Law Practice Management Asked and Answered Blog

Category: Compensation

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Jul 16, 2010


Law Firm Eat What You Kill Partner Compensation Systems

Question:

We are current using an “eat what you kill” compensation system in our firm. Is this appropriate method for our firm to use?

Response:

 It depends. You must ask yourself what kind of firm you want to be – team-based firm or group of space sharers or partnership of individual firms. Such systems are not appropriate for law firms that want to build a firm and create a team-based practice since such compensation systems typically reinforce “lone ranger” behavior resulting in a “me first vs firm first” orientation. It is hard to build a team-based firm with such an orientation. However, some firms do not want to practice as team-based firms – they want to practice as groups of individuals. For these firms such a system may be appropriate. The challenge will be to nail down a method of allocation revenue and overhead that is fair and equitable to all members concerned. Compensation systems should do more than simply allocate the pie – they should reinforce the behaviors and efforts that the firm seeks from its attorneys. Many firms are discovering that desired behaviors and results must go beyond short term fee production and must include contributions in areas such as marketing, mentoring, firm management, etc. to ensure the long term viability of the firm. Eat-what-you-kill systems discourage these behaviors.

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

Aug 26, 2009


Should Time Spent Managing the Firm Count in Partner Compensation Systems

Question: I am one of the founding partners in a 25 attorney law firm in the northeast. We have three equity partners, six non-equity partners and sixteen associates working in the firm. We focus totally on litigation. Each of us three equity partners have equal ownership percentages and since day one (20 years) have divided firm profits equally along those lines (1/3, 1/3, 1/3). 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 two 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:

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

May 14, 2009


Two Attorney Compensaton System

Question:

Our firm has been getting by for 18 months since start-up.  We are starting to get some repeat business and I think we on our way.  However, my partner looked at the numbers for 2008 and realized that she made about a third more money last year, both in terms of actual dollars for her work and in terms of origination. Our actual hours were roughly even, but there might have been some slighter disparity.  Now were are having that first talk about changing from the straight 50-50 split to the perhaps the other extreme of "each woman for herself" (after jointly paying basic expenses).  What are your suggestions?

Response:

I have reviewed your comments. In small firms the best systems are those that are simple, easy to understand, and easy to implement. Often two partners start out on a 50%-50% arrangement and the arrangement eventually has to be changed when and if their situations change that has a major impact upon their overall contributions to the firm. (Notice I used the word contributions – not necessarily – fees collected).

However, until level of contributions change – I have often seen 50% arrangements work well in small firms that are looking to build a Firm – rather than simply their own practice and earn as much money as they can for themselves. When level of contributions change – in a healthy partner culture – the partners will be able to talk to each other and sit down and discuss an alternative arrangement that makes sense for them.

I encourage firms to look beyond single year timeframes – typically 3-5 year cycles. Sometimes in healthy firm cultures one partner may need to carry the other partner for awhile. For example, an attorney with a PI plaintiff practice may have wide swings and may need to be carried in lean times – but when the big fee comes in both share in the benefits. In other situations billing cycles mandated by clients, etc. can impact timing of collections. In your firm – it may be a little early yet to have a true picture concerning contribution. Sounds like you are both putting in about the same time investment in the firm and commitment even though one's numbers are higher. Is one of you managing the firm or doing other activities that still benefits the firm?

You must ask yourselves what kind of firm you want to be – team-based firm or group of space sharers or partnership of individual firms. Eat-what-you kill compensation systems are not appropriate for law firms that want to build a firm and create a team-based practice since such compensation systems typically reinforce "lone ranger" behavior resulting in a "me first vs firm first" orientation. It is hard to build a team-based firm with such an orientation. However, some firms do not want to practice as team-based firms – they want to practice as groups of individuals. For these firms such a system may be appropriate.

The challenge will be to nail down a method of allocation revenue and overhead that is fair and equitable to both of you. Compensation systems should do more than simply allocate the pie – they should reinforce the behaviors and efforts that the firm seeks from its attorneys. Many firms are discovering that desired behaviors and results must go beyond short term fee production and must include contributions in areas such as marketing, mentoring, firm management, etc. to ensure the long term viability of the firm. Eat-what-you-kill systems discourage these behaviors.

In the long term the highly successful law firms will be those that are team based that where the partners look beyond their own self interests and have a "firm first" attitude.

I think you need to have an open exchange about what kind of firm you want to build and the commitments each of you are willing to make to achieve that. You need to decide what you consider to be contribution and value to the firm – fees generated, fees originated, primary attorney fees, marketing, firm management, etc. If those commitments are in general alignment – they maybe you should stay on the 50-50 split for awhile longer. Another option would be to stay on the same split – but create a special bonus pool – say 25% of income that could be allocated on a discretionary basic for unusual accomplishments, etc. Of course you would have to agree on who gets how much. Another option would be to have a base draw and then either a formula or discretionary bonus pool for distribution of the excess.

The general trend in compensation systems in larger firms is toward more subjective based system rather than formula. However, many smaller firms do still use objective or formula based systems.

 

I hope this helps.

 

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

Jan 10, 2008


How Can We Determine If Our Law Firm Partner Compensation System Is Working

Question: Do you have any suggestions concerning how we can determine if our compensation system is functioning properly?

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.

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

Jan 27, 2001


Leadership and Accountability in Law FIrms

Question:

What do you see as the primary management problems in law firms?

Response:

We are frequently asked to assist law firms in areas such as management reviews, marketing, compensation, and strategic planning. However, these are often symptoms of another problem – leadership, trust, and accountability. Frequently we find that unless proper leadership is in place we are all wasting time on attempting to treat the symptoms. Without sound firm leadership at the partner level other initatives are never able to get off the ground. Law firm leadership is the top challenge facing the profession today.

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

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