Best Practice: Attorney compensation in a contingency fee firm
Asked and Answered
By John W. Olmstead, MBA, Ph.D, CMC
Q. Our firm is a five attorney personal injury plaintiff law firm located in San Francisco. We have 2 equity partners, one non-equity partner and two associates. One hundred percent of our fees are contingency fees. Our attorneys work on some cases together. We do not keep time sheets.
The two equity partners are compensated based upon their ownership interests and this has worked well. We are looking to improve our compensation for the non-equity partner and the two associates. Currently they are paid salaries and a percentage of firm collected fee revenue over a certain threshold. We feel that they have not been profitable and we have been overpaying them. We would appreciate your thoughts.
A. Personally I think that a percentage of firm revenue or profit should generally be reserved for equity partners or shareholders. There should be a reason for them to want to become equity partners. I would tie the majority of their compensation to individual performance - client origination revenue, working attorney production revenue, and responsible attorney revenue, and case profitability - being the primary factors. Develop specific guidelines for client origination (rules for the credit - direct effort of the attorney versus the brand of the firm). Since you don't keep time sheets you will have to develop some method for allocating the working attorney credit when attorneys work together on cases - subjective determination of value and contribution to the case, etc. Without timesheets it will also be difficult to determine profit at the matter/case level. Decide how you want to weigh origination, working attorney, responsible attorney and case profitability and then use these to determine a compensation percentage to be used for overall compensation or bonus.
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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.