Evolution of a Law Firm Compensation Plan: A Parable

Jack, Jill, and John were three lawyers who joined together to start a new law firm. They recognized synergy among their practices because they had each referred clients to the others in the past. Jill represented small businesses and Jack handled business litigation. John did estate planning and had some successful entrepreneurs as clients.

Parity

They shared the intention of putting all their efforts into making the firm successful. They chose a parity compensation structure in which they shared all profits equally. They had a sense of teamwork and mutual goals, and reveled in each other’s successes. They shared the administrative burdens and tried to split them up according to their respective talents and interests. It worked well for the first few years.

Gradually, Jill emerged as a much more effective rainmaker than Jack or John. She brought in as much business as Jack and John put together. To service her numerous active clients, she worked longer and longer days and part of most weekends. By contrast, John left the office by 5 p.m. most days because he was active in coaching his children’s sports teams. That involved practices during the week and games on weekends. He had chosen estate planning in part because it allowed him to keep fairly regular hours.

Jill began to resent sharing the wealth equally, and called a partnership meeting to re-balance the arrangement. Tensions mounted when Jill suggested she should own 50% of the firm. Jack and John both predicted upward trends in their own future business development. Jack recently won a high-profile case, significantly enhancing his reputation in the courtroom. He also had a contingent-fee case that might settle for a handsome return. John’s devotion to kids’ sports engendered trust in the community and he was building relationships with parents who could become significant clients.

Eat What You Kill

To avoid future uncomfortable discussions like this, they decided to keep the voting and equity ownership the same, but change the compensation structure to “eat what you kill.” Each partner would take home the percentage of firm profits that corresponded to the net revenues generated by that partner. Shared overhead, such as rent, insurance, staff salaries, office supplies, equipment and marketing costs were deducted to calculate the firm’s net revenues.

In the first year under the new system, John completed an estate plan for a successful entrepreneur whose daughter was on the soccer team he coached. In the course of developing that plan, John learned a lot about the client’s business and other legal needs. He brought in a substantial amount of ongoing work from that client to Jill and Jack. Because his work for the client was complete, under the new system he no longer benefited from the client’s business that he brought in.

John voiced concerns to his partners about the likelihood of repetition of this scenario. As a rainmaker, Jill was sympathetic to the issue. The partners revised the compensation plan to allocate an origination credit of 25% of collected fees to the partner who originally brought the respective client in.

The firm prospered and grew, largely because Jill’s clients prospered and the firm’s work for them expanded to matters handled by John and Jack, as well. The firm hired paralegals and young associates to assist with the increasing work load. Gradually, they brought in lateral partners with other areas of expertise to increase the opportunities for cross-referrals and to provide full service to existing clients. John found himself handling more and more management responsibilities by default, because no one else stepped up. The firm formally named him managing partner. By the time the partners promoted their first associate to junior partner, the firm had 16 attorneys.

Unintended Consequences

Over the years, under the formulaic compensation system, the partners tended to focus their time on billable work, with diminishing attention to non-billable matters. Community and bar association activity declined, along with the public visibility of the firm. Partners devoted little time to mentoring and training associates and staff because it cut into their own productivity. Problems cropped up, and John’s practice began to suffer from his attention to firm management. He had to work longer hours to keep up, yet under the eat-what-you-kill plan, his income did not keep up with his partners’.

When new work began to dwindle, partners hoarded work that could be handled more cost-effectively through delegation to associates or even other partners, impacting client satisfaction. Turf battles broke out over who would get origination credit for new clients. Some partners became controlling and jealously guarded client interactions. Associate morale declined as they witnessed the tension and worried about their own career development opportunities. Two partners left, taking the firm’s best associate and some clients with them.

John longed for the “one for all and all for one” climate back in the early days of the firm. He worried that the firm’s sustainability could be threatened.

A Values-Based System

John recruited Jill, who was still the firm’s biggest rainmaker, to join in finding ways to unravel the disincentives created by the firm’s compensation system. They brought in a facilitator who helped the firm clarify its values. Although some of the partners grumbled, the firm held a partnership retreat, small working group meetings and even firm-wide meetings with associates and staff to distill the kind of firm culture they wanted.

They explored questions like:

  • How do we define success?
  • What kind of reputation do we want to have? What do we want to be known for?
  • What do we like about practicing law? How can we maximize those factors?
  • What do we dislike about it? How can we minimize those factors?
  • What can we all agree matters to us?
  • What is required to create and maintain trust among us?
  • What must we have in place to recruit and retain good people?
  • What do our best clients expect from us?
  • What behaviors are necessary to give our clients what they want and need?
  • What are the factors that are necessary to the sustainability of the firm?
  • What behaviors must be encouraged to support the firm’s sustainability?

Keeping the values and behaviors they want to support in mind, the partnership leaders crafted a written statement of the subjective and objective measures of partner performance, and got buy-in from the other partners. The partners voted on a compensation committee to determine subjective bonuses based on conformance with the firm values and performance measures. They set out an accountability process for non-conformance, including the option of assistance for partners struggling to comply.

As the senior partners of the firm, Jill, Jack and John reinforced the enumerated values by taking time to discuss at least one of them at each gathering of partners, associates or staff they joined. They recited brief descriptions of those values in action that they observed in the firm, and commended the actors by name. They invited meeting participants to share values-enhancing behaviors that they had witnessed.

Under the new system, partners earned bonuses which rewarded skill and effort in desirable traits and behaviors, such as:

  • Supervision, mentoring, and training
  • Firm leadership, management, and committee work
  • Client satisfaction feedback
  • Technological or financial prowess
  • Collegiality, teamwork, and sharing
  • Community activity and reputation
  • Depth or uniqueness of expertise
  • Innovation and efficiency
  • Speaking, writing, and client education

Although holding partners to a new and different standard was not without challenges, an improved atmosphere began to emerge. As lawyers received recognition and compensation for beneficial activities, they found increased satisfaction in expressing their individual talents beyond billing hours. Internal competition waned and collaboration began to expand. John found balance returning to his practice as some partners were more willing to take on specific management duties. He also finally felt respected and appreciated for his management efforts when they were compensated. John felt a glimmer of the old “all for one” culture dawning.

This fictional story is based on a compilation of real events. Law firm compensation plans have many variations. For a more comprehensive discussion of partner compensation systems and the experiences of real life lawyers under them, see my article in the ABA’s Law Practice magazine.

About the Author

Debra L. Bruce is president of Lawyer-Coach LLC, which provides executive coaching and training for lawyers, and is a member of the ABA’s Law Practice magazine board. Contact her on Twitter @LawyerCoach.

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