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February 2021

Feb 10, 2021


Law Firm Partnership – Non Performing Partners

Question: 

Our firm is a litigation defense firm in the Chicago suburbs.  Four of us started the firm twenty years ago and we have since grown to a sixteen attorney firm consisting of eight equity partners and eight associates. The other four partners were initially associates and later admitted after they had been here for five to seven years. The other four partners bring in very little business and their production is dismal compared to the four founders. Our associates working attorney receipts are larger than a couple of our equity partners. Our compensation is a equal salary for all partners with remaining profits allocated to each partner based upon their ownership percentage which are 15% for each of the four founding equity partners and 10% for each of the other equity partners. They was no buy-in for the newer partners. Profits have been flat for several years and partner compensation as well. We would like to hear any thoughts that you may have.

Response: 

It sounds like partners are left to their own and are not accountable to other partners in the firm. Successful firms your size have performance expectations and guidelines for all attorneys in the firm with consequences for non compliance.

Many firms your size use a compensation committee to determine partner compensation and performance peer reviews – – both written and face to face interviews are conducted with each partner in the firm. Partner performance reviews are often avoided like the plague by many firms. They are time consuming and it is hard to give candid feedback to colleagues. However, without partner performance reviews neither the partners nor the firm will reach full potential. When partner performance reviews are used not only to review performance but to set measurable goals this data can be incorporated into the compensation system and provide additional hard data for providing a true measure of partner contribution and value.

You may have to consider changing your partner compensation system or changing nonperforming partners status to non-equity partners or associates.

You must muster up the courage to confront underperforming partners but before you do that you have to determine what the baseline performance expectations are for the firm, communicate them, and put in place consequences for non-compliance.

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

 

 

Feb 02, 2021


Law Firm Compensation – Changing System to Incorporate Client Origination

Question: 

Our firm is a small insurance defense/corporate litigation firm in Los Angeles, California. We have six partners and 7 associates. Our partner compensation system is primarily based upon working attorney collections with no incentives or rewards for bring in clients – client origination. We have been thinking of including client origination as a new metric in our system. We would like to know your thoughts regarding client origination and partner compensation.

Response:

Here are my thoughts in general.

Pros and Cons of Origination Credit

Client or matter origination credit is a touchy subject. Some firm-first or team-based firms refuse to track it at all for fear that it will open a can of worms and will be divisive. At a recent bar association presentation, the presenter and managing partner of a firm stated, “one of the quickest ways to split up a law firm is to incorporate client origination into the partner compensation system” Other firms track origination credit and use it as a factor in subjective compensation systems but do not compensate origination directly or in the form of numerically determining partner compensation percentages. Many firm’s that use formulaic or eat-what-you-kill systems do not include client origination and only include working attorney and/or responsible (billing) attorney collections. Other eat-what-you-kill firms do incorporate client origination.

Personally, I believe that a law firm should track and recognize the importance of origination  and use that knowledge to determine attorney career advancement to the different tiers (non-equity partner, managing partner of an office, and equity partner) and to differentiate different levels of income among lawyers without pursuing a formulaic or commission approach to compensation. While I believe that origination should be tracked, recognized, and rewarded, it has not been my experience that a change in the compensation system will make rainmakers out of service partners or associates.

Tracking of Origination Fee Credits

There should be an expectation that an individual’s business origination efforts and results will improve over time. Fees collected should be the controlling metric used in determining origination. Origination should be tracked at the matter level as opposed to the client level. This provides greater flexibility to share origination credits. Tracking origination should not require a formal scorekeeping system. According to recent surveys less than half of the law firms grant formal origination credits.

Duration of Origination Credits

Origination policies can cause hoarding of client relationships and matters, creation of origination credit annuities, and divisive internal competition. To mitigate this tendency firms often limit the duration of the credit and sunset the origination credit after so many years – often five years. One option is to grant the origination credit on all matters opened for a new client for the first three or five years that the client is with the firm and after that time origination credit for new matters of a client would be credited to the firm, responsible, or billing attorney.

Origination Guidelines/Protocols

It is important that the firm establish written guidelines and protocols for allocating business origination credits whether the firm is using origination directly or indirectly in compensation.

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

 

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