How to Fix Your Law Firm's Compensation Plan

I need your help as a reader of morepartnerincome.com.  A reader sent me the following e-mail:

"I just re-read Why Law Partners Hoard Work? and I wonder if you have clients who have implemented this type of system, and exactly what kind of weight they attribute to each category mentioned, and exactly how this approach has been applied in practice, and with what success.  I am particularly interested in the idea of limiting origination to 18 months, and substituting a measure of associate work supervised."

 

If you are among those firms who have taken steps to fix your compensation plan, let me know by adding a comment or, if you prefer to remain publicly anonymous, send me an e-mail at morepartnerincome@juris.com and I will put you in touch with the above inquiring partner.

 

Why do compensation plans need to be fixed?  Most midsized law firms stuck in a lower per-partner income box are there due to their existing compensation plan.  Here is the dilemma:

 

·         Partners hoard work rather than delegate because they make more money by doing the work themselves.

·         The law firm underutilizes their expensive income-producing assets, associates, by 25-30 percent.

·         The law firm doesn’t have enough associates to create the leverage needed for top per-partner income performance.

·         Because partners are “doing the work,” they are not bringing in sufficient business to use the associates they have or to build leverage by adding more.

·         Because partners are “doing the work,” they don’t take the time to mentor associates in order to increase their capability to handle work independently.

The ABA Law Practice Management Section has just published Jeffrey L. Nischwitz’s new book Think Again!: Innovative Approaches to the Business of Law. In it he details the destructive impact of the “every person for himself or herself” mentality of the typical law firm business plan.

 

·         “Eat what you kill” plans fail to create or nurture loyalty. Attorneys quickly learn that their success depends on their individual efforts and results, not the firm’s.  They are “hired gun slingers” who are inclined to “sell their gun” to the highest bidder.  The best people leave.

·         Attorneys are reluctant to follow instructions unless those instruction best fit with the compensation system.

·         There is a lack of team thinking and support where the biggest victims are cross-selling and client service. Attorneys “actually take affirmative steps to keep other partners away from ‘their clients’” with devastating impact on income.

·         Lifetime origination credit isolates clients from effective development and “to the financial detriment of everyone in the firm, most of the work never comes in the door.”

·         The “once my client, always my client” attitude works as an effective bar against any cooperative marketing and business development efforts.

·         Even worse are plans that give a single partner credit for establishing a referral source relationship where all credit for referred business from that source is credit to the initial originator. The protected source becomes a wasting asset, assuring “that the firm will consistently and repeatedly under perform, with countless opportunities being left on the table and likely picked up by other firms.”

·         As for mentoring, Nischwitz reports that he repeatedly hears attorneys say they just do not have the time or incentive to help others. “How unfortunate!  The firm’s best source of improved results is not implemented because the compensation system does not value such efforts”.

For Nischwitz, fixing your compensation plan means that it must base the incentive portion of compensation on three components:

o        What you deliver

o        What you brought in

o        Total firm (team) results

Nischwitz would not leave associates out of the process.  He wisely notes that associates “come to the table with the same internal drives and ways of thinking.  Partners do not develop a ‘what’s in it for me’ thought process upon achieving partnership—it is fundamental in most people.”  Thus, the incentive portion of their compensation should similarly be tied to firm overall performance in some fashion as well as rewarding for bringing in business and doing the work.

 

Of course the devil is always in the details.  Frankly, I favor a system where every employee and member of the firm has a base compensation amount together with an incentive portion. Why not base compensation 100 percent on individual performance? As Nischwitz notes, a pure incentive arrangement fosters a shared office mindset devoid of firm loyalty. I also favor keeping the incentive portion as simple as possible.

 

You can find some ideas about setting base compensation levels in the pervious post titled Law Firm Value, Partner Compensation and Continuity.  For other insights on a balanced approach to compensation together with an example plan, read the Managing Partner Advocate article Moving Beyond Eat-What-You-Kill Compensation Plans which begins on Page 7 of the June 2006 edition. 

 

Fixing your compensation plan doesn’t just improve long-term firm results; doing so has an extraordinarily favorable impact on per-partner income and wealth.  Firms that build leverage and fully utilize their associates make seven times the per-partner income of firms that do not.  Firms that do, survive.  Firm that do not, don’t.

 

 

Morepartnerincome.com is sponsored by Juris, Inc.  For information about Juris® products and services for increasing law firm performance and partner income, go to www.Juris.com.

Related posts

• Moving Beyond Eat-What-You-Kill Compensation Plans
• Law Firm Business Model - Realization
• Law Firm Business Model - Measuring Rate
• For Long Term Increases To Income, Partners Must Delegate Work
• E-billing Can Increase Law Firm Partner Incomes