Law Practice Management Asked and Answered Blog

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November 2014

Nov 25, 2014

Law Firm Partner Compensation – Individual vs. Firm Based

Question:

I am the managing partner of a 9 attorney firm in Cincinnati. We have four equity partners and five associates. Partners are compensated on the basis of their ownership shares which are currently 25% each. In the past the system worked well – but now we are having problems. The two senior partners are working and contributing less and are taking out half of the compensation which is causing dissatisfaction and division within the firm. We have been discussing alternative approaches. Should we consider a system total focused on individual partner performance and production – an eat-what-you kill if you will?

Response:

I agree that personal production and performance should have a relationship and a tie to compensation. However, a move to a total eat-what-you-kill system might be a drastic first-step move. Eat-what-you-kill approaches can often destroy teamwork in firms that desire to be team-based firms. For firms that want to be lone ranger firms eat-what-you-kill is fine.

Since I don't know what you have done so far it is hard to identify the first step. Sometimes all that is needed is a frank and open discussion and a realignment of percentages tied to recent performance. In other cases is might be appropriate to have different percentages for compensation (participating compensation percentages) based upon say a three years rolling performance average/ratio. One approach would be to use this instead of ownership percentages for allocating profit to the partners. Another approach might be to create two profit pools – say 70% of firm profit and allocate this profit to the partners based upon participating percentages and 30% of firm profit and allocate this profit to the partners based upon ownership percentages.

Obviously there are many of approaches that you can take. This approach moves closer to individual performance but retains firm participation as well.

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John W. Olmstead, MBA, Ph.D, CMC

 

 

Nov 18, 2014

Law Firm Administrators – Effecting Change by Selling Your Ideas to Your Partners

Question:

I am the firm administrator with a 27 attorney firm in Detroit. We have fifteen partners and twelve associates. I have been eight months with the firm and in this position. I replaced another administrator who was terminated because the partners did not believe he lived up to their expectations. He was their firm administrator. This is my first law firm and I want to be successful. I feel that I am struggling and am not sure of my priorities. I would appreciate your thoughts.

Response:

Few things are as important to an administrator’s future as that person’s ability to influence the decision-making process and effect change.  Skills and competencies are important but so are results. In order to transcend to the next level and enhance their value to their law firms, administrators must help their firms actually effect positive changes and improvements and improve performance. This requires selling ideas to partners in the firm and having them accept and actually implemented. To succeed administrators must achieve three outcomes:

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John W. Olmstead, MBA, Ph.D, CMC

 

 

Nov 11, 2014

Law Firm Budgeting – Creating a Financial Budget for 2015

Question:

I am the managing partner of a 12 attorney firm in Springfield, Illinois. We have never had a financial plan or budget but I have been thinking of creating one for next year. I would appreciate your thoughts as to whether the time invested in putting one together is worth the effort.

Response:

I believe that successful firms:

  1. Are focused
  2. Have a sense of where they have been and where they are heading 
  3. Have a vision and a strategy
  4. Have business and financial plans
  5. Have goals and measured attainment 
  6. Foster accountability from self and others 
  7. Are proactive 
  8. Work the books and aggressively managed and balance the RULES (Rates, Utilization, Leverage, Expenses, and Collections)

Lawyers that fail to focus their practices; set goals, measure accomplishment, and foster accountability will fall short and not meet their financial objectives.

Attorneys need to begin focusing their practices, setting firm and individual performance goals, measure accomplishment, and implementing systems to instill accountability from all members of the team – attorneys and staff alike.  Budgeting is a tool that can help you measure goal attainment and how well you are doing.

What is measured is what gets done

With budgeting law firms and attorneys can:

  1. Reduce worry and stress at home and at the office 
  2. Improve productivity and profitability  
  3. Increase accountability – yourself and others  
  4. Focus the practice  
  5. Improve balance between personal and professional life  
  6. Maximize practice value for eventual practice transfer/transition

Keep in mind that budgeting entails both financial and non-financial goals.

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John W. Olmstead, MBA, Ph.D, CMC

 

 

Nov 04, 2014

Law Firm Attorney Compensation in a Contingency Fee Firm

Question:
 
Our firm is a five attorney personal injury plaintiff law firm located in San Francisco. We have 2 equity partners, one non-equity partner and two associates. One hundred percent of our fees are contingency fees. Our attorneys work on some cases together. We do not keep time sheets.

The two equity partners are compensated based upon their ownership interests and this has worked well. We are looking to improve our compensation for the non-equity partner and the two associates. Currently they are paid salaries and a percentage of firm collected fee revenue over a certain threshold. We feel that they have not been profitable and we have been overpaying them. We would appreciate your thoughts.

Response:

Personally I think that a percentage of firm revenue or profit should generally be reserved for equity partners or shareholders. There should be a reason for them to want to become equity partners. I would tie the majority of their compensation to individual performance – client origination revenue, working attorney production revenue, and responsible attorney revenue, and case profitability - being the primary factors. Develop specific guidelines for client origination (rules for the credit – direct effort of the attorney versus the brand of the firm). Since you don't keep time sheets you will have to develop some method for allocating the working attorney credit when attorneys work together on cases – subjective determination of value and contribution to the case, etc. Without timesheets it will also difficult to determine profit at the matter/case level. Decide how you want to weigh origination, working attorney, responsible attorney and case profitability and then use these to determine a compensation percentage to be used for overall compensation or bonus.

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John W. Olmstead, MBA, Ph.D, CMC

 

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