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Law Firm Compensation & Culture

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As we approach Labor Day, law firm managing partners should re-evaluate the connection between compensation structure and firm culture. This is a good time to review financial data, identify patterns, and, if appropriate, negotiate a new compensation plan to implement for next year. Perhaps there’s not much cross-marketing going on at your firm. Perhaps partners are hoarding work and not pushing it down to associates. These behaviors are often a direct result of the incentives set up by the firm’s compensation model. The first step to updating your compensation plan should be to identify what you most want law firm partners to do.

At many firms, there is a lack of consensus about how much weight should be given to partners who have the client relationship but don’t do the legal work. Different firms answer this question in different ways. The extent to which partners are incentivized to bring in work that they don’t personally do, or which may be outside their competencies to do, plays a major role in determining a firm’s culture.

How information about compensation is shared and the level of flexibility in the compensation structure can also impact culture. Partners specifically need to address the following questions:

 

  • How transparent do you want your compensation structure to be? To what extent is compensation information shared among partners? To junior lawyers?

 

  • How discretionary will compensation be? Does the firm want to use a strict formula across the board? What will factor into that formula? And what will warrant deviations from it?

 

Too many managing partners rely on precedent and are slow to address their compensation systems, even when they clearly aren’t incentivizing the desired behaviors. As consultants, we have seen many law firm leaders hesitate to address compensation because they know it will be a divisive issue. There is no avoiding the reality that emotions are more likely to flare when discussing money, power, and status.  But avoiding difficult discussions now is likely to force even more difficult decisions in the future. Compensation and its connection to culture are frequently the reasons a firm is not growing as quickly as its partners would like, and now is the moment to start changing that for next year.

Determining Compensation Levels for Law Firm Staff

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Law firm leaders too often rely on precedent when making managerial decisions for their firms. A prime example of this is how they decide how much to pay staff members (and to a lesser extent junior lawyers). The most common mistake is to set compensation levels based on historical experience. For example, a law firm that previously paid a paralegal $20 an hour or a contact attorney $35 an hour five years ago will offer to pay that much now. In contrast to large corporations, law firms rarely conduct compensation surveys to determine what their competitors are paying. Thus, law firms are predisposed to miss changes in market wages. This is true for staff members who get paid by the hour as well as those who receive an annual salary.

There is a no-cost and efficient way to get a good sense of the current market for a specific position. Ask the candidates to provide their salary demands as part of the initial phase of the hiring process. In addition to asking for a resume, require candidates to specify how they want to be paid. Most candidates won’t provide salary information, and that is usually not disqualifying. It makes sense to interview qualified candidates even if they haven’t provided their salary requirements. In my experience, however, enough applicants do to provide such information to give the employer a rough sense of current market conditions.

For example, I recently worked with a law firm to hire a part-time paralegal. The firm received several dozen responses through Craigslist. Approximately ten candidates provided salary information. The responses fell into a typical pattern—the marginally qualified, the qualified, and the very experienced/over qualified. In this particular case, candidates without law firm experience were asked for $10-$14 an hour, those who possessed most of the requirements set forth in the job posting asked for $15-$25, and the most experienced/over qualified, which included several folks who had graduated from law school, sought more than $30 an hour. The advantage of this approach is that it allows the employer to see how much additional skill and experience is available at higher price points.

Over the past few years the market for lawyers with less than four years of experience who are applying for part-time or other non-partnership positions has changed dramatically. The market is such that lawyers will respond to jobs paying $20 and hour and sometimes even less. By contrast, paralegals continue to command the same hourly rates that they did a few years ago.

To be clear, the fact that it is possible to pay less for junior lawyers and staff members doesn’t mean that it is wise to do so. Paying low wages can be counterproductive because it increases turnover. Overall, however, there is no question that the ratio of available talent and what it costs has never been more favorable for law firms. It is therefore critical that law firms obtain current wage information and not guess or rely on precedent when setting compensation levels for staff and junior lawyers.

Law Firm Resolution: A 5,000 Billable Hour Year

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It’s the middle of January and many New Year’s resolutions have already bitten the dust. In part that’s because setting annual goals is inherently unreliable, especially when the goal isn’t accompanied by a mechanism for reaching it.

Annual billable targets for law firms aren’t exactly resolutions. In most firms they are couched as requirements that are tied to compensation. Increasingly law firms are creating tiered billable hours targets. The lowest tier is set at a level that is necessary to keep one’s job. And higher tiers correspond to higher levels of compensation.

Too often, however, the billable hour target becomes a career development milestone for senior associates and non-equity partners. When you ask such lawyers what their goals are for the year, they answer in terms of meeting or slightly exceeding the firm’s targets.

The problem with this approach is that it tends to encourage incremental thinking and subtly discourage ambitious rainmaking. If you are locked in a system that pegs compensation to billing a certain number hours or collecting a certain number of dollars, it is hard to devise a system that significantly exceeds that figure. If the billable target is, for example, 1,800 hours or the expected book of business is $1 million, lawyers are unlikely to bill or collect much more than that.

But there is a different and better way to set your billable hour goals or revenue goals for the year. When I advise lawyers who have been out of law school for 8 years or more, I suggest that they set for themselves the goal of generating enough work to keep at least three attorneys busy. This translates to generating about 5,000 billable hours in a year. Depending on the nature of your practice, the 5,000 hours could be divided among half a dozen of paralegals and other lawyers in your firm. From a revenue standpoint, 5,000 hours is roughly equivalent to a book-of-business of at last $1.5 million. In my experience, that is the level of production that provides attorneys with the maximum flexibility and control over their careers. At this level, there is an active market for the lawyer’s services and the lawyer can stay where they are, move to another firm, or start their own law firm.

In today’s dynamic legal market, it is common knowledge that a portable book of business provides career insurance. What is less appreciated is that the optimal situation is when you can keep at least three lawyers busy.

That’s why in 2016 you should seek to bill 5,000 hours.