April 6, 2007
Law Firm Partner Compensation; The Case for Limited Origination Credit
People who sell are usually at the top of the food chain in every organization. Why? Because nothing happens until you have a customer or client. They are the force. They are the only source of revenue. They are the only thing that gives an organization the opportunity to succeed. Everything else is cost!
If it all begins with sales, it makes sense that origination credit, the equivalent of sales commissions in the business world, would be an important component in the compensation system of law firms. Having said that, there are good compensation plans and there are bad ones. Bad origination credit arrangements impede business development and get in the way of cross-selling, and team selling.
Think of the law firm as a triangular vessel that accumulates revenue-producing clients and matters.
The problem in most midrange law firms is that work doesn’t get delegated. Partners tend to hoard work. As their capacity is used up doing the work, new business development diminishes. It is a process that limits the firm’s performance and growth. What is the fix? The reward for “bringing in business” needs to be temporary. The politics need to be driven out of the system. You should get credit for making the sale if you make it, regardless of who will supervise or do the work. You should not get credit for the sale if you didn’t make the sale. Thus, new business occurring naturally from established relationships, referrals, and branded sales should not result in origination credit. The most important change needed to continually drive new business is that origination credit should expire with the case or matter, or for a continuing portfolio sale, it should expire after 12 or 24 months. Origination credit should be viewed more as a “bonus” than a way to build a compensation annuity. The emphasis should be on “what have you done lately?" Providing a handsome bonus for bringing in new business, say 20 percent off the top, requires that not all revenue be burdened with an origination cost.
Law firm partners are revenue producers, but if their individual production is all they contribute, the firm’s capacity is fixed and limited. One can break through that capacity barrier only if partners recruit, mentor, delegate and supervise. The role of a midrange law firm partner is to bring in business and get as much of the work done by others as practical. Thus, a sound compensation plan will not only have a “commission” component designed to reward for current “sales” (rainmaking) success, it should also compensate for supervision of the cases and matters regardless of who does the actual work. In midrange firms, this is typically the billing attorney role.
When it comes to individual production, the plan should not reward partners for neglecting rainmaking and delegation. One way to do that is to provide the partner with a billable target for personal production, one that leaves room for business development and the duties associated with delegation and supervision duties. Those hours are job requirements, and for that target the partner would receive a base compensation. The variability in compensation should come from three sources:
1. Collections for matters and cases under the partner’s supervision regardless of who did the work. That will include collections related to the attorney’s personal production as well as that attributed to others.
2. Origination credit earned only on new business where the partner actually closed the business. The credit is limited to the case, or for new portfolio business, it is limited to the revenue produced only for a temporary period such as 12 to 24 months.
3. A subjective element based on performance that considers assigned individual goals, teamwork, and support of firm strategies and policies.
Of course, it is always easier said than done. Fitting the pieces together is never easy. What is important is to understand that a compensation plan that is weighted heavily toward individual productivity limits partner income and firm capacity. Without rainmaking, delegation, and supervision, the triangle that represents the firm’s capacity is significantly smaller.
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.
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Filed under Compensation by Tom Collins
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