An alternative to the division of credit for securing business is to regard the lawyer obtaining a client as the manager of the matter. As manager, he may then call on the services of those of the firm's lawyers who are most capable of handling the client's problem at the lowest price.
This approach has operated successfully in a number of law firms. A description of one such system which has operated successfully for several years is as follows:
- Each attorney who brings a matter into the office acts as the "account executive" for that matter and is responsible for managing the matter to its satisfactory conclusion. If the obtaining attorney does not desire to manage a matter, he may turn it over to another attorney who will do so, but the obtaining attorney in that case receives no credit for obtaining the work.
- Each attorney and paralegal is assigned a billing rate for each year. The "account executive" purchases time from the other attorneys, at his own discretion, at 85 percent of that handling attorney or paralegal's billing rate. The "account executive" is free to set the billing for the client at the assigned rate or at any other rate he feels is appropriate to the matter.
- Time records are maintained by all attorneys and paralegal assistants.
- Each of the partners with managerial responsibilities is assigned a budget of hours for management activities, including training of associates. He is credited in the system for such activities at 85 percent of his billing rate.
- Retainers paid in advance are credited to the account executive when received and debited when funds are reallocated to other attorneys who have performed services.
- Figures are accumulated on all producing personnel, including associate attorneys and paralegal employees. These figures are considered in their compensation, among other factors considered.
- An associate will not be an account executive on any matter, but will serve only as a "subcontractor," selling his time to the partners of the firm at 85 percent of his billing rate.
When a matter is concluded or, in the case of continuing clients, at the end of each year, the account of the responsible attorney (account executive) is adjusted so as to deduct all credits paid to other attorneys in the firm. He is then credited with "profit" on the matter. If he has expended more professional effort than the fee justifies, he may end up with a "loss" resulting in a deduction from his available credits. On the other hand, if he bills the matter at substantially more than standard fees he may end up with substantial excess over the 15 percent called for by the discount rate.
Lockstep Approach
Under a lockstep approach, a law firm's compensation plan will be predetermined. Firms with a lockstep compensation plan generally assign interests on an annual basis, based on the number of years a partner has been a partner, up to a maximum number of points after 15 or 20 years. For example, a firm may have a system whereby a new partner enters into the partnership with ten points and receives an additional point every year until he has a maximum of 25 points. At this stage he and all other partners who have served as partners for 15 years will share equally.
A similar approach to compensation of associates is even more common. In many larger law firms, associate salaries are established by the number of years of experience. In a few firms, distinctions based on individual evaluations are made in either salary or bonus, however.
Some firms operating under the lockstep approach report that it serves them well and avoids controversy. However, other firms find that the lockstep approach causes them to have partner turnover because it makes no provision for the "superstar" performer and may reward a mediocre partner in the same amount as one far superior in talent or work habits. One of the requirements of an accepted compensation determination is that the amount resulting must be viewed by the recipient as a measure of his or her success within the firm in comparison to all other lawyers. The lockstep approach fails to meet this criterion.
Peer Evaluation
Another approach to compensation planning is "peer- evaluation" system. Under this system, a series of criteria relating to those factors that the firm as a whole determines are important in valuing the worth of a partner are used by each of the partners to prepare a rating for each of the other partners. In some cases, the factors are weighted in accordance with the value that the firm places on them. For example, dollar production ratings could be valued at twice that of management contribution, or vice versa.
The resulting average ratings are converted into percentage interests, sometimes by an independent third party.
Combination Systems
It is entirely possible to devise combination systems that include fixed amount payments, distributions based on statistical systems, and possibly also discretionary distributions, percentage interests, or any combination of these.
The varieties of combinations of such systems are almost endless. In devising a system for specific groups of individuals, their needs as a firm, their goals, objectives, and concepts of equity must be taken into careful consideration. In these matters law firms are not alike. The incentives which work well in one law firm may not work the same way in another.
Determining Which System to Adopt
The basic outlines of a firm's compensation plan may remain the same for a long period of time or they may be changed or modified with some frequency. However, the relative standing of the partners and the ingredients of the pay plan must be examined each year or two.
There is, unfortunately, no magic formula, no scientific method for setting up or revising a compensation plan. Most law firms do so by negotiation between the partners. When income is on the rise, such negotiation is generally amicable and easily resolved. It is more common to encounter difficulty when income is static or declining.
Professional Corporations
The compensation of shareholders in professional corporations may in many respects be similar to the compensation of lawyers in partnerships.
Shareholder-employees are, above all, employees of the professional corporation. Employees in business may be paid on many plans. In addition to salary, these plans may include commissions, deferred compensation, productivity payments, group incentives, piece-rate pay, and a host of other arrangements. Profit-sharing is an accepted method of compensation for senior professional employees and managers in business corporations. These concepts, suitably altered, may be utilized in a professional corporation. Almost any employee is paid a salary and the employees of a professional corporation should also be paid a salary in order to insure the continued treatment of the enterprise as a corporation, for tax purposes.
Paying and Advancing Associates
Compensation paid to associate lawyers took a dramatic rise in the 1980s and has continued upward at a more moderate pace since. Starting salaries for new law school graduates in 1986 ranged generally between $30,000 and $65,000 for high-ranking graduates of major law schools. From these lofty figures, starting compensation ranges downward to less than $20,000 in smaller firms for graduates of less highly regarded institutions.
There is today an almost universal practice of paying associates a basic salary. The exception is in some patent law firms where associates are paid only a proportion of the fees they earn. This practice was at one time prevalent in many other types of firms as well.
Progressions above hiring salary are generally at the rate of $3,000 to $5,000 per year for the first several years.
There are two general approaches to the payment of bonuses in addition to salaries:
The associate receives a proportion of fees collected from his own clients, or
The associate is paid a discretionary bonus depending on the profitability of the firm and the quantity and volume of his work.
Of the two, the second is the sounder alternative.
The division-of-fee method of compensating associates is divisive. It teaches the young associate that he must work for himself to accomplish something within the firm, rather than to work for the common good. If the employer's purpose in engaging an associate's services is to get the firm's work done, as is most often the case, the practice of splitting fees from the associate's clients is a disincentive to getting the firm's work done. The result may well be that the firm's important clients languish, while the associate busily pursues the minor legal problems of his low-paying friends.
The fee-splitting system is often justified by the explanation that an associate must be encouraged to bring in new clients or to obtain legal business. The statement is, of course, true, but it does not justify fee-splitting. The greatest incentive for an associate is usually to become a full-fledged partner of the firm. The firm should make it plain to each of its associates that the ability to bring in good work is an important consideration in the admission of partners. This will generally suffice to encourage associates to bring in business. There may, of course, be situations in which an associate can bring in an unusually attractive matter, such as a relative's probate estate. When this happens, there is nothing to prevent the employer from considering that fee in the allocation of discretionary bonuses.
Some firms pay associates as much as one-half of the fee for the work they bring in. The firms that pursue this course generally lose money on each of an associate's clients.
Some type of bonus is, of course, often a wise course. Associates must learn early that they are part of a team and that the results of the team's efforts are shared among all of its members. A flexible bonus which takes into consideration the year's profits generally and the individual contribution of each associate is a means for reinforcing team spirit. In evaluating an associate's contribution, the firm should consider not only the business he obtains, which may be quite unimportant, but also his progress, diligence, ability, perseverance, and billable hours.
A formal evaluation procedure for associates is valuable even in the smallest firms and is a virtual necessity in larger aggregations of lawyers. The evaluation assists the firm in making sound judgments as to relative worth of associates and their progress toward partnership. In addition, it provides a tool for engaging associates in formal interviews regarding their progress.
Evaluations are generally made more frequently for the newest associates and less frequently for more mature individuals. For example, a firm may formally evaluate associates quarterly during their first year, semi-annually during their second and third years, and annually thereafter. Following each evaluation, the associates should be counseled by a responsible partner who will discuss the rating in detail and suggest approaches to obtaining a better rating. These counseling sessions must, of course, consider any statistical measures of associate performance in addition to the formal evaluation. Government and industry have long recognized the value of formal evaluation procedures in salary administration and training. The private legal profession has not kept pace in this area.
The most common complaint of associates is that they are not told how their work is perceived by their employers. Usually the only indication that an associate gets as to work quality and timeliness is negative comments when the work product is not up to the standards of the firm or when it is late. Fortunately, the trend toward performing regular evaluations is growing.
A typical rating system will require that an individual be rated by at least two and sometimes three or four others who are familiar with his performance. The scorings of each rater are reviewed and analyzed to assure that the rater is neither too "tough" nor too lenient. A partner who rates everyone as "very good" or sees no merit in any associate can destroy the validity of the rating system.
The scores of each individual rated are then averaged to obtain a composite score and this score is considered for salary advancement, but the discussion with the individual rated is the more important factor.
A law graduate seeking employment with a law firm should inquire about the firm's evaluation program. Much future heartache may be avoided by not joining a firm which lacks a means of regular evaluation. Too many associate lawyers find out after three or four years on the job that they will not be considered for partnership because of some flaw in their performance. This could have been avoided through regular evaluations which would have given the associate the chance to remedy the defect. Instead he or she finds out too late that new employment will have to be sought.
Compensation of associate lawyers does not create the problems that partner compensation creates. Associates generally are well paid today. The major source of associate concern encountered today relates to the years of service as an associate which the firm will require before admission to the partnership.
There are some trends in the number of years required to attain partnership.:(1) Admission is likely to be earlier in the small firm (under 25 lawyers) than inthe large one; (2) the length of time to partnership is growing longer.
In the 1970s the average time to partnership was about five years. Currently many firms are using 7 to 8 years and talking about lengthening the time to admission even more. Some very large firms are creating other classes of quasi-partners between the associate and partnership level. Some of these alternatives might be called "non-capital, non-voting" partners, "junior, non-voting" partners, and "senior associates."
The causes of both the lengthening of the time to partnership admission and the use of intermediate steps are (1) increasing costs of hiring associate lawyers,(2)inflation and the erosion of the partners' net dollars, and (3) slowing growth of the profession.
In large law firms, the partners expect to have high earnings. This can best be accomplished through profit on the work of associates. If associates are made partners they expect high earnings also and the profit on their work diminishes or disappears. Firms cannot keep adding more and more associates at the bottom of the ladder forever, and this realization by the owners of large firms is causing the protraction of the length of time which associates must serve before becoming partners.
Salary Plans in Corporations and Government Agencies
Business corporations and government agencies large enough to employ their own legal staffs are generally highly managed. Most often, such enterprises utilize professionally developed salary administration plans or civil service plans for the white collar, managerial, and professional employee groups. Staff lawyers, as well as accountants, engineers, scientists, and other such employees, are generally included in the management-level compensation program.
The amount of flexibility in such programs as well as the methods of establishing pay grades or classes varies in detail. In general, most corporate programs rate each position on the basis of a number of factors, and they may assign numeric scales or weights to each factor. Some programs use a ranking method in which a committee is required to review a position and rank it above, below, or on a par with other positions.
Factors considered in the various plans may include such items as the supervision of the number of persons, fiscal responsibility measured in dollars, prerequisite education and experience, reporting level, accountability for profit, physical requirements, mental requirements, and hazards encountered. Whether lawyers fare well or not depends on the particular plan and its administrators.
In one business situation where such a plan was installed, lawyers responsible for approval of commercial contracts were ranked higher than lawyers with responsibility for antitrust problems. This plan placed a heavy weight on fiscal responsibility, measured in dollars.
The attitude of the appropriate management official of the corporation may be important in providing the necessary flexibility for correcting such imbalances. In some large corporations, the pay grades of key levels or attorneys are rather arbitrarily pegged into the management pay structure, since it is difficult to use the same job evaluation formula for lawyers as for line executives. Once a few lawyer pay grades are tied into the general structure, it is a much easier matter to determine the relative value of the levels of lawyers to each other by using a simple forced ranking system, in which all of the lawyers are placed in a sequence of most valuable to least valuable. Pay grade lines are then drawn according to staffing needs and budget.
Special problems occur in corporate salary programs when compensation for one occupational group rises at a rate faster than compensation generally. In the fifties, this problem was prevalent for engineers, whose salaries escalated more rapidly than those of other groups of employees. In the later sixties and early seventies, lawyer compensation rose at a greater rate than that of most other occupations employed by corporations, causing some dislocations in salary-planning.
The Labor Market
The labor market is a concept developed by the fraternity of economists; it has its uses-and abuses. There is no neat little market for lawyers. Instead, the labor market in which each individual finds himself is distinctly his own, although it overlaps the labor markets of many other people. The labor market in which an employer seeks to fill a position merges with many other labor markets and also has individual characteristics. If we can imagine a series of overlapping circles, somewhat like the symbol of the Olympic Games, we have a picture of labor markets.
An illustration, from the point of view of the employer, is that he is trying to fill a specific, described job, or he wants to find an employee who can accomplish identified, needed work. The employer, therefore, is not just looking for a "lawyer." He is seeking, for example, a patent lawyer with a certain technical background (let's say chemistry), and possibly one admitted to practice in a certain jurisdiction, one with certain experience and skills to be employed in a specific location. Further, he may have strong ideas about the need to develop the new employee into more responsible work.
If the larger labor market for registered patent lawyers, at the time the employer is recruiting, consists of 500 persons who are willing under some circumstances to change jobs or who are out of work, chances are that only a few meet most of the specific needs of the employer. These few, for the purposes of this vacancy, are in the employer's specific labor market.
A particular lawyer who is one of the people in whom the employer is interested may have had experience as a corporate lawyer as well as a patent lawyer, and therefore finds himself fishing in two labor market ponds. However, he may not want to move to the city where the employer is located. His labor market is not the same as the labor market of the employer.
Despite the complexity of the labor market concept, the availability of individuals with certain skills and the demand for these skills at any given time has an interacting effect on compensation. Salary surveys provide measures of this effect. The general shortage of certain legal skills unquestionably exerts an upward pressure upon compensation in private firms, government and corporations, and upon the fees charged by lawyers.
Intra-Employer Pattern
A major consideration of management is to maintain a rational and defensible relationship among the compensation of each of an organization's employees. There are in use many formal wage and salary plans, all of them dependent in some measure on subjective evaluations and none of them perfect.
To fit into a salary program the diverse technical skills, management functions, sales functions, and other specialized occupations which exist even in a small enterprise is a complex and difficult undertaking. A formal wage and salary administration program should relate the salary of a particular lawyer not only with the salaries of other lawyers employed by the organization but also with the compensation of the company doctor, the vice president for finance, and the production workers.
Industry and Geographic Patterns
The compensation structure of each company or legal organization relates generally to an industry pattern; in some cases it may also relate to geographic compensation patterns. For example, historically the oil industry has been among the highest-paying industries, although that situation has changed somewhat in recent years. Textile manufacturers, on the other hand, were and are among the less well-paying industries, because of the competitiveness of the industry and the large use of manpower. Also, manufacturers generally have higher compensation patterns than utilities.
The size and strength of an employer will affect pay scales. Larger, stronger employers may pay a premium in order to attract and hold the best employees.
Because of the national scope of many corporations and also because of union drives to eliminate formal regional wage differentials, geographic differences are no longer as pronounced as they once were. Increasing thought is being given, however, to paying living cost differentials for certain locations, particularly New York City and California.
The Individual
Studies of factory workers, where output can be precisely measured, show conclusively that an individual who is outstanding at a task may produce more than twice as much as the average worker and several times as much as a marginal worker.
Such differences apply just as well to professional workers, although their productivity and value are far more difficult to measure. Most corporations and some larger law firms attempt, at least subjectively, to measure the productivity of lawyers.
Corporate and governmental compensation programs usually provide a salary range for each position and for professional groups; they often allow movement among several position levels for employees with quite similar responsibilities. A typical salary range, if calculated from the minimum figure, may go up by at least 50 percent of the minimum (from $30,000 to $45,000). Adjacent position levels usually have overlapping salary ranges.
All of these devices are designed to permit management to retain competent employees. The individuality of salaries usually is apparent when employees with identical classifications and similar experience are paid different salaries, which happens in most organizations.
