Law Practice Management Asked and Answered Blog

Category: Compensation

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Jan 22, 2020

Associate Performance and Coaching

Question: 

I am a partner in a three attorney law firm based in Orlando, Florida. I did a quick Google Search this morning and stumbled upon your excellent blog posting – Associate Attorney Compensation.  John did an excellent job in answering the attorney’s question.  We have an associate who I like very much; however, heading into her 3rd year with the firm, she has gotten a bit comfortable with our laid back style of management.  Our situation is similar in many respects to the situation posted by the Chicago attorney.

I would like to find out more about whether coaching could help us improve our associate’s performance. Her billable hours are 800 per year and net profit after deducting her salary, benefits and assigned support staff from her collected fees is around $15,000 and this does not take in to account other office overhead. Frankly, I am a bit hesitant to spend more money on her practice area as it is not really producing a profit for the partners in the firm. However, I am exploring ways that we can improve the situation for this part of the law firm.  I look forward to chatting with one of you. Again, I enjoyed reading the article.

Response: 

Whether coaching can help depends upon the specific situation and the cause or causes of the problem. It sounds like you might want to kick the can down the road and have someone deal with the oversight responsibility that you and your partner should be handling. Typical causes of poor associate performance include:

An outside coach could possibly be helpful if the problem is poor time management or poor timekeeping habits. You would want her on board with using an outside coach and might want even to consider having her pay half of the coaching fee. However, if the problem is one or a combination of the other three areas, an outside coach might be a waste of money. Maybe you and your partner need coaching on the top three areas. It is also possible that you simply have an associate that wants to work nine to five and may not be wrong person on the bus. Successful professional service providers whether they be attorneys, accountants, or management consultants don’t work forty hour or less weeks – they work fifty hour plus weeks.

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

Nov 12, 2019

Partner Compensation in Law Firms – Objective vs Subjective Approaches

Question: 

Our firm is at a crossroads concerning partner compensation. We are a twelve lawyer firm in Richmond, Virginia with nine partners and three associates. We are in our second generation of partners as the original founders have retired over the years. We do not have a managing partner or management committee – management decisions are made by all the partners. Our compensation is based upon compensation participating percentages set at the beginning of each year based upon the recommendation of a rotating member compensation committee recommendation which must be approved by the full partnership. These percentages are then used to allocate each partner’s share of firm profit. Monthly draws are taken against projected allocations and the calculations are trued up each quarter and at the end of the year. There is nothing in writing and it is unclear what is taken into consideration by the compensation committee. However, in general the primary metric is individual working attorney production collections. Supposedly, other metrics and subjective factors are taken into consideration but no one knows what they are. The majority of the partners have been relatively happy with the system but a few are not due to the vagueness of the system. I am wondering whether we should move more to a formulaic approach. What are your thoughts?

Response:

The trend in compensation, particularly in larger firms, is toward subjective or hybrid approaches and a movement away from strictly formulaic – eat-what-you-kill – objective systems. These systems are fine in “lone ranger” firms but often are unsuccessful in firms that are or want to be “firm first” or “team based” firms. The unhappiest partners that I see are in some of the firms with eat-what-you-kill objective systems. It sounds like your system has worked fairly well and a majority of the partners have been satisfied with the system. However, it may not be reinforcing the behaviors that you would like to instill in your partners if the only metric used, or is perceived as the only metric being used, is working attorney collections. Your firm is very partner top heavy and I would not be surprised if your utilization of paralegals as effective billable revenue producers is minimal. You are encouraging personal production period. What about delegation, new business origination, leadership, contribution to firm management, mentoring and training of associates, etc? Subjective or hybrid approaches often do a better job of dealing with overall contribution to the firm if they are setup properly.

I would suggest you fine tune your existing system. Consider the following:

  1. Put your system in writing. Outline the performance factors that are considered and the general importance or weights of each. This includes objective or directly measurable factors and the more subjective or harder to measure factors.
  2. Make more of the intangible or subjective factors measurable by requiring that a personal plan be submitted by each partner and reviewed with and approved by the compensation committee. This plan should contain specific measurable goals and objectives that are specific, measurable, attainable, rewarded in the compensation system, and on a specific completion timeline.
  3. Require that the compensation committee conduct personal partner interviews each and every year prior to their deliberations on compensation. This interviews should be mandatory. Self evaluations with related narrative should be provided by the partner being interviewed prior to the interview and the approved plans should form the basis for the discussion and reviews.
  4. The full partnership should either approve – up or down the compensation committee recommendation – not be allowed to pick apart or modify. If the partnership does not approve the committee’s recommendation the committee starts over and submits another recommendation. There should be a provision for what happens if a decision cannot be make – for example used last year’s percentages, etc.
  5. There should be an appeal process if a partner has a complaint with regard to the decision concerning his or her compensation.
  6. Consider extraordinary bonus pool for exceptional performance rewards.

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

Oct 23, 2019

Associate Attorney Compensation – Incentives Beyond Billable Hours and Working Attorney Collections

Question: 

I am the owner of a five attorney firm, myself and four associates, in Bakersfield, California. While we are a general practice firm, much of our practice is focused on commercial real estate, estate planning/probate, and corporate/business law. All of the associates have been with the firm over five years. The associates are paid a salary plus a bonus based upon their individual working attorney collections that exceed a quarterly threshold. While there have not been any complaints with this system I am not sure that it is the best system and that I am providing the right set of incentives. I would appreciate your thoughts and any ideas that you may have.

Response: 

Many firms use a system such as your system. However, other firms add more factors into the equation. A system that focuses on billable hours or individual working attorney fee collections often creates a firm of lone ranger attorneys that:

You might want to consider additing a component that recognizes delegation to paralegals and other attorneys (responsible attorney collections) and client origination (originating attorney collections). Some firms rather than rewarding client origination directly pay a bonus for handling new client intakes and successfully closing new business in the form of a flat dollar bonus after designated thresholds. You could also pay flat dollar bonuses for contribution to firm and business development – not time or activity – but for specific results such a having articles published, implementing a document assembly system, or writing a procedures manual. If you wish to avoid a formula approach simply use a discretionary bonus to reward firm these other factors and firm contributions. However, be clear about the factors that are be rewarded and the importance/weight of each.

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

 

Mar 20, 2019

Associate Attorney and Non-Equity Partner Compensation

Question: 

I am the owner of a seven lawyer insurance defense firm in downtown Chicago. Two of the lawyers are non-equity partners and four are associates. Currently I pay the associates a set salary and a performance bonus based upon annual billable hours over 1800. Until last year non-equity partners were paid in the same fashion, however non-equity partners received a few additional perks such as a firm credit card and a country club membership. Last year I changed the non-equity partner compensation system to focus on collected receipts rather than billable hours. Non-equity partners receive a salary and a performance bonus based upon working attorney collected received above a established threshold and a delegation bonus.

Currently all of the non-equity partners are paid salaries above $100,000 and two of the associates are above $100,000.

My results with the two bonus systems are dismal at best. My objective was to motivate my attorneys to bill more hours. However, they don’t seem interested. Very few have received bonuses. Last year I had several lawyers that did not even bill 1500 hours. What have a done wrong?

Response: 

There is noting wrong with your approach to compensation. You may have the wrong people on the bus. They simply aren’t hungry and this is not something you can teach. You are paying them salaries high enough that they can pay their bills – they are content and don’t want to put in the additional work to earn the extra income. Work-life balance is as important to more and more young attorneys as is money. If your attorneys are simply meeting the thresholds (billable hour or revenue expectations) and not exceeding them that is one thing. However, if your attorneys are not meeting the minimal expectations (hours or revenue thresholds/expectations – this is another issue as they are not producing at a level to justify the salaries they are being paid. Salary adjustments downward may be in order or simply terminating them. I don’t know many insurance defense firms that will tolerate less than 1800 billable hours.

While you must get compensation right in order to acquire and retain top lawyer 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 not only about the money or compensation package.

Jim Collins sums it up best in the following quotes from Good to Great (p 10-13)

“First who – then what”

“They get the right people on the bus, the wrong people off the bus, and the right people in the right seats.”

“People are not your most important asset. The right people are.”

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

Jan 03, 2019

Law Firm Non-Equity Partner Subjective Compensation Factors

Question:

Our firm is a seventeen-attorney commercial litigation firm in Atlanta, Georgia. I am a member of our firm’s management committee that decides raises and bonuses for non-equity partners and associates. Currently our non-equity partners are paid a salary and a discretionary bonus. We would like to stay with this approach however we have had complaints that our system is totally arbitrary. We would like to be able to provide more transparency – a general list of the items that we consider when making our decisions on salary and bonuses. You thoughts would be appreciated.

Response: 

Here is a suggested list of factors with weights that you might want to consider:

  1. Fee Production – Client Origination Collections – 25% weight
  2. Fee Production – Working Attorney Collections – 25% weight (billable hours in some firms)
  3. Profitability of Work – 10% weight – (effective rate per hour, realization, etc.)
  4. Delegation of Work  – 10 weight (delegation to paralegals and associates)
  5. Client and Case Management – 5% weight
  6. Technical and Professional Competence – 5% weight
  7. Professional Conduct – 5% weight
  8. Firm Management and Leadership – 15% weight

You can adjust this list for your particular situation and what is important for your firm.

Here is a sample list of subjective compensation factors with detailed consideration factors with weights and points.

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

 

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 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

 

 

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

 

 

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