Best Practice Tips: Associate Attorney Compensation – Five Approaches

Asked and Answered 

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

Q. I am the owner of a six-attorney firm in the western suburbs of Chicago. There are five full-time associate attorneys working with the firm. Two have been with the firm for more than 15 years, two over 10 years, and one for seven years. All are being paid salaries in excess of $100,000 per year and none are even close to generating $300,000 or more in working attorney fee collections per year. Their billable hours are dismal as well. While I have an expectation of 1,200 annual billable hours, none are meeting that expectation. My income is suffering as a result. In addition to salaries, they sometimes receive a discretionary bonus. I am at my wit’s end. What are your thoughts?

A. First of all, I think that an expectation of 1,200 annual billable hours is too low and should be more like 1,600 annual billable hours. For years, the national average annual billable hours reported in surveys has been 1,750. This continues to be the expectation for many firms. In the past few years, due to lack of work and other factors, some firms have lowered the annual expectation minimum to 1,600. Litigation firms, especially insurance defense firms, currently have minimal expectations ranging from 1,800 to 2,000 hours. Firms that represent individual clients such as general practice firms, family law firms, and estate planning/administration firms currently have minimal expectations ranging from 1,400 to 1,600.

It looks like you are not enforcing your billable hour expectation. However, you need to look into your situation and determine the reasons. It could be that they are not putting in the work because the firm does not have enough work for them to do. Look into the following possible causes of their low billable hours and take corrective action:

• Not enough work available
• Poor time management habits
• Poor timekeeping habits
• Poor work ethic and not putting in the hours

An approach that many firms are taking is to incorporate performance bonuses such as the following to motivate additional production. Usually these are on top of a base salary. Here are some examples:

• Base salary plus 5 percent of base salary if the billable hour expectation of 1,600 is attained, discretionary bonus, and a 15 percent client origination bonus for bringing a client to the firm. The bonus is for the first year only.
• Base salary plus $50 per billable hour actually billed to clients that exceeds 1,750 annual billable hours. A 10 percent bonus on the collected revenue from other timekeepers that work is delegated to.
• Base salary plus 20 percent bonus for collected working attorney fees in excess of three times salary during the year. For example, an associate who is paid $100,000 would have a working attorney collection expectation of $300,000. If the associate had collections of $400,000 he or she would receive a bonus of $20,000. The associate also is entitled to receive a client origination bonus of 10 percent for business brought to the firm.
• Base salary, 1,200 annual billable hour minimum expectation, quarterly production bonus of 40 percent of working attorney collected fees less salary paid for the quarter, and 20 percent client origination bonus for work done by others in the firm.
• Base salary plus one-third of hourly billing rate for hours billed to clients that exceed 1,800 annual hours billed to clients.

Some firms have lowered base salaries when incorporating new performance bonus systems when the current expectation is far below expectation. Other firms are terminating underperforming associates.

Many firms are finding that associates in small firms who have salaries of $100,000 or more are content and are not motivated by the bonuses available. For these associates, work-life balance is more important than earning additional income. The bonus systems work better for associates who are still hungry or have lower base salaries.

Firms that have had the most success in getting associates past the “entitlement mentality” are those that incorporate goal setting, accountability, and individual coaching meetings with associates in addition to the performance bonuses.

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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.