can and should exercise?

10. To what extent should partners responsible for coordinating practice areas and for firm management interact and be held accountable for:

  1. Practice-area profitability?
  2. The redirection of firm efforts into certain practice areas?
  3. The creation of incentives for training, business development, production of legal work, client retention, quality assurance of work product, review of work product, systematizing practice areas, and so on?

11. Has your firm properly budgeted time for attorneys who take on the role of managing partner, participate in executive or administrative committees, or coordinate a practice area? Consider, too, how this "committee time" relates to an attorney's expected productivity time when compensation decisions are made.

AVOID THE EXTREMES OF GIVING UP ON YOUR COMPENSATION PLAN TOO QUICKLY OR STAYING WITH ONE TOO LONG

Remember, even the best plan won't solve every problem. It may be time to consider other simple management practices to help address and correct a host of economics issues. The following are suggestions made by the author:

1. Improve education and training in business development/client relationship practices as well as timekeeping, billing, and collection practices.

2. Turn to lateral hires in areas of need, reduce hiring, speed reviews, and terminate under-performing junior lawyers.

3. Use more contract associates or delegate to legal assistants.

4. Consider changing the firm's partnership admissions practices.

5. Take steps to terminate or force the withdrawal/retirement or unproductive and senior partners.

6. Examine the impact of continued increases or decreases in support staff and/or support services.

When considering various types of compensation plans, partners are cautioned that the lawyer compensation practices of other firms may not be satisfactory for their own offices. The fact that certain plans are in use does not indicate that they may be suitable elsewhere or even that they work well for the offices that use them.

©1999-2017 Joel A. Rose & Associates