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Law Firm Management

Law Firm Compensation Systems: Getting What You Pay For

I was once hired at a firm to replace a much more senior corporate lawyer who I will call Carl.

One of a number of things which Carl had done to cause the firm to search for a replacement was that he had gamed the compensation system. Under that system, Carl was paid a bonus based on a percentage of his billings, without reference to collections. This would be a fatal flaw in any compensation system, but at the time the firm was new to that type of thing and had not yet figured that out.

Carl had put a ton of bills through the accounting system late in the year but had somehow forgotten about the part where you mail the bills to the clients. When the firm followed up for payment after 60 days, quite a few of the clients said that they had never received their bills, nor did they like them much when they finally did see them. Carl had already received his bonus cheque and did not seem overly concerned.

Perhaps it was that incident which sparked my interest in compensation systems at law firms. Over time, I came to believe that compensation systems all tend to work well in the sense that they motivate lawyers to do the things that they reward handsomely. On the other hand, they often do not function so well in that they tend to discourage lawyers from doing all sorts of other things that would be beneficial for the firm.

For example, in most firms the compensation system will reward lawyers who docket many hours, and then bill and collect for those hours. The result is predictable:  lawyers work hard.

Also, in most firms the system will also reward lawyers who bring in new clients. Again, the result is predictable:  lawyers market their practices.

The problem is that successful law firms have to do many things well, quite apart from billing clients and bringing in new work.

For example, senior lawyers should delegate work to associates and law clerks. However, many compensation systems do not pay lawyers anything to do that or pay them less than they would earn by doing the work themselves. Again, the result is predictable:  Lawyers often hold onto work that could be delegated.

Let’s take another example. Lawyers in a firm should only do the type of work at which they are good. They should refer work that is outside of their expertise to their partners or associates who specialize in those areas. However, if the compensation system penalizes them for doing that, some lawyers will hold onto work which they should not be doing.

Most sophisticated law firm compensation systems do recognize that lawyers have to be encouraged to do all sorts of things that will make the firm successful. These systems purport to compensate lawyers for a whole host of factors other than hours billed and collected and business brought in. Things like participating in firm marketing and events, mentoring junior lawyers, working on precedent and knowledge management systems, and participating in professional activities which raise the profile of the firm. These schemes also attempt to penalize lawyers for doing things that harm the firm, such as providing poor client service, being difficult and uncooperative, or bullying and harassing associates and staff.

There is an old expression in the accounting world that “you cannot manage what you cannot measure.”

Billings and clients brought in are easy to measure and compensation systems tend to do a good job of awarding income for generating large numbers.

Mentoring, training, contributing to the firm’s profile, not being a jerk around the office and many other important contributions to creating a positive law firm culture tend to be subjective and therefore more difficult to measure. In my experience, law firm compensation systems tend not to be that good at attaching income to those activities.

But there’s more! It is not just that it is difficult to measure the value of these ‘soft’ contributions to law firm profitability. There are other factors at work which also explain why these activities tend to be under-compensated.

For example, law firms value the big money makers the most and often give them management positions in the firm. It is these people who develop the compensation systems in the first place, and they do it with a bias in favour of compensating lawyers well for what they themselves are good at. In other words, you will rarely find a senior lawyer with a large client base and high billings advocating for a system which diverts money from their own compensation and delivers it to lawyers who excel at things like training and mentoring juniors. They are more likely to say something like: “We all train and supervise our own juniors. That is just something that we do because we are partners at the firm. We don’t expect to be paid for it.”  And then after having said that, they keep promoting business, billing files, and leaving all of the ‘soft stuff’ to someone else to do.

Another factor is that lawyers with loyal clients and large billings tend to be mobile, and firms are always afraid that if they do not pay them enough, they will vote with their feet. And as we all know, there is no limit to what people think is ‘enough’ when it comes to their own compensation.

Somehow, no-one is ever overly concerned about losing a low billing but brilliant lawyer who knows the law cold and always finds time to help their partners, associates, law students and staff. Some high-earning partners have even been heard to make comments like: “We can always hire lawyers who are good at doing the work. Who we really need to reward are the lawyers who can generate billings and bring in business.” 

That is not true, of course. Lawyers who are great at doing the work and at training, supervising and mentoring associates are actually fairly rare. Perhaps they would be less rare if firms were willing to pay them for doing all of those things.

The bottom line is that as is the case with many things in life, you really do get what you pay for, and law firms pay more for clients and billings than they do for just about any other skills which are necessary to run a successful firm, including, interestingly enough, being a great lawyer and a great human being.

My simple theory which explains all of this is that we live in a culture which values immediate gratification. We place great value on maximizing this year’s income, but not so much on building a great organization to maximize income in future years.

Although beyond the scope of this little diatribe,  this theory also tends to explain why we push partners in law firms (and accounting firms) to retire early when they get to the stage of not wanting to work day and night, why we pay lip service to issues around mental health instead of reducing the crushing billable hour expectations which destroy mental health and why we cannot find a way to keep women from leaving private practice in droves after they start their families.

If I were starting a law firm today with the goal of creating a truly great firm, I would look for people who value skills other than their own, love helping other people succeed, and truly embrace the idea that being part of a team that respects each other’s unique skills is way more satisfying than making a pile of money. Of course, that is easy for me to say because I already made a pile of money by billing a ton, bringing in a truckload of clients and helping to develop a compensation system which rewarded me well for doing that.

Post-Script

A former partner of mine was once quoted in one of the legal newspapers on the topic of compensation systems. He said: “The secret of a successful compensation system is that everyone should leave the table feeling equally unhappy.”   While there is some truth to that, it always seemed to me that the lawyers with huge client bases and tons of billable hours were less unhappy with the compensation system than the others.

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