By Carlos Gonzalez
In today’s hyper-competitive marketplace, the key to selecting the right law firm compensation model boils down to one simple question: What kind of firm do you want?
Is your goal a firm full of lawyers working as a team? Or, are you comfortable with building a firm around lawyers who are primarily concerned with getting credit for the clients they originate, and not for the hours they actually work?
For those who decide to focus on originations, several other questions arise. How long do you reward a lawyer for his or her rainmaking abilities? Is a lawyer entitled to perpetual credit for a client that has been with the firm for decades? How about a client that was brought in by one lawyer, but is serviced exclusively by another member of the firm?
Finally, how do you attract and keep your future partners? What financial incentives do associate attorneys need in the current marketplace, and how much of an investment should you be making in the most junior member of your team?
For partners, business origination still stands as the most important or heavily weighted factor in determining compensation. Thus, regardless of the model you choose, your rainmakers will still receive the bulk of the firm’s profits.
But rainmakers represent only one aspect of a firm’s profit-making potential. Once the client has retained the firm, the rainmaker may take a backseat, or play a limited role in the representation. This is especially true for those lawyers who are effectively cross-selling the firm’s other partners and/or practice groups. Your compensation models may also account for the role that non-originating partners play in keeping and servicing clients. Compensation models can also be tailored to reward lawyers for their role in marketing and managing the firm.
Four of the most common models are discussed below:
- Lockstep Compensation. Under this model, a partner’s compensation is based on seniority. The longer a partner stays with the firm, the more he or she will earn. Proponents of this model argue that it encourages teamwork and cooperation. Opponents counter that a lawyer should not be rewarded simply because he or she shows up for work, year after year.
Both arguments have merit. Lawyers who are rewarded for their longevity will be more inclined to put the firm before their own personal interests. And, yet, a pure lockstep system may strike junior lawyers as unfair. If they are primarily responsible for maintaining and servicing the client, their efforts should be reflected in their compensation.
To reach a balance, this compensation model can be refined to include credits for service to the client and firm. As senior lawyers cut back on their work, their credits are reduced, while credits for junior lawyers who are taking on more responsibility increase. Both senior and junior partners then benefit from their time in the firm, as well as from their individual productivity.
- Individual Production. This model, also known as the “eat what you kill” method of compensation, rewards attorneys for their personal production. Although relatively easy to administer, this formula carries greater social costs for the firm. While rewarding rainmakers, it may also tempt attorneys to focus on their best interests, as opposed to those of the firm.
This method has worked effectively in small as well as new law firms. It may also be a good way of attracting top lawyers from other firms who feel they could be earning more if they were not hampered by a lockstep or other seniority-based compensation model. If those lawyers have a portable book of business, this model may be very tempting.
- Merit. Under this method, a partner’s compensation is based on a variety of factors which are assessed by a management committee of several partners. Factors to be considered may include service to the firm, service to clients originated by other attorneys, marketing, publications, and even pro bono service. The weight to be given to these and other subjective factors will depend entirely on how committee members view these elements. Even under this model, originations will still drive compensation.
- Associates. At the biggest law firms, associates, including first-year associates who are untested and untrained, still command six-figure salaries. At small law firms, the compensation is less and, arguably, more consistent with the value the firm and its clients receive from junior lawyers.
Although not yet very popular, some law firms have been offering associates partner-style compensation packages. Associates are offered a low base salary and the opportunity to make a significant bonus — sometimes several times their base salary — if the firm is profitable, or if it recovers a significant contingency free in a litigation matter.
As the legal profession continues to adjust to the present economic climate, these models will likely be refined to allow law firms greater flexibility while still attracting top legal talent.
Carlos F. Gonzalez is a Certified Anti-Money Laundering Specialist (CAMS) and partner at Diaz Reus & Targ, LLP, an international law firm serving U.S.-based and global clients, where he concentrates on trial and appellate litigation with an emphasis on international civil and commercial disputes and white collar criminal defense. Contact him at email@example.com.
Originally published: Jan 17, 2012