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Best Practice: Changing law firm compensation systems

Asked and Answered

By John W. Olmstead, MBA, Ph.D, CMC

Q. I am a partner in a 20-attorney firm in San Francisco. We have five partners. Two of the five partners are founders and the other three were made partners five years ago. From day one our compensation system has been an eat-what-you-kill compensation system based on a formula with two factors - working attorney collections and client origination. While the system worked OK for the founders, it is not working for the present firm. The newer partners are unhappy with the system and believe that it does not consider other factors that a partner contributes to the firm. Some of the partners are hoarding work, refuse to serve on committees, and don't want to do anything but bill. A couple of my partners suggested that we move to a totally subjective system. I would appreciate your thoughts.

A. More and more firms are moving to more subjective based systems for some of the reasons that you have outlined - especially larger firms. Success of such a system is dependent upon the compensation committee that is put in place (typically a three-member committee elected by the partnership) and the level of trust that partners have in the partners serving on the committee. With only five partners you don't have a large enough partnership to put in place such a committee. It would have to be a committee of the five which would probably not be feasible. In addition, your culture may not be conducive at this time to such a system. Your founders have grown up under the present system and will more than likely resist such a formidable change. I suggest that you make some changes to the existing system and see how that works. For example:

  1. Include responsible attorney as well as working attorney and originating attorney fee collection in the equation with a possible weighting of 60% working attorney, 20% responsible attorney, 20% originating attorney.
  2. Factor in overhead or if not have a reduction provision for attorneys that are consuming un-fair share of overhead.
  3. Factor in effective rate/realization and reduce compensation for realization that is below a certain threshold.
  4. Setup a bonus pool (15% - 25% of firm net income) for exception performance decided by the five partners. If there is no exceptional performance or the partnership cannot agree the funds are cycled back into net income and distributed in accordance with the formula.
  5. Provide production credit or paid special compensation for serving on management committee or as managing partner.

See how modifications to the present system work and consider a subjective system down the road as the firm's partnership ranks gets a little larger.

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John W. Olmstead, MBA, Ph.D, CMC, (www.olmsteadassoc.com) is a past chair and member of the ISBA Standing Committee on Law Office Management and Economics and author of The Lawyers Guide to Succession Planning published by the ABA. For more information on law office management please direct questions to the ISBA listserver, which John and other committee members review, or view archived copies of The Bottom Line Newsletters. Contact John at jolmstead@olmsteadassoc.com.

Posted on Jul 20, 2016 by Chris Bonjean | Comments (0)
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