A Start-up System – Is It Time to Change It
In my Illinois Lawyer Weekly Online Column and in my blog I encourage the submission of questions concerning law practice management topics. I am receiving more and more questions pertaining to partner compensation. Here is a question that I recently received concerning partner compensation in a newly minted two attorney firm.
Our firm has been getting by for 18 months since start-up. We are starting to get some repeat business and I think we are on our way. However, my partner looked at the numbers for 2011 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 we 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?
Here was my response to the question:
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 two attorney 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 a while. For example, an attorney with a personal injury plaintiff practice may have wide swings and may need to be carried in lean times – but when the big fee comes in both partners 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 activity 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 a 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. a “firm first” orientation. It is hard to build a team-based firm with eat-what-you-kill systems. 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 – working attorney fees generated, fees originated, responsible attorney fees, marketing, firm management, etc. If your commitments and performance are in general alignment – then maybe you should stay on the 50-50 split for a while 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 could write a whole book on compensation systems – but here are a few thoughts:
When perceived contributions get out of alignment partners are reluctant to have the candid discussions that need to occur as well as changes in the arrangement or compensation system. It could be the system – percentage interest is fine – but as contributions have changed the percentages need to change.
Resist the temptation to look at financial contributions in a single year. Look longer term – say the past three years.
John W. Olmstead, MBA, Ph.D., CMC, is a Certified Management Consultant and the president of Olmstead & Associates, Legal Management Consultants, based in St. Louis, Missouri. The firm helps law and other professional service firms improve the operations and management of their practices and the lives of their practitioners. The firm, founded in 1984 serves clients across the Globe assisting them with implementing change and improving operational and financial performance, management, leadership, client development and marketing.
Dr. Olmstead’s assignments have covered the spectrum of management issues. However, in recent years most of his time is focused on engagements helping firms with:
Dr. Olmstead is the Editor-in-Chief of “The Lawyers Competitive Edge: The Journal of Law Office Economics and Management,” published by Thomson West. He is currently serving as Past Chair, Illinois State Bar Association Standing Committee on Law Office Management and Economics and as a member of the Legal Marketing Association (LMA) Research Committee. Dr. Olmstead may be contacted via e-mail at firstname.lastname@example.org. Additional articles and information is available at the firm’s web site:
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