Law Practice Management Asked and Answered Blog

Category: Compensation

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Apr 17, 2018


Subjective Law Firm Partner Compensation Systems

Question: 

I am a partner in a twelve attorney commercial litigation law firm in Palm Beach, Florida. There are five partners in the firm. We are contemplating merging with another firm in the area of similar size. We have done our due diligence and have come across a possible non-starter – the compensation system. Our compensation system is totally objective – formula-based very close to an eat-what-you-kill system. The other firm has operated under a subjective system and they are pushing for the firm to operate under this type of system. We would appreciate your thoughts and enlightenment concerning subjective-based systems.

Response:

Subjective-based systems are the most commonly used approach to setting partner compensation, especially in larger firms. More and more firms your size and larger are moving to subjective systems as a result of the failure of other systems to account for the full range of contributions that partners make to the law firm. Subjective systems can take on a variety of forms but the central theme of such systems is that they rely on a subjective assessment of partner performance, without reference to specific weighting of factors or a set formula. This is not to say that subjective systems lack structure or predictability, or that they don’t consider objective financial data. Successful subjective compensation systems include these elements and more.

Subjective compensation systems vary widely. Here are some of the most common elements found in subjective systems:

In additional to subjective compensation systems some firms used hybrid systems that employs objective (formula) and subjective components.

Subjective systems are not for all firms. They will fail with out strong, trusted, leadership. In very small firms it is difficult to structure a compensation decision making body.

It sounds like your firm and the firm you are thinking of merging with may come from two very different cultures. Subjective systems work well for firms that are “firm first” firms but not for lone ranger firms that often operate under eat-what-you-kill systems. If you firm is not a long ranger firm and your are in fact a “firm first” firm or aspire to be such you may be able to adapt to a subjective system. However, you may need a post-merger phase-in period. Another comprise approach might be a hybrid system.

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

 

 

Apr 04, 2018


Associate Attorney Motivation

Question: 

Our firm is a fourteen attorney firm in Chicago. There are nine partners and five associate attorneys in the firm. Our practice is limited to insurance defense. I am one of the founders and senior partners in the firm and have been practicing for 35 years. We are having problems getting our associates to produce at the levels that we need for the firm to be profitable. We have a 1800 annual billable hour requirement and several of our associates aren’t even close. We have a bonus system that pays associates a bonus based upon billable hours exceeding 1800 billable hours. What are we doing wrong?

Response:

It often takes more than setting up a bonus system and then leaving it on autopilot. I am finding that the intrinsic reward of doing a good job and meeting the expectations of the firm’s partners are as important as the bonus system. In client law firms that have had similar problems we have found that by supplementing the bonus system with monthly reviews and coaching sessions with associates not meeting their targets has made the difference. Here is an outline of the process:

  1. Review you monthly billing/hours reports for all associates each month.
  2. Identify those are below targets and expectations.
  3. Meet with those associates that are below targets and expectations.
  4. Discuss why there are having problems meeting expectations. Lack of work, not working enough hours, poor time management habits, or poor timekeeping habits.
  5. Identify solutions to the above problems.
  6. Monitor and follow-up.
  7. Continue to meet every month until such time as the associate is meeting targets and expectations.

The bonus rewards those that want to push beyond the 1800 billable hours but does nothing to solve the problem of those not meeting the 1800 billable hour expectation.

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

 

Feb 14, 2018


Compensation Ideas for Law Firm Staff – Goal Bonuses

Question: 

I am the firm administrator with a ten attorney firm in Long Beach, California. I really enjoyed reading your blog – Law Firm Compensation – Bonuses for Staff, dated December 27, 2016.  

I really like your approach of tying bonuses to measurable outcomes. Have you used other approaches other than percentage of salary? Can you give additional examples of specific goals that would be appropriate for a bookkeeper, office manager, or firm administrator?

Response: 

Research and experience tells us that employment expect the following five things from management:

  1. Mutual agreement as to what is expected.
  2. The opportunity to exercise his or her ability.
  3. Feedback on his or her performance.
  4. Direction when needed.
  5. Reward – compensation in equal measure to his or her contribution to the firm.

The problem with staff employee is quantifying and measuring performance so that bonuses are not “Santa Clause” bonuses. A bonus system tied to measurable goals/objectives can, as outlined in my earlier blog, eliminate the problem of bonuses being considered by employees as an entitlement.

Other approaches that some of my law firm clients have used is to develop a limited laundry list of goals with a specific dollar amount tied to each goal for specific positions such a bookkeeper, firm administrator, etc. Typically, there is a cap on how much can be earned per year – 5% – 10% of salary. At the beginning of each year the employee selects the goals that they plan on working on for the upcoming year, obtains approval from his or her supervisor, and both parties sign off on a goal plan for the year. The goals must be SMART goals. Bonuses are paid as goals are completed.

Here are some additional examples:

Bookkeeper 

  1. Reduce accounts receivable over 90 days by 25%
  2. Write and implement an accounting manual by December 31 of this year.

Firm Administrator 

  1. Manage the firm within the approved expense budget for the year.
  2. Reduce staff turnover during the year by 25% below an average of the past three years turnover history.
  3. Reduce headhunting fees for staff by 40% below an average of the past three years.
  4. Write and implement an Employee Handbook by December 31 of this year.
  5. Implement a new time and billing system by December 31 of this year within time and cost budget.

The key to the goals is that they are important to the firm and are measurable.

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

Jan 17, 2018


Attorney and Staff Performance Compensation

Question: 

I am the firm administrator for a twenty-two attorney firm, twelve partners and ten associates, in downtown Chicago. I have been with the firm for seven years. The firm pays the associates and staff a base salary plus a end of year discretionary bonus which is the same for all staff and associate attorneys. The firm does not do performance reviews and honestly I believe the raises are simply an annual cost of living adjustment and the bonus at the end of year a gift. Many of our associates and staff have been here for many years and salaries are getting out of control. We would welcome your thoughts.

Response: 

There are two basic compensation philosophies, which should be seen at opposite ends of a continuum. At one end is the entitlement philosophy and at the other end is the performance-orientated philosophy.

Entitlement Orientation

The entitlement philosophy can be seen in many firms that traditionally have given automatic increases to their employees every year. Further, most of those employees receive the same or nearly the same percentage increase each year. Firm’s and employees that subscribe to the entitlement philosophy believe that employees who have worked another year are entitled to a raise in base pay, and that all incentives and benefit programs should continue and be increased, regardless of changing economic conditions. Commonly, in firms following the entitlement philosophy, pay increases are referred to as cost-of-living raises, whether or not they are tied specifically to economic indicators. Following an entitlement philosophy ultimately means that as employees continue their employment lives, firm cost increase, regardless of employee performance or other firm competitive pressures. The firm acts as Santa Clause at the end of the year, passing out bonus checks that generally do not vary from year to year. Therefore, employees “expect” to receive the bonuses as another form of entitlement.

Performance Orientation 

When a performance orientated philosophy is followed, no one is guaranteed compensation just for adding another year to firm service. Instead, pay and incentives are based on performance differences among employees. Employees who perform well get larger compensation increases; those who do not perform satisfactory receive little or no increase in compensation. Thus, employees who perform satisfactory should keep up or advance in relationship to their peers in the labor market, whereas poor or marginal performers should fall behind. Bonuses are paid based on individual, practice group, or firm performance results.

Few law firm are totally performance-orientated in all facets of their compensation systems for staff and attorneys. However, more and more firms are breaking the entitlement mode and associate and staff compensation systems are being redesigned for that are performance focused. Santa Clause bonuses are being discarded and replaced with measurable performance bonuses. Salary increases are being tied to increases in skills, competencies, and overall performance based upon performance reviews.

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

 

 

Dec 06, 2017


Law Firm Partner Compensation – Dealing with an Overpaid Partner

Question: 

I am a founding partner of a two partner firm in Springfield, Illinois. We are finishing up our third year since we started the firm. We have six associates and our practice focuses on health law. My partner and I each have a fifty percent interest in the firm and our compensation is based on our ownership percentages. We split firm profits fifty-fifty. Ever since starting the firm I have been bringing in substantially more fees that my partner. This year I will bring in sixty-five percent of firm fees. I am getting frustrated and feel that our compensation system is not fair, not working, and needs to be changed. I would appreciate your thoughts.

Response: 

It sounds like you are referring to origination of client business and referencing fees resulting from business that you brought into the firm. Most firms do not consider fee origination as the only partner compensation variable. Working attorney fee collections as well as other contributions such as firm management, mentoring and developing associates, developing firm systems, etc. are also considered when determining partner compensation. Many firms actually give more weight (credit) to working attorney production that to origination while others may give no credit at all.

I think you need to keep in mind overall contributions of each partner – not just client origination. Pull working attorney statistics and include these in your analysis as well as firm overhead consumed. Consider other contributions that each of you have and are making and see where the data takes you. Don’t look at just one year – look at the data over the long term – say three year trends. If you still feel that the compensation arrangement is no longer fair, you and your partner need to sit down and have a heart to heart discussion.

The best approach may be to simply realign your compensation percentages after you have come to terms with the compensation factors that you consider important to the firm and the metrics you are going to use going forward.

If you and your partner can’t sit down and have such a discussion consider getting outside help.

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

Sep 20, 2017


Compensating Your First Associate Attorney in a Law Firm

Question:

I am the owner of a law practice in Belleville, Illinois. My practice focuses on real estate, estate planning and administration, and bankruptcy. I have three legal assistants. While I have been in practice for ten years, I have never hired an associate. I have a busy practice and now is the time. I have identified a candidate with six years experience that I want to hire. He has business that he can bring with him. He has been working with a larger firm as an associate and has been paid a straight salary. My next step is to make him an offer but I am struggling with how to pay him. I would like to hear your thoughts.

Response:

Some small firms put associates on an eat-what-you kill system based upon fee revenue collected from clients they bring in and fee collections from other matters they are assigned. They are they paid a percentage – ranging for thirty to forty percent when the fees are paid. However, in most firms associates are paid a salary and possibly a bonus based upon performance. Bonuses may be discretionary or formulaic based upon performance factors such as billable hours, working attorney collected fees, client origination collected fees, goal attainment, signed engagements, etc. Personally, I think a salary plus and discretionary bonus is the best approach for new associates.

However, in your case with an associate that is more seasoned and that has a book of business I think you should consider a salary with a formulaic bonus based upon his working attorney fee collections and client originations. Here are the mechanics:

I would also set a minimum performance expectation of $240,000 for the salary that is being paid.

You could also include non-billable goal attainment bonus as well but you can always add that later.

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

Aug 22, 2017


Measuring Law Partners’ Performance

Question: 

I am a partner in a twelve attorney firm in Houston. The firm has five partners and seven associates. We are a first generation firm and we, the partners, have never practiced in other law firms. Currently, the partners have equal ownership interests and are compensated equally. We are experiencing issues with the present method of partner compensation and we are giving some thought to considering other approaches. One of the issues that we are trying to get our heads around is how to measure each partners’ performance – value – and overall contribution to the firm. Do you have any suggestions?

Response: 

The first step in a partner’s compensation plan is to develop a system for measuring each partner’s performance. Measuring performance involves selecting the appropriate: (1) performance measurement factors, (2) performance measurement programs, and (3) performance measurement reports.

Performance Measurement Factors 

Each firm must decide on its own particular basis for rewarding quality performance by its partners. Factors must be selected against which each partner’s performance can be measured. Then the firm must decide how much weight to assign to each performance factor. The performance factors commonly used to measure partner performance include: (1) professional competency, (2) business development, (3) productivity, and (4) profitability.

Professional Competence 

A partner’s professional competence is usually the most important factor in measuring partner performance and is the most difficult to measure because it cannot be easily quantified and it has to be determined subjectively. In addition to technical proficiency professional competence also includes leadership ability, associate mentoring and development, management contribution, and other contributions made to the firm.

Business Development 

In many firms a partner’s ability to generate new business is an important performance factor in measuring partner performance. Client origination can be measured in terms of fees generated from new clients and fees generated from new business for existing clients.

Productivity 

A partner’s productivity can be measured by determining a partner’s: (1) chargeable hours related to client matters and (2) nonchargeable hours related to those firm matters which the firm has recognized an important partner responsibilities. Another approach is measuring billed or collected fees. Another measure of a partner’s productivity is his or her pyramid of responsibility – the number of associates chargeable hours or collected fees for which the partner is responsible.

Profitability

A partner’s profitability can be measured using three factors: (1) fees billed to clients, (2) realization of fees billed and (3) speed of collection of fees billed. Other measures include collected, effective rate per hour, etc.

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

 

Apr 25, 2017


When Should a Law Firm Partner Compensation System Be Changed?

Question: 

I am a partner in a fourteen attorney business litigation law firm in New Orleans. There are five partners in the firm. We are a first generation firm and all of the five partners are the original founders. Each of the partners have equal ownership interests and are compensated based upon ownership points. While this approach to compensation worked for many years this system is no longer working for us. Performance used to be pretty close but this is no longer the case. Your suggestions are welcomed.

Response: 

This is a common problem that new law firms eventually face. Here are a few thoughts:

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

Feb 07, 2017


Law Firm Partner Compensation – Collaborative Team Practice

Question: 

Our firm is a 25 attorney firm based in San Antonio, Texas. We have 15 equity partners. We are equal partners and have equal ownership interests. Our partners are paid based upon ownership shares. Thus, each are paid the same. The system has worked well for us for many years and has supported our team-based collaborative culture. However, we are having issues with non-productive partners and some of the productive partners feel that the compensation system is no longer fair.  Some of the partners have suggested that we more to a formulaic system. Other partners in the firm feel that such as system would destroy the collaborative culture that we have built. We would appreciate your thoughts.

Response: 

I agree that the compensation system must shift to a system that rewards performance and overall contribution to the firm and yet preserve the culture that you have built over the years. I think that a pure formulaic system would shift your culture to a “lone ranger” culture with everyone out for themselves. I believe that for your firm a subjective or a hybrid system incorporating quantitative and qualitative performance factors would be the best approach.

In order to implement such a system you will need to set up a compensation committee that will made partner compensation decisions. I suggest a three member committee elected by the partners on three-year staggered terms. The committee will determine and publish performance factors that will be considered, conduct annual face-to-face performance evaluations, approve each partner’s annual personal goal plan for the following year, and make their partner compensation recommendation to the partnership regarding the upcoming year salary and bonus for the year ending year.

The partnership agreement or other compensation policy document should specify the procedure and what happens when the partnership does not approve the recommendation of the compensation committee or when a partner requests reconsideration.

A system such as this requires more time and work but usually yields better results, especially in a team-based collaborative practice. More and more larger firms are using subjective or hybrid systems.

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

Dec 27, 2016


Law Firm Staff Compensation – Bonuses for Staff

Question:

I am the sole owner of a four attorney firm in St. Louis, Missouri. Our firm has four staff members – 2 legal assistants, a receptionist, and a office manager/bookkeeper. It is that time of year again where I anguish over year end bonuses for staff which end up being Santa Claus bonuses with no relationship to actual performance. I would like to move away from this approach and tie their bonuses to performance. How do I measure performance for bonuses?

Response:

I like to tie salary increases to performance reviews tied to skills, competencies, value of the position in the market, cost of living, etc. Bonuses on the other hand should be tied to accomplishment of specific measurable results. Since staff results usually cannot be measured in terms of billable hours or collected dollars another measure must be used. I prefer to tie bonuses to accomplishment of specific agreed to goals or objectives.

Here is a system that some of my clients are using:

  1. Four goals are set at the beginning of each year.
  2. Two of the goals are firm goals. One goal might be for the firm to hit a certain revenue target. Another goals might be for the firm to hit a certain profit margin target.
  3. Two goals are personal/individual staff member goals that are discussed and approved by you.
  4. Goals should be SMART goals
    1.     S – Specific
    2.     M – Measurable
    3.     A - Attainable
    4.     R – Realistic
    5.     T – On a specific timeline
  5. Each goal (firm and personal) is worth 2.5% (maximum 10%). The percentage is taken times annual base salary of the staff member to determine bonus.
  6. At the end of the year determine which goals were met and calculate bonus.

The goals should be tough.

Example of individual goals that meet the SMART test:

  1. Write and publish an Employee Handbook by December 31, 2017.
  2. Write and publish an Office Procedures Manual by December 31, 2017.
  3. Successfully complete six hours in accounting at a local college by December 31, 2017 with a grade of B or better.

Other approaches can be taken – the key is to tie variable bonus to actual results.

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

 

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