Best Practice Tips: Compensating Your First Associate

Asked and Answered

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

Q. I am the owner of a law practice in Belleville, Illinois. My practice focuses on real estate, estate planning and administration, and bankruptcy. I have three legal assistants. While I have been in practice for ten years, I have never hired an associate. I have a busy practice and now is the time. I have identified a candidate with six years of experience that I want to hire. He has business that he can bring with him. He has been working with a larger firm as an associate and has been paid a straight salary. My next step is to make him an offer but I am struggling with how to pay him. I would like to hear your thoughts.

A. Some small firms put associates on an eat-what-you kill system based upon fee revenue collected from clients they bring in and fee collections from other matters they are assigned. They are they paid a percentage ranging from 30-40 percent when the fees are paid. However, in most firms, associates are paid a salary and possibly a bonus based upon performance. Bonuses may be discretionary or formulaic based upon performance factors such as billable hours, working attorney collected fees, client origination collected fees, goal attainment, signed engagements, etc. Personally, I think a salary plus a discretionary bonus is the best approach for new associates.

However, in your case with an associate that is more seasoned and that has a book of business I think you should consider a salary with a formulaic bonus based upon his working attorney fee collections and client originations. Here are the mechanics:

• Pay a set salary.
• Establish a bonus threshold using a multiple of three times salary.
• Establish a weighted performance measure and weight working attorney fee collections .60 and client origination fee collections .40. For example, if the associate brings in a client and does all the work he/she would receive 100 percent fee credit. If the associate works on a matter but does not bring in the fee he/she would receive a .60 fee credit.
• The associate would be paid a bonus of 20 percent for weighted performance measure in excess of the threshold. For example, if the associate is paid a $80,000 salary the threshold would be $240,000. If the weighted performance measure is $300,000 the amount in excess of the threshold would be $60,000.  Thus, the associate would be paid a bonus of 20 percent times $60,000 or $12,000.

I would also set a minimum performance expectation of $240,000 for the salary that is being paid.

You could also include non-billable goal attainment bonus as well but you can always add that later.

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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 and author of The Lawyers Guide to Succession Planning published by the ABA. 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.