Law Practice Management Asked and Answered Blog

Category: Compensation

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Oct 01, 2013

Law Firm Partner Compensation – Origination Credit in a Two Partner Firm

Question:

Our firm is a 8 attorney firm in Fort Worth, Texas. We have two partners – myself and my partner. Our approach to compensation has been based upon our ownership interest percentages which have been adjusted over time based upon working attorney (personal) collections. We have been discussing implementing a formula using working attorney collections and also bringing client origination credit into the equation has well – weighing each equally. Our ownership percentages would be adjusted based upon the fee credit ratio between the two of us. I would appreciate your thoughts on the matter.

Response:

My first thought is whether you are trying to build a firm-first firm or a group of separate practitioners. How will you incorporate other factors such as firm management, business development, mentoring and training associates, etc? If both of you are making roughly equal contributions in these areas your approach might have merit but be careful that you do not head down the path of separate practices – and become a lone ranger firm. My other concern is with client origination – this often gets tricky. With only two partners you don't have anyone to serve in the capacity of attribution police when and if there are disagreements as to origination credit. (attribution committee) So you will have to be able to discuss this subject openly and hopefully upfront. Share origination credit when appropriate, allocate to firm when it appears that a client came to the firm based upon firm brand or name recognition, and consider a 5 year sunset provision whereby the credit reverts to firm or responsible attorneys.

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

Jul 02, 2013

Law Firm Managing Partner Compensation

Question:

I am one of the founding partners in a 27 attorney law firm in San Antonio, Texas. We have four equity partners, six non-equity partners and seventeen associates working in the firm. We focus totally on litigation. Each of us four equity partners have equal ownership percentages and since day one (20 years) have divided firm profits equally along those lines (25%, 25%, 25%, 25%). We each put in the same amount of effort and work – but since I am managing partner – my fee collections are much lower than those of the other three equity partners and I am concerned that they may feel that I am not carrying my weight since my fee collections are lower. How should this be handled in our compensation system?

Response:

This is a common question that we hear often. It sounds like you are still allocating income in the same manner that you did when the firm first started. Often when a firm grows the partner compensation system needs to be reexamined when and if partner roles or contributions change. As the firm has grown I suspect that your time spent on management activities has grown as well. I, as well as many other legal management consultants, believe that firm management (running the business) is as important as generating client fees and should be so considered in partner compensation systems.

We have numerous law firm clients where at least one or more of the equity partners "run the business" and do not provide billable client services at all.

Management time should not be used as a non-billable time category (excuse) to simply "dump" time. Your partners have a right to expect results that improves the bottom line and the size of the pie for all.

Here are a few suggestions:

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

May 14, 2013

Law Firm Compensation – Associate Bonus – Fee Split

Question:

Our firm is a 12 attorney firm located in downtown Chicago. We have 8 partners and 4 associates. We are considering making a change to our associate compensation system. Currently associates are paid a salary plus a discretionary bonus at the end of the year. We are considering continuing to pay them a salary plus 60% of any business they bring in (origination). Does this plan make sense?

Response:

I would need to know more about your financial situation, your overhead, and profit ratio. You and your partners should expect to make a profit from your associates. I believe you should expect to realize a profit margin of 25% – 30%.  After factoring in firm overhead and associate compensation I don't believe you will be able to give away 60% and realize this goal. 20%-30% may be all that you should incorporate into a bonus system. Be careful that a bonus system such as this accomplishes what you are seeking to accomplish and that you don't create a lone ranger culture. 

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

 

 

 

Mar 19, 2013

Law Firm Lateral Partner: Size of Book of Business

Question:

I am a partner in a mid-size firm in Memphis. We have 250 attorneys in the firm and I am considering making a move to a smaller firm. While I have a client base I am not sure how much business would go with me. I am currently making $600k in compensation. With my experience – 25 years plus – how important is a book of business initially? How big of a book will firms be looking for?

Response:

A portable book of business is critical – especially if you are looking to earn what you have been earning. A rule of thumb for many of the lateral moves that we have seen for compensation is 1/3 of book. You will need a book of $1.5 to $2.0 million to generate interest from major players.

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

Mar 12, 2013

Partner Compensation – Two Attorney Start-up Firm

Question:

I am a solo practitioner in Chicago. I've been offered by another solo to join him as a partner, and was wondering if you could suggest any articles or books I could look at to think about how to structure the partnership.  We bill about the same number of hours, but his rate is 50% higher than mine (300 v 200) and he has 20 years on me in age and experience.

Response:

I am a believer in true partnerships as they seem to work best and the compensation system that seems to work the best is where the partners share and share alike the profits based upon their ownership percentage. Initially a percentage is agreed upon based upon the revenue/profit
history and experience that each brings to the firm. If the level of contribution changes over time you talk about it and the percentages are adjusted. You may want to start by looking at your fees and profits over the last five years and compare them to his and use this as a starting point. Consideration should also be given to his experience. Hours don t matter as much as dollars. Then determine that ratio. Often in an arrangement such as this, depending on the ratio, it might be a 60%/40% split. If this is what you agree to then establish your capital accounts in accordance with that ratio (initial firm investment in the form of cash or other assets) and then split profits according to this split. Over the years adjust as needed. If you have a healthy partnership you will be comfortable discussing this subject.

Other approach if you want to be lone rangers would be a formula eat-what-you kill approach.

Here are my blogs on this topics generally:

https://www.olmsteadassoc.com/blog/category/compensation/ 

Here are a couple specific blogs:

 https://www.olmsteadassoc.com/blog/2009/05/  

https://www.olmsteadassoc.com/blog/law-firm-eat-what-you-kill-partner-compensation-systems

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

 

Oct 23, 2012

Redesigning a Law Firm Compensation System – 8 Attorney Firm – 4th Year of Practice

Question:

We are an 8 attorney law firm in Evansville, Indiana. We have five members and three associates. We started our firm four years ago. Each member has an equal share for both ownership and compensation purposes. We cut the pie equally. After four years some of the members feel that the equal sharing approach is no longer working and we need to consider a different approach to compensation. I would appreciate your thoughts on how we might get started on modifying our approach.

Response:

Virtually all successful compensation systems feature two common qualities that are linked to
each other and stand the test of time.

First, a successful system must be fair and be perceived as fair by the partners who
are  essential to the firm’s economic success and reputation.  The perception of fairness is critical.  To determine if a system is fair, partners can ask the following questions:

  1. Do  I understand the system?
  2. Does the system recognize what individuals contribute to the organization?
  3. Are the rules clear?
  4. Are the rules followed and applied in a consistent manner from person to person from year to year?
  5. Are the compensators individuals who are trusted and respected?               

A second quality of successful compensation systems is that of simplicity.  Research has shown that there is a direct correlation between the simplicity of compensation systems and the degree to
which partner understand how their compensation is determined.

The challenge is structuring a compensation system for a law firm is in selecting the best mix of appropriate compensable criteria and the right amount of participation that is consistent with the firm’s needs and its culture. 

Before you go very far you should address what type of firm you are trying to build – Lone Ranger (a group of individual practitioners) or firm-first (a team-based firm). In other words "are we in this together." The answer to this question will provide a clue as to whether eat-what-you kill or other approaches to compensation will be appropriate.

Changing your compensation system is difficult and should be approached carefully and thoughtfully.

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

 

Apr 25, 2012

Law Firm Partner Compensation – Why Change If We Are Happy

Question:

I am a partner in a 16 attorney firm in Memphis. Our firm has had the same partner compensation system for 20 years and we are generally happy with it. It is an eat-what-you-kill system. Since we are generally happy why should we consider changing it?

Response:

You can start with the following firm – self-test. Has the firm experienced or is it experiencing:

If your firm is experiencing or has experienced the above symptoms, it is time to really examine where the firm is headed and what messages your compensation is sending out to your partners. Is the firm trying to be a firm or merely a group of lone rangers? Even though your partners are content your compensation system may be holding the firm back from becoming all that it desires to be. Contentment may not be the best measure of success.

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

Feb 07, 2012

Law Firm Compensation Committee

Question:

For years our14 attorney firm has operated under a formula based eat-what-you kill system. We are moving toward a more subjective-based system. We have been advised that we will need a compensation committee. What are your thoughts regarding compensation committees?

Response:

The components of your compensation plan and partner buy-in will be important to the success of your program. However, how you setup and constitute your compensation committee will be crucial. In a subjective system trust is paramount. How the members are selected, who serves on the committee, how the committee operates, and other matters must be spelled out and communicated to all partners. Here are a few ideas:

  1. Consider a three member compensation committee.
  2. Elect members to staggered three year terms. On the initial election elect the individual with the most votes to a three year term, the individual with the second most votes to a two year term, and the individual with the least votes to a one year term.
  3. Hold elections annually to fill vacancies for the upcoming year.
  4. Consider adopting a policy of requiring a partner whose term has expired to remain off the committee for one year before being able to run for another term.
  5. Incorporate procedures for removal of members by majority vote of the partners. Specify the voting requirements.
  6. Outline the general flow of the compensation review process, how it will work, specifically what performance factors will be considered, etc.
  7. Outline the approval procedure of the partnership. Suggested that the partnership only be able to disapprove the recommendation in total – not pick apart and change. If the proposal is disapproved by a majority vote – the compensation committee starts all over.
  8. Specify appeal rights and procedures.

The key ingredient of a successful subjective compensation system is that partners perceive the system as fair and have faith and trust in the compensation committee. The process is as important as the outcome.

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

Dec 07, 2011

Client Origination Credit and Importance in Law Firm Partner Compensation Systems

Question:

Our firm is a 18 attorney insurance defense firm located in Chicago. We are in our second generation and none of the original founders are still working in the firm. The majority of our insurance company clients have been with the firm for decades and were inherited. Our current crop of partners are primarily "worker bees" and have not developed "rainmaking" skills. We have not added a new client to our client roster in years. In the past two years we have lost several clients due to mergers, consolidations, and partner defections. This concerns us. Currently partners are rewarded and compensated totally on "working attorney" fee collections. We are considering changing our compensation system to including a credit for origination of new business. What are your thoughts regarding client origination credit?

Response:

All law firms need a mix of finders, minders, and grinders. Finders (client originators) are needed to provide sufficient work to keep the workers busy. Minders (responsible matter attorneys) are needed to manage the portfolio of client work. Grinders (working attorneys) are needed to service and produce client services. While there are exceptions, in most firms partners must hit on all three of these cylinders. In other words, most of the partners must do well at finding, minding, and grinding. Partners may perform some of these roles better than others, however overall they should be competently performing each of the roles. Very few firms can afford the luxury of having several senior partners only bringing in business without being required to maintain personal production levels as well. Partner compensation research concludes that the most a law firm can afford to pay a rainmaker – over and above his or her own billable hours (fee collections) is the marginal profit derived from the associates the rainmaker can keep busy, regardless of how many partners he or she occupies. The most valuable partners are those who offer a balance of skills: worker, delegator, supervisor, and rainmaker.

Since origination of new clients is the lifeblood of any firm it is a key factor that should be recognized in any compensation system. The exact weight that it is given will depend upon the firm and how dependent it is upon constant client replacement, only a few institutional clients, turnover of clients, leverage ratio, etc. A firm that has a well diversified base of institutional long time clients will typically weigh client origination much lower than a firm that has to constantly replace individual clients.

Actual approaches to implementation will depend upon whether your system is a subjective or a objective (formula system). However, the pitfalls are the same. Actual assignments of origination credits to partners can be difficult to initially determine. When and how should origination credits be shared between partners? Who determines and monitors such determinations? How long should the credit be awarded?

Origination credit becomes counter productive when it encourages senior partners to become comforable on the income received from origination credits from clients they brought in 20 years ago to the extent that they no longer develop new sources of business nor generate working attorney fees.

For this reason we believe origination credit should have a sunset expiration provision and that a firm should set time limits on origination credits – say five years on a reducing schedule – and have partners share origination credit with other members of the firm who develop business by cross-selling the firm's services to clients whose accounts were originated by another partner. In addition, offer "maintenance credit" as long as the originating partner continues to perform tasks that reinforce the relationship between the client and the firm.

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

Aug 09, 2011

Reducing Law Firm Employee Benefits

Question:

As the administrator of our 14 attorney firm I have been asked to present a plan to the partners for reducing employee benefits. We have had a difficult time during this recession. So far we have not had to reduce our employee headcount – but this could change in the future. It is our hope that if we can reduce the cost of benefits we won't have to layoff or terminate any employees. What is the best way to handle/manage this difficult discussion and process?

Response:

As an "at-will" employer you have the right to change benefits whenever you please. However, you must be careful as employees will perceive a reduction in benefits as a reduction to their overall compensation package.

If you do decide to cut benefits it is advisable to plan carefully and communicate as much in advance of the changes so that people know what is coming in time for them to allow for changes in their lives. It is also a good idea to be prepared to clearly and concisely share comprehendible reasons for making these changes. If implementing this type of change will save jobs, present it this way. If you believe that you may again provide benefits that have been cut once the economic environment is better, that knowledge will make it more palatable to employees.

A key point here – do an overall examination of your benefits and cut once and be done with it -don't keep reducing benefits every month or so.

You might want to examine your overall benefit costs – especially medical insurance – and strategically think about best approaches. It might make sense to cut here rather than a day of sick time or vacation.

Food for thought – According to a Society for Human Resource Management Poll taken in March of 2011 in the last six months 20% of employers reported that they had reduced benefits – the highest level since the fall of 2008. "Employees continue to scale back on health care coverage for employees (91%) and dependents (89%), and the amount of leave that an employee can accrue (54%).

So proceed with caution – but go for it if it makes strategic sense for your firm.

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

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