United States: Do's and Don't's for Today's Compensation Plans

The past decade has brought sweeping change to the legal industry, from the influx of Millennials into law firms to growing competition from alternative legal services providers. Yet many firms have clung to compensation plans first devised years ago, in a very different climate.

Even firms that have been stubbornly holding out in hopes the pendulum might swing back are beginning to recognize that they need to adapt their plans to today's realities. Keeping some critical do's and don't's in mind can help ease the transition.

Related Read: " New Study Highlights the Threat of Alternative Legal Service Providers to the Traditional Law Firm Model"

Need for change

Rainmaking and billable hours have long been the cornerstones of law firm compensation. But this approach now is counterproductive in many ways. Prioritizing new clients and billables can lead law firms to incentivize attorney behaviors that may undermine client satisfaction, efficiency and even attorneys' health.

For example, traditional compensation plans encourage attorneys to rack up as much billable time on a matter as possible, with little to no reward for results. Clients, on the other hand, want to achieve certain outcomes as quickly and affordably as possible and are increasingly requesting some form of value-based pricing. Similarly, traditional plans put greater emphasis on landing clients than on serving them.

In addition, these plans emphasize personal success over firm success, providing little reason to devote time to management, client relationships, marketing, associate development and other nonbillable activities. They also discourage any type of work-life balance, something younger attorneys in particular crave these days. And they make partners reluctant to assign work to those associates.

Guiding principles

Designing a new compensation plan that is better suited to the current legal landscape is no small feat. You should find it easier, though, if you keep in mind the following elements to do:

  • Incorporate Both Objective and Subjective Components
    No one is suggesting law firms completely abandon consideration of objective measures such as hours billed when calculating compensation. But also weight some subjective factors such as client satisfaction, technological competence, community activity and associate mentoring.
  • Go One Step at a Time
    It is not realistic or wise to completely overhaul your compensation system in one fell swoop. By changing two or three elements at a time, you minimize the disruption and have more time to obtain buy-in. For example, establish a hard ceiling on the number of annual billed hours for which an attorney will be rewarded (with a lower limit for partners).
  • Think About Retention
    Younger generations generally are more comfortable switching jobs than their older colleagues. To keep these attorneys on board, make it worthwhile for partners to train and otherwise help develop them.

Practices to avoid

Of course, for every do, there is a don't:

  • Rely on a Pure Individual Performance Approach
    Firms that compensate attorneys based solely on their own production prioritize individual performance over collaboration and firm performance. Think about basing, for example, only 10% of compensation on an individual's work, with 40% based on practice group performance and 50% on overall firm performance. You may find that your younger attorneys in particular prefer collaboration to competition.
  • Reward Partners by Bumping Them Up the Pay Tiers
    Avoid mechanically moving partners up the pay scale. Instead, reward them with bonuses. If a partner's productivity drops off in future years, you can withhold bonuses, rather than being stuck paying them at that higher rate.
  • Overlook Realization
    Traditional plans generally focus on hours billed, ignoring actual collections. As a result, they may compensate attorneys for billings that are never realized and eventually written off, thereby encouraging attorneys to overbill, and potentially alienate, clients.

Transparency matters

Regardless of the approach you ultimately adopt, it is essential that you be transparent about how compensation decisions are made. Make sure everyone knows which factors play a role and why.

Sidebar: What does the research say?

A recent study backs up the notion that providing greater incentives for leadership activities and weaker incentives for billable hours can pay off for law firms. The study, published in the journal Industrial and Labor Relations Review, looked at an international law firm that shifted away from an "eat what you kill" approach for team leaders.

The firm changed its compensation plan so that leaders could address a multitasking problem: The leaders were focusing on billable hours and spending insufficient time on nonbillable activities to build the firm. The plan incorporated leadership activities such as cross-selling, mentoring and management activities.

After the new plan was implemented, team leaders increased their nonbillable hours, with no change in total hours worked, and shifted billable hours to their associates. The leaders' "personal profits" (the revenue generated by each lawyer less the compensation the firm pays the lawyer) were unchanged, while the associates' personal profits jumped significantly.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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