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Sep 26, 2018

Associate Attorney Compensation – Five Approaches

Question: 

I am the owner of a six-attorney firm in the western suburbs of Chicago. There are five full-time associate attorneys working with the firm. Two have been with the firm over fifteen years, two over ten years, and one seven years. All are being paid salaries in excess of $100,000 per year and none are even close to generating $300,000 or more in working attorney fee collections per year. Their billable hours are dismal as well. While I have a 1200 annual billable hour expectation none are meeting that expectation. My income is suffering as a result. In addition to salaries they sometimes receive a discretionary bonus. I am at my wits end. What are your thoughts?

Response: 

First of all I think that a 1200 annual billable hour expectation is too low and should be more like 1600 annual billable hours. For years the national average annual billable hours reported in surveys has been 1750 and this was the expectation for many firms for many years and still is for many firms. In the past few years, due to lack of work and other factors, some firms have lowered the annual expectation minimum to 1600. Litigation firms, especially insurance defense firms, currently have minimal expectations ranging from 1800 to 2000 hours. Firms that represent individual clients such as general practice firms, family law firms, and estate planning/administration firms currently have minimal expectations ranging from 1400-1600.

It looks like you are not enforcing the 1200 annual billable hour expectation that you have. However, you need to look into your situation and determine the reasons. It could be that they are not putting in the work because the firm does not have enough work for them to do. Look into the following possible causes of their low billable hours and take corrective action:

An approach that many firms are taking is to incorporate performance bonuses such as the following to motivate additional production. Usually these are on top of a base salary. Here are some examples:

  1. Base salary plus 5% of base salary if the billable hour expectation of 1600 is attained, discretionary bonus, and a 15% client origination bonus for bringing a client to the firm. The bonus is for the first year only.
  2. Base salary plus $50.00 per billable hour actually billed to clients that exceeds 1750 annual billable hours. 10% bonus on the collected revenue from other timekeepers that work is delegated to.
  3. Base salary plus 20% bonus for collected working attorney fees in excess of three times salary during the year. For example, an associate that is paid $100,000 would have an working attorney collection expectation of $300,000. If the associate had collections of $400,000 he or she would receive a bonus of $20,000. The associate also is entitled to receive a client origination bonus of 10% for business brought to the firm.
  4. Base salary, 1200 annual billable hour minimum expectation, quarterly production bonus of 40% of working attorney collected fees less salary paid for the quarter, and 20% client origination bonus for work done by others in the firm.
  5. Base salary plus 1/3 of hourly billing rate for hours billed to clients that exceed 1800 annual hours billed to clients.

Some firms have lowered base salaries when incorporating new performance bonus systems when the current expectation is far below expectation. Other firms are terminating under-performing associates.

Many firms are finding that many associates in small firms that have salaries of $100,000 or more are content and are not motivated by the bonuses available to put in the time to earn the bonuses. Work life balance is more important that earning additional income. The bonus systems work better for associates that are still hungry or have lower base salaries.

Firms that have had the most success in getting associates past the “entitlement mentality” are those that incorporate goal setting, accountability, and individual twice a month coaching meetings with associates in addition to the performance bonuses.

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

 

Jun 20, 2018

Associate Attorney Compensation and Motivation

Question: 

Our firm is based in Springfield, Illinois. We have four partners and four associates. We are a general practice firm. All of our associates have been with the firm over ten years and each of them are receiving $100,000 base salaries plus discretionary bonuses. Our associates are excellent attorneys however none of them bring in any business  and their production numbers are low. Annual billable hours are below 1200 and working attorney fee collections are below $300,000. We have not given raises or bonuses for the last several years. We are losing money on some of our associates and not even covering our overhead alone making any profit from our associates. We are at a loss as what to do. Please share any thoughts or ideas that you might have.

Response: 

It would be interesting to know whether you set production goals such as billable hours or working attorney fee collection goals for your associates and if and how they are enforced. Billable hours should be in the range of 1600-1750 per year and fee collections should be $300,000+ for associates being paid $100,000 per year. It sounds like production goals either don’t exist or are not enforced.

I suggest that you look in to the cause or causes of your associates low production. Here are a few questions you should ask yourselves concerning the cause of your associates low production:

  1. Does the firm have enough work for the associates?
  2. Are the associates working enough hours? What is their work/billable hours ratio? Goal 70%.
  3. Are the associates clear as to their goals – billable hours/fee collections.
  4. Do associates have time management issues?
  5. Do associates have time keeping issues?
  6. Are there consequences for poor production?

I suggest that you meet with each of your associates, address the above questions, and determine what is going on. It could be one or all of the above. If the firm does not have enough work for the associates you need to determine if partners are delegating sufficient work, whether business is down at the firm (short-term vs long-term), and whether the firm may have too many associates for the work that is available. If there is simply not enough work, has not been enough work for some time, and it is projected that the firm’s workload will be the same for the foreseeable future the firm will need to consider eliminating an associate’s position or reducing the work hours, and compensation, of one or more associates. If the work is there and associates are just not working and putting in the hours you need to insure that goals and consequences for non-performance are in place – you might want to consider changes your compensation system. If associates are having problems with time management or timekeeping conduct some training sessions and coaching.

Some firms have changed their systems whereby associates are paid a base salary plus a bonus for billable hours or collected fees over a predetermined threshold. However, incentive bonus work better when salaries are kept low. Often when salaries reach $100,000 or more additional bonuses may not motivate attorneys that are not hungry for more, are comfortable, and their priority is work-life balance.

While you must get associate compensation right in order to acquire and retain top associate talent as well as reward performance and reinforce desired behaviors, the starting point is hiring and retaining the right people to begin with.

Research from a classic business study that was highlighted in the popular business book “Good to Great” (Collins, 2001) authored by Jim Collins found that the method of compensation was largely irrelevant as a causal variable for high and sustained levels of performance. Other research also bears out that performance and motivational alignment are impacted by intrinsic and other factors other than just extrinsic factors such as compensation or methods of compensation. Over the years I have seen too many partners leave lucrative situations in law firms to join other firms for less compensation or to start their own firms to suggest that it is only about the money or compensation package.

Your compensation system should not be designed to get the right behaviors from the wrong people, but to get the right people on the bus in the first place, and to keep them there. Your compensation system should support that effort.

James Cotterman, Altman & Weil, Inc., (Cotterman, 2004) contents that there are two groups of employees for whom compensation is not an effective management tool. The intrinsically motivated (6% to 16% of partners perhaps) do not need compensation as an incentive. The struggling performers (another 6% to 16%) will not react favorably to a compensation system that rewards positive behavior.

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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

 

Mar 14, 2018

Attorney Career Progression – Competency Model

Question: 

I am a member of a three member executive committee with our twelve-attorney firm in San Antonio, Texas. One of our responsibilities is oversight of our career development program for associates and non-equity partners. We  have been discussing our policy of admitting associates to non-equity partner and non-equity partners to equity partner. Presently, we do not have anything in writing regarding timeline for consideration or what qualifies one to move to the next level. Associates and non-equity partners are unhappy with the present process. They want more clarity concerning their career advancement within the firm. You advise would be helpful to us.

Response: 

Several of my clients are developing career advancement programs that incorporate a competency-based approach that  outlines specifically what is takes to be successful and advance from associate to non-equity partner and from non-equity partner to equity partner. Rather than leaving the formula for success in the minds of the equity partners, a competency model gives each attorney in the firm an understanding of how he or she will need to perform in order to be perceived as progressing, an ultimately, as successful. Competency models offer transparency and clarity. The model outlines specific behavioral observations as the primary source of performance information. Benefits are as follows:

Associates are presented with clear information on expectations for their level of experience and a road map of what is expected as they progress. Specific expectations are laid out for progression to non-equity partner as opposed to a specific timeline.

Non-equity partners are presented with clear information on expectations for their level of experience and a road map of what is expected as they progress. Specific expectations are laid out for progression to equity-partner as opposed to a specific timeline.

Equity partners and senior lawyers benefit from a consistent description of performance standards that allow them to access performance, assign work effectively, and offer more meaningful career guidance.

The firm has a consistent methodology for making and compensation decisions.

In order to work, a competency model should be integrated with attorney recruiting, performance evaluations, training, and compensation systems. Associates and partners must invest time in attorney development.

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

 

Jan 31, 2018

Law Firm Leadership – Profile for a Legal Administrator for an Eight Attorney Firm

Question: 

Our firm is an eight attorney estate planning firm in the Chicago area. Our firm has grown from two attorneys to our present size in four years. We have five partners and three associates. Currently management is handled by a managing partner. The partners have been discussing hiring a legal administrator. We were thinking of hiring someone with experience in managing law firms and a solid background in human resources and bookkeeping/accounting. One of our clients suggested that we hire someone with a strong academic background, MBA, CPA type that has served as the CEO of a mid-size corporation. What are your thoughts?

Response: 

I think you are too small to justify hiring a person with this background that is currently employed in such a role. Such a person would be unaffordable and if you could locate such a person your firm would probably be a stepping stone until they find a position elsewhere. If you were able to find someone that is retired and willing to work in a small firm setting that could be a possibility. Another option would be to hire someone that has served as CEO, COO, or CFO of a smaller company – with or without MBA, CPA designation. You could also look for an experienced legal administrator that has worked in a larger firm – possibly with a CPA or MBA. Again affordability will be an issue as well as long term retention. Personally, at your current size I think you should look for someone with BA or MBA degree in business, with a strong background in accounting and human resources, and experience as an administrator in a law or other professional services firm such as an accounting firm, consulting firm, engineering firm. Look for someone that has worked in a firm with 15-35 attorneys/professionals. Be careful of applicants that have worked in very large firms – i.e. 50+ attorney firm for example, as they may only stay a short while in a firm your size and move on to a larger firm when a position becomes available. They may also not be the “hands on jack of all trades” administrator that you need in a firm your size.

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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

 

 

Sep 27, 2017

Associate Attorney Business Development – Becoming a Rainmaker

Question: 

I am an associate attorney in a ten attorney firm in Atlanta. The firm represents mid-size to small businesses – transactional as well as litigation. There are six partners and four associates in the firm. I graduated from law school two years ago and have been with the firm for two years. All of my work is given to me by the partners and since joining the firm I have not brought in any clients. When I joined the firm I was told not to worry about bringing in clients – the firm has plenty of work. I am paid a salary and a bonus if my billable hours are at a certain level. There appears to be no desire by the partners for me to spend time developing clients. I have talked with my peers in other law firms that tell me that this is short sided and that developing clients is a major factor in their firms for associates to be considered for partnership. I would appreciate your thoughts on what I should be doing and what direction I should take.

Response: 

I agree with your peers. Whether you are encouraged by your partners or not developing “rainmaking” skill is an important skill that you should develop and will be a major career success factor if you remain in the private practice of law. While your partners hired you to primary be a “worker bee” and work on their matters, down the road it will become more important for you to develop business. It takes time to develop “rainmaking” skills and a network of contacts and the sooner you start the better.

In spite of many of the marketing initiatives undertaken by law firms, a majority of the business that comes to many law firms is through personal and professional referrals – from people a lawyer knows. The more people you know the more opportunities you will get. The value of your network is worth more than the sum of its parts, and that value grows geometrically over time and with the size of your network.

Lawyers who consistently find a modest amount of time for client development and invests it wisely will have a much easier time later in their careers when they must bring in business to get promoted than those who wait.

One of the problems that many law firms are facing today is not enough business and not enough rainmakers. Don’t wait for your partners to encourage you or to be compensated or otherwise rewarded. Invest your time in developing your network of contacts even if it requires dedicating some personal time and consider it an investment in your career and future.

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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 02, 2017

Associate Attorney Career Track in a Small Law Firm

Question: 

I am the owner of a five-attorney estate planning practice in Denver. I have four associate attorneys of which three have been with the firm for over twelve years. Last year an associate that had been with me for many years left the firm and started his own practice. I thought I was paying him well by virtue of a competitive salary and discretionary bonus in additional to other benefits. I do not want to lose other seasoned attorneys. What should I do to provide more incentives for them to stay with the firm?

Response: 

Our experience as well as research over the years by our firm and others has demonstrated that the following, in priority order, are the key drivers of associate attorney job satisfaction:

  1. Satisfaction with immediate manager or supervisor
  2. Opportunities for training
  3. Satisfaction with team and coworkers
  4. Opportunities for career growth
  5. Compensation
  6. Opportunities for promotion

While compensation often is considered the primary factor related to associate satisfaction, I often find that opportunities for career growth and promotion play a significant role. Associates do leave law firms for less money for career growth and promotion opportunities in other firms or in some cases starting their own firm.

A key tool that law firm’s should be using for managing attorneys is a well-defined career path/track. The critical components of a career track include well-defined levels, roles and responsibilities at each level, promotion criteria, and compensation plans for each level. Typically these are outlined and documents in a career advancement program policy document. For example:

  1. Levels. Each attorney level within the firm (partner, non-Equity partner, principal, senior associate, associate) should carry a specific and clear title.
  2. Roles and Responsibilities. For each level, the typical roles and responsibilities should be clearly documented including client service work as well as business development and administrative responsibilities.
  3. Promotion Criteria. For each level in the firm, the criteria for promotion to that level should be outlined in the career track or career advancement program policy document. These criteria are often tied to competencies (knowledge, capabilities, and experience of the attorney), tenure as well as other factors.
  4. Compensation. A compensation plan should be developed for each level. (salary, bonus, benefits, and other perks)

I suggest that you give some thought to developing such a program. As you start with levels you will have to do some soul searching and confront the most burning issue – is partnership an option for associates in your firm – do I want partners –  and go from there.

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

 

 

 

 

Aug 04, 2015

Law Firm Associate Attorney Performance

Question:

I am the managing partner of a 8 attorney general practice firm in Chicago western suburbs. We have 5 partners and three associates. For years it was just the five partners all who started the firm together. In the last three years we added our associates. We are not making money from our associates and wondering what we need to be doing differently. One associates is logging 925 billable hours, one is logging 1200 billable hours, and the other 1400 billable hours. You thoughts are welcomed.

Response:

If these are full time associate positions and they have been with your firm a couple of years you should be getting 1600 – 1700 billable hours per year. If your firm does litigation – 1800+ billable hours. Some practice areas such as estate planning/elder law – range in the 1500-1600 hour area.

The starting place is setting expectations. During interviews with associate attorneys at client law firms I ask – what is your billable hour goal/expectation, etc. Frequently I am told that they have no idea or they tell me that they think that the expectation is such and such. Other times they advise me that the firm simply does not have a billable hour expectation. Of course the partners tell a different story and can't believe that their associates are not clear on billable hour expectations. 

Some firms put in place auto pilot type incentive bonuses based upon hours or dollars and believe that these bonuses in themselves will motivate performance and as a result billable hour expectations are not needed. Often this is simply not the case.

I believe that baseline expectations should be spelled out and measured monthly. These baseline expectations are the minimal requirement to remain employed and justify the base salary that the associate is being paid. If these baseline expectations are not been met, you must had some heart-to -heart discussions in real time. Outline the problem and consequences for non-compliance. 

The billable hours your associates are logging just won't cut it. If the work is there they simply must get their hours up to desirable levels. You might look into the reasons for the low hours – work ethic, time management issues, or problems with timekeeping. If there is not enough work – long term – you may have to consider reducing the work hours that you are paying for.

It sounds like you may not be adequately mentoring or training your associates. Consider performance reviews and active mentoring and coaching. Insure that you are providing adequate feedback to your associates. Your time investment in the short term will pay dividends in the long term. 

 

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

 

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