Best Practice: Law Firm Compensation Committee

Asked and Answered

By John W. Olmstead, MBA, Ph.D, CMC

Q. For years our 14 attorney firm has operated under a formula based eat-what-you kill system. We are moving toward a more subjective-based system. We have been advised that we will need a compensation committee. What are your thoughts regarding compensation committees?

A. The components of your compensation plan and partner buy-in will be important to the success of your program. However, how you setup and constitute your compensation committee will be crucial. In a subjective system trust is paramount. How the members are selected, who serves on the committee, how the committee operates, and other matters must be spelled out and communicated to all partners. Here are a few ideas:

1. Consider a three member compensation committee.
2. Elect members to staggered three year terms. On the initial election elect the individual with the most votes to a three year term, the individual with the second most votes to a two year term, and the individual with the least votes to a one year term.
3. Hold elections annually to fill vacancies for the upcoming year.
4. Consider adopting a policy of requiring a partner whose term has expired to remain off the committee for one year before being able to run for another term.
5. Incorporate procedures for removal of members by majority vote of the partners. Specify the voting requirements.
6. Outline the general flow of the compensation review process, how it will work, specifically what performance factors will be considered, etc.
7. Outline the approval procedure of the partnership. Suggested that the partnership only be able to disapprove the recommendation in total - not pick apart and change. If the proposal is disapproved by a majority vote - the compensation committee starts all over.
8. Specify appeal rights and procedures.

The key ingredient of a successful subjective compensation system is that partners perceive the system as fair and have faith and trust in the compensation committee. The process is as important as the outcome.

Click here for our blog on compensation

Click here for our published articles

John W. Olmstead, MBA, Ph.D, CMC,(www.olmsteadassoc.com) is a past chair and member of the ISBA Standing Committee on Law Office Management and Economics. For more information on law office management please direct questions to the ISBA listserver, which John and other committee members review, or view archived copies of The Bottom Line Newsletters. Contact John at jolmstead@olmsteadassoc.com.