Lawyers work to have a purpose in life, to aid their clients, out of pride in their profession or their firm, for companionship, and for the approval of their peers, their spouses, and relatives. Lawyers work for money as well. The importance of money in this list is neither constant among lawyers, nor for the same lawyer at different times of his life.
A wealthy individual may care little for the financial rewards of law practice. A young lawyer without family, or an older one whose family is grown, may be little interested in a few hundred or thousand dollars of extra earnings. He or she may prefer a more comfortable office or a longer vacation as an alternative. But not all well-off lawyers disdain money. For some, their share of profits or salary is the measure of their worth, quite distinct from the purchasing power and wealth represented by money. Many lawyers view their compensation as the value their peers place on them personally.
Pay is viewed at several levels by the recipient:
- Pay needs to be sufficient to meet financial obligations at a reasonable level for the recipient's age and standing.
- Pay is viewed by the recipient as a measure of success in comparison with peers, law school friends, and other lawyers of the same age in the community.
- Pay is perceived as a measure of the lawyer's importance within the firm or legal department in comparison with all other lawyers. It is a status symbol, and a very clear one.
"Financial rewards are not major sources of positive motivation in the modern industrial society, even though discontent with them inhibits performance," states lawyer academician.
An employee (or partner) who feels trapped in a low-paid job will generally not perform well. A young lawyer coming out of school who has a choice between a job in a location he or she does not want at higher pay, or one in a preferred location for a little less, may choose location over one, two, or three thousand dollars a year more.
Problems with compensation can break up friendships and firms, cause employee turnover and result in massive waste of energy within an organization.
"Few instruments of management evoke more powerful and complex emotions in an organization's membership than its compensation policy," remarked a Harvard assistant professor of business administration in Harvard Business Review.
He continued: The source of these emotions is a concept we call equity. . . Researchers have framed several different concepts of equity, but there is agreement on two important points:
- Compensation should be equitable;
- It should be perceived as equitable by employees and managers alike.
Three perspectives on equity have special relevance to the design of compensation systems. Respectively, each of these defines equity through:
- The individual's preconceived, unconscious idea of what constitutes equitable payments in specific cases
- Comparisons of the total strengths--social as well as professional--that the individual brings to his job and the total satisfaction he takes away from it
- Relationships between the individual's performance and reward.
Unfortunately, a person's concept of equity may change with time and circum-stances. For example, B. Paine is hired as an associate lawyer. He is not native to the city and has no clients. In the course of time, he becomes the firm's expert on wills and trusts and handles these matters for the other lawyers of the office. By the time Paine becomes a new partner, he is recording 1,800 billable hours a year, which he calculates will gross the firm $135,000 at his $75-per-hour rate. Paine figures that he is underpaid when in his first year as a partner he earns $60,000. The argument that Partners Gooch and Twitty and six other partners brought in most of the work he performed carries little weight.
A few years pass, and Paine is now established in the firm and in the community. He has a good reputation, and generates clients of his own. His annual billable hours are now 1,400 which at his $100-per-hour rate bring in $140,000. His earnings from the firm now come to $100,000. But he generated $160,000 worth of new client business, by his own private calculations. The shoe is now on the other foot. Partner Paine wants to be compensated both for the work done and for the business he brings to the firm. He does not want to "subsidize" partners and associates who bring in no business. He is even willing to admit that in his early years with the firm he was overpaid, but there is no reason not to change the system now to one which is more equitable.
Such problems regarding the concept of equity are difficult for a group of partners to handle. When these situations arise, impartial and knowledgeable outside assistance can render a valuable service.
Compensation Plans, in General
Every organization of lawyers must develop a compensation plan in order to deal with this complex matter. Any organization which is unable to develop a plan understood by all will eventually find itself in trouble.
A compensation plan must recognize the needs for equity of the lawyers, the economics of the enterprise, the competitive factors of the labor market, and the goals and objectives of the organization. A plant which is satisfactory now may be inadequate next year. The compensation plan should be promulgated only after objectives have been carefully considered and the essential features of the plan worked out.
The compensation plan should be developed after broad consultation with those affected, and then well disseminated and understood.
The late Reginald Heber Smith of the Boston Bar enunciated one other objective of a law firm pay plan:
The whole purpose is to let the work in the office flow where it will be done best, most quickly, and at the lowest cost. The man having too much business must not be afraid to part with it, he must be encouraged to do so, and when he does so, the system must protect his natural and proper interest in the case and the fruits thereof.
Compensation Considerations in a Partnership Plan
The considerations which may be taken into account in devising a compensation plan for partners may be assigned varying degrees of importance. Some of these factors may hardly be considered at all, but they exist.
Production of Fees: Work that is billed and paid for is one of the fundamental components of partner compensation. In this respect, the partner (or shareholder in a professional corporation) differs not at all from the salaried employee.
Profitability: The profit derived from work supervised or managed by the partner is important. Even in those firms which do not systematically assess the profitability of legal work, partners who handle the obviously profitable, or that which is thought to be profitable, often can command extra economic consideration.
Bringing in and Holding the Client: Weight is given in almost all of the formal plans developed by law firms to "client catching." Quite often, the importance given to this function is exaggerated in the well-established firm. Doing good work, on time, is an important aspect of keeping clients and of bringing in new clients. Some of the systems in use in law firms do not fully recognize this latter factor.
Risk and Investment: The entrepreneurial function, as we have seen, is a compensable factor for partners and shareholders of professional firms. Capital accounts are only a small portion of the total risk factor, since the partners (shareholders) absorb any "losses" through a reduction in their own pay. Firms in which the founding lawyers are still active may also consider the risk these lawyers took in starting a firm. Most new law firms offer few financial rewards during their early years. These years are a part of "investment" even though they cannot be formally capitalized.
Technical Contribution: The contribution a lawyer may make to his firm by virtue of his special technical skills is an important compensation consideration. A law firm is an aggregation of special, mutually reinforcing talents. The talents may relate to legal specialties as well as to such law-related talents as writing expertise, ability to formulate legal theories, and special abilities in debate and argument.
Client Following: The ultimate test of strength in a professional organization is posed in the question, "Who will follow the lawyer if he leaves the firm?" This is not precisely the same as bringing in and holding the client, since recognition and credit for that factor is allocated as the firm (or the senior partners of the firm) perceives it, not necessarily as it really is.
Participation in Bar Association Activities: In firms where there is a strong feeling of obligation to the law as a profession, credit may be given for participation in local, state or national bar association work.
Noteworthy Activities Outside the Legal Area: Some firms have members who are well known because of political activity or charitable work. These firms may include non-bar-related activities, especially as they contribute to client getting and the image of the firm, as a factor to be given weight in income division deliberations.
Compatibility: The ability of a lawyer to contribute to the smooth-running nature of a practice receives great consideration in some law firms and none at all in others. In some firms, compatibility is considered only when a certain lawyer's behavior is such that it causes high turnover of clerical personnel or constant disputes within the partnership. It then becomes a negative compensation factor.
Hours Recorded: The production of raw hours, which may or may not be billed and collected, is a factor considered by some firms. This is so because they have no system for determining exactly which of the hours are actually turned into dollars. In other firms, there simply appears to be a compulsion for working long hours.
Delegation and Training of Associates: It is necessary to the longevity of any law firm that it is constantly preparing for the future through the training of new associates and paralegals. Lawyers who contribute to the future of the firm through developing new attorneys often receive credit for this work under a compensation formula or in a peer evaluation plan.
Seniority: Seniority is not as important a factor in compensation determinations as it was several decades ago, but it is still considered by some firms as important in the income allocation procedure.
The Need for Flexibility
Rigidity in the compensation plan of a professional firm almost certainly will result in its demise. The relative contributions of the partners (or shareholders) change over the years. No formula agreed upon in an earlier time can be continually enforced. Any rigid plan will ultimately violate the concept of equity. This is just as true when partners initially agreed to share equally as when an unequal initial plan was developed.
Each person need not be compensated for every one of the foregoing factors. Some lawyers are largely producers of professional work, some are managers, and some are good at marketing. Who is to say which function has the greater value?
Percentages and Points
The simplest form of income division among partners is to allocate to each partner a percentage of the earnings of the firm. In the firm of Pine, Elm & Oak, percentages may, for example, be allocated as Pine-45 percent, Elm 30-percent, Oak-25 percent. This is the simplest of all systems and it works quite well in many small firms.
A problem may arise when another partner is added. In the above example, let us assume that Associate John Apple has been made a partner. If the firm wants to remain on a percentage basis, this will require that each of the partners divest himself of some percentage interest in the firm in order to allocate to Apple. This is emotionally difficult for some partners and will generally result in the complication of fractional interests.
When a firm stays for too many years on a percentage division system the emotional impact can be disquieting and disturbing to younger as well as to older partners.
The point system is also advantageous in changing the relative interests of existing partners. Any firm that will not, from time to time, examine the contribution of each of the partners and make adjustment will not remain a firm.
Statistical Systems
Statistical systems were made famous by Reginald Heber Smith, the former managing partner of the firm of Hale & Dorr, Boston. Writing in the American Bar Association Journal, Mr. Smith described, in part, a system used in his firm. Since that time, many other law firms have adopted systems for maintaining records of the production and profitability of work, based on the Hale & Dorr approach.
Some firms have used the results of statistical systems directly in the compensation of partners. This means that if Pine were to have achieved 31 percent of the statistical credits of the system, he would be allocated 31 percent of profits.
Statistical systems, in brief, are compensation plans in which "credits" for fees brought in, clients obtained, and, in some cases, the profitability of work performed, are accumulated by the accounting department. These "credits" are converted to percentages, which are applied against the net income of the firm to determine each partner's interest in the net. In effect, statistical systems require the bookkeeper to keep data and, at the end of the year, tell each partner what he has earned.
Where this direct application of statistical records to compensation has been made, it has sometimes resulted in firms which function more like a series of individual practitioners than as law firms. Although it is useful and perhaps necessary to maintain a careful record of the contribution of each partner and associate to the welfare of the firm, it is simplistic to think that all of these contributions can be measured in terms of clients obtained, work done, and profitability of assignments. The other factors listed earlier -- general management, risk and investment, technical contribution, and client following--are not adequately measured by statistical systems.
Most firms should consider the yield of a statistical system as an important factor in making profit allocations between partners, but this should never be the only consideration.
