Note: This post was originally published by Loretta Ruppert.
“If you want to understand a firm’s culture, start by understanding the firm’s compensation procedures,” wrote Eric Goldman, an Associate Professor of Law at Santa Clara University School of Law. From personal experience compensation does drive behavior in a law firm – good and bad. And culture is really just the result of the surroundings that include the firm’s leadership. Depending on how you read this, you could see partners hoarding work for themselves or openly mentoring and growing other legal professionals.
Legal professionals are making career changes in unprecedented numbers. Whether is it legal professionals being laid off from large firms or law students graduating from law school – many are faced with hanging a shingle or working contract for a law firm, and if an experienced attorney with a book of clients is looking, they most likely can get an offer to partner with an existing law firm.
Challenging economic times cause stakeholders in law firms to look at what’s working and what’s not. The results of deep analysis of law firm performance can result in a law firm split or acquisition of a law firm with a specialty. These types of activities are among the most opportune times to evaluate an existing compensation plan or to develop a new one.
Here are a few best practices for lawyer compensation plans that work and some considerations to think about as you look at developing or modifying a compensation plan.
Mary Ann Altman and Robert I. Weil, authors of How to Manage Your Law Office, had a straight forward point of view, “Every compensation plan works – Every compensation plan fails. Compensation plans can run the spectrum from objective to subjective, participative to dictatorial.” Overall, Altman and Weil said it was important to keep the compensation plan simple and not too complicated.
“Primer on Partner-Compensation Models” by Denise Dickins, lists a few compensation plan qualities that overlap, complement and add to what Altman and Weil recommend as good qualities for a compensation model:
- Ensure the compensation model is fair, or perceived to be fair, to junior and senior partners. It’s important to distinguish between being happy with compensation vs. a sense of equal treatment among partners.
- Compensation models must be flexible to change as the law firm evolves, like change in ownership, the growth of an area of practice over another, etc.
- Senior partners will eventually retire from the firm and the model must be sustainable and financially reasonable so the firm does not incur cost that puts the future of the firm at risk.
- Compensate based on performance. Performance can be defined in traditional terms like how many new cases / matters do you bring in each year, the percentage of work completed by non-partner legal professionals, client retention, billable hours and collection of receivables. But it is also recommended to include other, more subjective terms like leadership development, participation on committees to help the firm advance in areas such as IT or strategic client development efforts like service in community and bar activities.
Other law firm compensation considerations:
- Partners with clients who make up a large percentage of the annual revenue or that are growing
- Partners who have a specific field of expertise that is desired
- Partners’ referral network
In addition to those considerations about the partners, you’ll want to:
- Know what kind of capital investment to request: Will it be one lump-sum investment, annual payments for set number of years, or a graduating payment over a few years?
- Prepare for a dissolution or bankruptcy – how will the debt and guaranteed payments be handled in the event the firm has to dissolve? A recent article in the Wall Street Journal, “Debts of Defunct Law Firms Haunts Partners,” says just because your firm has filed for bankruptcy doesn’t mean you are free and clear. If you start up another firm, you may be liable to pay debtors from your new firm.
Compensation discussions are personal and can raise emotions that you don’t see otherwise from legal professionals. If you are starting your own law firm, merging with another, or in an existing law firm that needs a new compensation plan, take time to consider and weigh all of the information; involve all levels of stakeholders; develop the compensation plan to be flexible fair to all stakeholders, fiscally responsible, simple and with contingencies in case of dissolution or bankruptcy.
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