Many lawyers practicing now came up through the ranks in a time when the norm was to compensate associates with a third of the revenues they brought in through billable hours (another third going to employee benefits and overhead and the remaining third going to the firm’s profits). In today’s market, using this rule almost always means you’re paying associates more than you need to or should.
Rainmaking For Lawyers recently advised a Los Angeles-based boutique firm regarding how they would compensate a second-year litigation associate whom the firm had hired on a contract basis. The firm wanted to convert the associate to a salaried position for the new year. The firm’s relatively new managing partner used the one-third/one-third/one-third formula to calculate a salary of about $110k. The market for associates, even in large cities, is not what it used to be. In fact, it can be harder and more expensive to find an experienced litigation paralegal than a junior litigation associate. The firm ended up offering $85k, and the associate gladly accepted it. As consultants to law firms, we can assure you this is not an isolated result, so please drop this dated and dangerously reductive method.
Instead, tie the elements of associate compensation to the conduct you want to encourage. If, for example, you want a junior associate to learn their craft, compensate them for the hours they bill along with the professional development activities in which they engage. This can be an appropriate opportunity to provide bonuses for increased billable hours, so long as the increased hours are not marked with a reduction in quality of work. Likewise, if you want a senior associate to start focusing on business development, reward them for their marketing efforts, and pay them a percentage of what is collected on the work they bring in. Especially, don’t overlook the importance of the management efforts attorneys offer to more junior lawyers and to the staff. The economic value of managing, training, and mentoring can exceed the dollar value of a billable hour and, in some circumstances, by a very large margin.
Compensation at law firms is and should be complicated. Law firms essentially have nothing to offer apart from the skills and talents of their people. And human beings respond to money, status, and other compensation-related factors in complex and sometimes counter-intuitive ways. So, please give this the attention it deserves. Senior law firm management should not be using a simplistic formula to determine something as important as associate compensation.