Best Practice Tips: Associate Attorney and Non-Equity Partner Compensation
Asked and Answered
By John W. Olmstead, MBA, Ph.D, CMC
Q. I am the owner of a seven-lawyer insurance defense firm in downtown Chicago. Two of the lawyers are non-equity partners and four are associates. Currently I pay the associates a set salary and a performance bonus based upon annual billable hours over 1,800. Until last year, non-equity partners were paid in the same fashion, however non-equity partners received a few additional perks such as a firm credit card and a country club membership. Last year I changed the non-equity partner compensation system to focus on collected receipts rather than billable hours. Non-equity partners receive a salary and a performance bonus based upon working-attorney-collected-received above an established threshold and a delegation bonus.
Currently all of the non-equity partners are paid salaries above $100,000 and two of the associates are above $100,000.
My results with the two bonus systems are dismal at best. My objective was to motivate my attorneys to bill more hours. However, they don’t seem interested. Very few have received bonuses. Last year I had several lawyers who did not even bill 1,500 hours. What have I done wrong?
A. There is nothing wrong with your approach to compensation. You may have the wrong people on the bus. They simply aren’t hungry, and this is not something you can teach. You are paying them salaries high enough that they can pay their bills—they are content and don’t want to put in the additional work to earn the extra income. Work-life balance is as important to more young attorneys as is money. If your attorneys are simply meeting the thresholds (billable hour or revenue expectations) and not exceeding them, that is one thing. However, if your attorneys are not meeting the minimal expectations (hours or revenue thresholds/expectations), then this is another issue as they are not producing at a level to justify the salaries they are being paid. Salary adjustments downward may be in order or simply terminating them. I don’t know many insurance defense firms that will tolerate less than 1,800 billable hours.
While you must get compensation right in order to acquire and retain top lawyer talent as well as reward performance and reinforce desired behaviors, the starting point is hiring and retaining the right people to begin with.
Research from a classic business study that was highlighted in the popular business book “Good to Great” (Collins, 2001) authored by Jim Collins found that the method of compensation was largely irrelevant as a causal variable for high and sustained levels of performance. Other research also bears out that performance and motivational alignment are impacted by intrinsic and other factors other than just extrinsic factors such as compensation or methods of compensation. Over the years I have seen too many partners leave lucrative situations in law firms to join other firms for less compensation or to start their own firms to suggest that it is not only about the money or compensation package.
Jim Collins sums it up best in the following quotes from “Good to Great” (p 10-13)
“First who – then what”
“They get the right people on the bus, the wrong people off the bus, and the right people in the right seats.”
“People are not your most important asset. The right people are.”
Your compensation system should not be designed to get the right behaviors from the wrong people, but to get the right people on the bus in the first place, and to keep them there. Your compensation system should support that effort.
James Cotterman, Altman & Weil, Inc., (Cotterman, 2004) contends that there are two groups of employees for whom compensation is not an effective management tool. The intrinsically motivated (6 percent to 16 percent of partners perhaps) do not need compensation as an incentive. The struggling performers (another 6 percent to 16 percent) will not react favorably to a compensation system that rewards positive behavior.
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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.