Determining attorney compensation and Its Effect on Overall Practice Strategy

What are some of the options and issues regarding attorney compensation? This one issue is central to every other decision in a law firm, especially the firm's strategy and direction. Certainly this is one of the most often discussed subjects of law practice management, since by definition it affects all attorneys. The pages of practice management books and law journals have lengthier analysis of more types of plans than one would think possible to exist. Someone once made the comment that for every 20 law firms there must be at least 25 different compensation schemes—just for partners!

This article discusses a few plans, as they relate to practice development and marketing, and looks at their results achieved over time. Articles in the New York Law Journal and Legal Economics have presented views on both subjective and objective formula approach to compensation. Arguments for both sides were presented and had merits. However, there are two other and more important aspects in the procedure to determine compensation.

BASIC ISSUES OF COMPENSATION

Perhaps the most important issue of all is the objective of the practice. If the objective is to increase production, then rewarding production through the compensation system is clearly the most appropriate strategy to pursue. It boils down to the simple concept that if behavior is rewarded, it will be repeated.

However, one would suspect that readers of this article are considering methods to modify their practice in any one of several ways, presumably by way of selected marketing tactics. Therefore, a compensation system which rewards "rainmaking" is preferable. That sounds obvious, but many lawyer compensation plans contradict the stated objectives and priorities of the firm. Second, the most important factor is trust. When discussing compensation with attorneys, the subject of trust often comes up, either implicitly or explicitly. Whether pay is determined by the Executive Committee or a separate compensation committee, it requires that those subject to their decisions must trust their motives and the system itself to reward their contribution.

THREE CASE HISTORIES

Here is a firm that encouraged associates as well as partners in the business development process:

A small firm of four partners and seven associates with a fairly focused practice emphasized land use and real estate law. Their partner pay is predicated on contribution to profitability as determined by a formula that includes billable hours, leveraged hours, and collections. However, their plan departs from the norm in that associates receive 5 percent of annual billings of clients they obtain, in addition to salary. Obviously new business is a high priority, and performance is rewarded.

Here is an example of a firm that encouraged cross-selling but put the primary responsibility for retention on the attorney that brought the client into the firm. A law firm, practicing in estate planning and employee benefits, uses a system based on "responsible" and "billing" attorney. When a client is brought to the firm by a partner, that partner receives 5 percent of billings for as long as the partner remains with the firm, no matter who in the firm does the work. The "billing" partner is directly responsible for the work, even that of paralegal and associates, as well as his own. In return, the billing attorney receives 30 percent of all revenues generated by the client.

This system works well for them because "rainmaking" is rewarded, as are billable work production, supervision, and personnel development. Leveraging is encouraged in addition to passing matters on, or cross-selling to others for purposes of work load balancing. But the system is based on trust of different levels—trust that someone else will do quality work for "my" client and trust that each partner will get proper credit for business development. It is also based on trust that the system will remain in place long enough to reward business development and contributions to the firm. Additional time, such as for marketing planning, library, computer office management, firm management, and other duties, is done voluntarily with no direct remuneration in the belief that serving the firm will be rewarded indirectly.

This third example describes a firm that is fairly traditional, but does in fact reward nonproductive time, while filling important needs mandated by the firm's management committee.

A general practice firm uses a system similar to the longevity-based "lockstep" method except small "credit" is given toward billable hours requirement for extra duties, such as associate and staff development, marketing, library and computer management, and so on. The basis is still production oriented so little incentive exists for business development.

Whatever the formula for compensation, it is clear that no other factor says as much about the firm's objectives and strategic planning than the compensation structure. Even the traditional lockstep method which rewards largely on the basis of longevity and acceptance to a structured partnership is based both on trust and firm objectives.

A detailed discussion and analysis of compensation is not within the scope of this article and is more properly addressed in law firm management books as well as practice-oriented journals. Of particular merit in this area is Prentice Hall's newsletter service, Of Counsel. Overall, no single other item will influence a firm's direction to the extent of compensation.