Best Practice: How to compensate new associate who brings a book of business
Asked and Answered
By John W. Olmstead, MBA, Ph.D, CMC
Q. I am the sole owner of a law firm in Walnut Creek, California. I have three associates and five staff members in the firm. I am looking to hire another associate. The associate I am considering has been out on his own for five years - no office and no employees. He would bring around 30 active matters with him. I was thinking of paying him a salary with a discretionary bonus based upon performance. Fees originated and generated would be a major component of the performance determination that would impact future salary increases, bonuses, and eligibility for partnership. However, I believe that I must do something with regard to the business that he brings with him. I would appreciate your thoughts and suggestions.
A. I agree with your general approach with regard to his compensation. Payments for originations for associates gives me pause. However, I believe you have to treat business that he brings with him differently. Here are my thoughts:
1. Create a list of the pending matters that he will bring with him. The list should list the A/R and WIP for time bill matters. For flat fee matters whether the fee has been collected and spent, whether there will be any more fee, the amount of work that remains to be completed (percent), and the estimated hours required to complete the work. For contingency fee work - a list of the expected fee - low and high - for matters in progress.
2. He should get 100% of A/R and unbilled WIP earned but not billed or paid before he joins the firm. 20% of the work done after he is with your firm.
3. I would pay him 20% of the fees earned (prorated) for flat fee matters while the matter is with your firm if a fee will be due and paid. If not - your firm should be entitled to an offset for the overhead servicing his work for which there will be no fee forth coming.
4. Once the matters on the list are concluded any future work that he originates would be "firm accounts".
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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.
Member Comments (1)
While I don't know who Mr. Olmstead is, it's clear that he is of the baby-boomer generation. Twenty percent of the work done after he is with the firm? You've lost your mind. The firm didn't spend time generating that client, developing a relationship with that client. This baloney about overhead....the 'overhead' devoted to that one particular case probably doesn't add up to 15% of the fee. To be generous, let's say it adds up to 20%. That leaves the remaining 80% up for grabs. So the associate who generated the work, and developed the relationship with the client, and who (ostensibly) will be doing the work on the case gets twenty percent?!
Number one, the associate should get at least half of the fees after 'overhead', so that's at least 40%. It's law firm curmudgeons and old-school, solipsistic partners (like Mr. Olmstead apparently) that make hanging out your own shingle such an attractive choice for recent grads. Extrapolate this concept out to a generation, and it's nothing more than a reflection of the Social Security mess that we're in. The "Me" generation (baby boomers) think that now that they've "made it", the younger generation should support them into their old age. To Mr. Olmstead and his law firm ilk: You're glory days are swifting coming to an end. We're not going to hand you the lion's share of money earned serving the clients. We're going to take your clients.