Avoiding Common Errors In Compensating Law Firm Associates

Many lawyers practicing now came up through the ranks in a time when the norm was to compensate associates with a third of the revenues they brought in through billable hours (another third going to employee benefits and overhead and the remaining third going to the firm’s profits). In today’s market, using this rule almost always means you’re paying associates more than you need to or should.

Rainmaking For Lawyers recently advised a Los Angeles-based boutique firm regarding how they would compensate a second-year litigation associate whom the firm had hired on a contract basis. The firm wanted to convert the associate to a salaried position for the new year. The firm’s relatively new managing partner used the one-third/one-third/one-third formula to calculate a salary of about $110k.  The market for associates, even in large cities, is not what it used to be. In fact, it can be harder and more expensive to find an experienced litigation paralegal than a junior litigation associate. The firm ended up offering $85k, and the associate gladly accepted it. As consultants to law firms, we can assure you this is not an isolated result, so please drop this dated and dangerously reductive method.

Instead, tie the elements of associate compensation to the conduct you want to encourage.  If, for example, you want a junior associate to learn their craft, compensate them for the hours they bill along with the professional development activities in which they engage.  This can be an appropriate opportunity to provide bonuses for increased billable hours, so long as the increased hours are not marked with a reduction in quality of work. Likewise, if you want a senior associate to start focusing on business development, reward them for their marketing efforts, and pay them a percentage of what is collected on the work they bring in. Especially, don’t overlook the importance of the management efforts attorneys offer to more junior lawyers and to the staff. The economic value of managing, training, and mentoring can exceed the dollar value of a billable hour and, in some circumstances, by a very large margin.

Compensation at law firms is and should be complicated. Law firms essentially have nothing to offer apart from the skills and talents of their people. And human beings respond to money, status, and other compensation-related factors in complex and sometimes counter-intuitive ways. So, please give this the attention it deserves. Senior law firm management should not be using a simplistic formula to determine something as important as associate compensation.

The Truth About Compensation For Law Firm Associates

Many law firms mismanage how they compensate associates.  Consider the following real-life examples:

A law firm that represents consumers in litigation has to scramble because a key associate gives notice and the firm ends up increasing the associate’s pay by more than 30 percent to keep her.

Some associates at a corporate transactional firm are paid by the hour while others receive a salary.  Both groups of attorneys express dissatisfaction and the firm’s leadership has to scramble to determine how to respond.

An associate at a business litigation firm mishandles the discovery aspects of an ongoing case.  When the senior partner asks what happened, the associate surprises the partner by expressing dissatisfaction about how he is compensated.

These examples reflect a troubling truth about associate compensation:  Firms are much more likely to have an unreliable process for determining associate pay than a solid compensation strategy.  Too often law firms change associate compensation only after they receive a critical mass of complaints.  This is a strange and shortsighted way to manage some of the most profitable contributors to the firm.

Moreover, some law firm leaders are surprised that associates didn’t express their dissatisfaction about compensation more openly.  Partners are acting as if they have never realized than many lawyers are passive aggressive.  And the hallmark of that trait is that you can’t infer happiness or contentment from silence.  Passive aggressive people may not complain about their pay, but that doesn’t mean that you can infer that they are happy about it or that they don’t resent or object to it in whole or in part.

In today’s dynamic and fluid market for associate talent, law firms need to take the initiative and establish and communicate a compensation system that is based on a specific compensation strategy.  And that system begins by identifying what kind of behavior the firm wants to encourage in its associates.  For example, Rainmaking For Lawyers was recently retained by a firm that wanted to redesign its compensation so that it would maximize the chance that certain associates would make partner.  The consulting process included detailed meetings with the associates about what they wanted.  This in turn led the firm’s managing partner to increase the marketing budget for two key associates as well as increasing how much business development training they received.  Different law firms need different compensation strategies and it’s not hard to imagine that some firms might reasonably conclude that it doesn’t make financial or strategic sense to invest more heavily to increase the number of associates who join the partnership.  But the decision whether to encourage or discourage associates from becoming partners should be a conscious decision of the firm’s leaders, and not the byproduct of neglect or mismanagement.

Law firms also err when they tell associates that they have to everything—bills lots of hours, develop new skills, learn to manage clients and cases, serve on firm-wide committees, and bring in new matters and clients.  “Do everything” is not a strategy.  Likewise, too many firm leaders are entirely ignorant of the fact that offering more money will not motivate everyone equally or at all.

Creating and implementing an effective associate compensation system takes time and a strategic focus.  But if done correctly, associate compensation can provide law firms with an enormous competitive advantage.  Let other firms scramble to respond to dissatisfied associates.  You can and should be the firm that aligns your associate compensation system with your broader business goals and objectives.