I spoke Friday at the ABA Techshow on profitability and the key drivers of partner income.  At the end, I posed some questions to the audience to facilitate discussion on the findings of the 2007 Law Firm Economic Survey.  One of the questions I asked was "why would firms have low associate utilization?"  A partner in the audience responded, "Partners don't trust them to do the work."

That is a common answer I hear from partners.   However, without fully utilized associates, firms can't leverage.  Leverage affects the growth of the firm and there was a strong correlation between leverage and income by respondents of the 2007 Survey.  The challenge for small to mid-size law firms is finding ways to increase associate utilization so that the firm positions itself to leverage.  If trust is an issue, then confront it.  Mentor associates so that you can trust them to do the work as you would.

An article written by Allison Wolf in her Lawyer Coach Blog titled The Fine Art Of Delegating was the basis of a post by Tom Collins in August, 2007 called Spinning Increases Law Firm Income.   Both Wolf and Collins stress that partners who aren't "spinning" work to associates need to face the reasons that prevent them from delegating - don't let the reasons be an obstacle. 

Wolf writes:

Delegation is one of the lawyer behaviors that need to be rewarded by compensation committees. For a law firm to be most profitable partners are required to spin work down to juniors. Savvy compensation committees look at the combination of billable hours and spin earnings when allocating partner income.

Collins adds:

[A] firm’s compensation plan is often the reason Why Partners Hoard Work. That, in turn, leads to poor leverage, underutilization of associates and high turnover.

On the issue of trust, Wolf writes:

Successful people surround themselves with talent. Your challenge is to help develop the juniors so that they do the work as well if not better than you do.

Formal mentoring programs are still rare in small and mid-size firms, yet the need is apparent based on the findings of the 2007 Survey and from what I hear from partners.  In a year where inflation may very well end up over 4%  (over 1% higher than the annual average the past 10 years), firms can't rely on rate increases alone to maintain income.  Develop programs to help associates manage more caseload.  Give partners an incentive to delegate and mentor.  Those who do will create the circumstances necessary to leverage and grow the firm, ultimately leading to sustainable increases to income.

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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.

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Recently a managing partner asked me if there had been any economic surveys targeting US midsized law firms using lockstep compensation plans.  The question came up as I was explaining the finding that under the traditional US compensation plan approach, midsized law firm partners are hoarding work—working more hours than associates. Why? For one reason, they make more income by doing the work rather than delegating it.

To my knowledge, there haven’t been any U.S. studies or surveys targeting just lockstep followers.  Lockstep plans are not common in the USA. With regard to the hoarding issue, the buzz is that lockstep compensation plans can have the opposite effect unless ruthlessly administered.  Since individual production is largely removed from the compensation equation, lockstep can give a raise to the partner who suddenly dropped from 2000 billing hours per year to 400. And that missing 1600 hours has not been redirected to management or rainmaking. Thus, performance standards must be ruthlessly enforced so that those abusing the system are outed quickly to prevent the system from becoming corrupted.

The consulting firm John P. Weil & Company has posted a thorough description of the lockstep approach on their page, which contains other articles of interest to those involved in law firm management. 

Even in the UK, where lockstep is a tradition, there are few pure lockstep plans around nowadays.  Modified lockstep plans prevail as firms introduce both objective and subjective measurements to affect results in support of law firm strategies and goals.  Bruce MacEwen of Adam Smith, Esq. posted an interesting article dealing with the trend toward modification of lockstep plans. Patrick McKenna has an insightful post on performance differences among firms depending on their compensation plan type. His post supports the belief that statistically driven plans yield lower results. McKenna also has a great white paper on the various types of plans used by law firms.  

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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Playing off the lyrics of a Randy Newman’s song, I once wrote that "blended rates got no reason”. Blended rates never made sense to me. I just didn’t understand how they could benefit anyone.

I was recently in a law firm where some partners tended to make significant use of associates while others attorneys tended to horde the work. Some of the firm’s clients were paying for associates to do associate work. Others were paying partners to do the same level of work. The motive for hording work in this case was another illustration of the untended consequence of a compensation plan. The originating attorney who did his or her own work made more money under the compensation formula by not delegating their associate-level work. The client was incurring a higher cost than might have been necessary. The attorney doing his own associate-level work was not out stirring up more business. The firm had unutilized associate time, etc.

In this case, proposing a blended rate might add encouragement for the attorney to move work to the associate and spend more time looking for higher-valued work. The firm would increase its effective rates for associate work. The client would experience a lower cost. The attorney would devote more time to rainmaking. Everyone would be a winner!

Of course, an even better alternative would be strong law firm management. Without that, one has to constantly tweak the compensation formulas and pricing strategies to encourage good practices and discourage poor ones.
 

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  “Leverage or not to Leverage?” seems to be the question now days.

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I frequently hear the comment, there is no perfect compensation plan and I agree. I also believe that management, not compensations plans, must be the driving force steering the firm into its future.

Recently, I was talking with a managing partner about his firm’s effective blended rate. It was below competitive levels. As is turned out, the firm’s partners had vetoed a proposal to increase rates.

We took a look at some financial models, and it was clear that even with some client losses, per partner income would increase significantly if rates were increased.

Why would partners veto such an obvious and appropriate move? The motivation lies in the partner compensation plans. Each partner’s compensation was based on a formula that included origination credit, supervision credit and worked credit. While the increase in rates might lose some clients, each individual partner was concerned that those losses might be among their particular clients. It did not matter that the move would be good for the firm as a whole. Each partner was concerned about their particular book of business, especially those generating origination credits. The environment was one of sub-optimization where the interest of the parts (individual partners) ruled rather than the interest of the whole.

Compensation plans based on purely empirical data may avoid disputes in the short term over allocation of the firm’s profits but the approach can also block effective management in pursuit of common goals. Likewise, failure of the partners to empower an executive officer or executive committee to make the hard decisions runs counter to long term firm success. What appears to be a good thing at one point in time can spiral down to marginal performance and eventually collapse.

P. S.     Finally the answer - after drafting the above post, I came across an item on Adam Smith. Bruce MacEwen’s answer is that the right compensation plan depends on where the firm is in its life cycle. This is one of the best insights into the relative influences and benefits of the Eat What You Kill plan versus the Modified LockStep plan. It is truly a must read post. Go to his November 17, 2005, article, The Optimal Partner Compensation System, Revisited.
 

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Last Friday, I joined 19 managing partners of non-competitive law firms as they discussed and compared compensation plan approaches. Some used purely objective methods based on origination, supervision and individual production. Others were in the subjective camp with guaranteed "salary like" monthly distributions and smaller year-end bonuses based on performance.

No one thought there was a perfect compensation system. In the end, there seemed to be general agreement that what works - works. So, if your compensation plan is working, leave it alone. I wish it was that simple. But depending on your current plan, it may not be. At least that is the case, if you view the law firm as a business with an expected life beyond the current partners.

Purely objective compensation plans, for example, do a great job of generating income and allocating that income among the partners. However, once a firm crosses the threshold from a personal service business that dies with its current owners, the view changes. Survival of the firm as an institution moves to the head of the list of compensation considerations. Thus, for mid-sized and larger firms, the purpose of the compensation system becomes two fold:

Continuity issues require the addition of a subjective component to the compensation plan addressing such items as account hand-off, mentoring, and knowledge sharing. The plan has to facilitate additions to the partner ranks and deal with the decline and eventual withdrawal of older partners.

Unfortunately, the introduction of subjective elements into the compensation system makes disputes over compensation more likely. Firms avoid those disputes only at the risk of sacrificing long-term survival of the law firm. Personal service companies have no life beyond the life of those involved. Long-term survival requires a metamorphose from an "eat-what-you-kill" personal service culture to an intuitional culture more like that of a corporation where the business has a life independent of its current owners and current employees.

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In a previous posting, I talked about the natural force related to the compensation plan that can destroy the firm over time — relative deprivation.  Getting relative deprivation and the firm’s position regarding it out in the open is the first step in reducing its negative impact.  If you haven’t read the Relative Deprivation posting, you might want to read it first.

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As I worked with law firms over the years, I came to understand that, from the time each was born, they carried within them the seeds of their own destruction—“the compensation plan".  It’s not the dollars received by each partner, but “Relative Deprivation” that does the nasty work.  It is the issue of “my compensation” related to “your compensation” that is the issue.  You are getting too much or I’m getting too little.

A lot has been written about getting compensation plans right, but relative deprivation will always be around no matter how right you get the compensation plan.  So keep working at it, but there are other places to look to find the answer to keeping the family of partners happy.  Well, maybe not happy, but together.

The first step is to put the concept of “Relative Deprivation” out in the open.  Partners are adults.  They need to understand it is natural to feel they deserve more and/or that someone else deserves less.  For that lawyer, there is someone else who feels the same about him or her, i.e., he/she deserve less and they, more.  No one has an exclusive on Relative Deprivation.  Relative Deprivation is not healthy for the individual or the firm.  It is healthy to actively work for a fairer compensation plan or to pursue how you can make more by contributing more.  But every individual needs to understand that even if their compensation doubled or tripled over night, the feeling of Relative Deprivation would still be at play.  It is natural.  Don’t let it become destructive.  If an individual understands it and understands that others will recognize it when exhibited, its negative impact is reduced.

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