As the economic recovery remains sluggish, law firms need skilled management and leadership more than ever before. This fact raises the thorny issue of how a firm should compensate those partners who have sacrificed some of their practice to manage the firm, a practice group or an office.
For years, many firms simply did not address this issue because management was considered less important than practice. Recently, however, more firms, particularly MidLaw and SmallLaw, have recognized that effective management is as important as quality practice and as a result have developed systems that attract and compensate their most capable leaders.
Which positions deserve management compensation?
The most important, of course, is managing partner, president or CEO. Even in firms that have capable non-lawyer managers or administrators, in my experience, this partner usually devotes up to 40% of his or her time to the job.
Next in importance is department chair or practice group head, which, as the result of the growing need for effective practice organization, have become part of senior management in most mid-size and large firms. Based on my experience, many practice group leaders spend up to 30% of their time on management. The leader of a newly launched practice group may initially have to devote even more time to get the group fully up and running.
Many firms have a management or executive committee. Depending on the responsibilities of the committee, its members could be expected to devote up to 20% of their time to management issues. When that level of time commitment is involved, some firms also provide a level of management compensation for committee members.
How is compensation structured?
There are two basic approaches. Firms in which partners’ compensation is based on billable hours give credit for a certain number of hours based on the percentage of time the partner is expected to devote to management.
For example, a firm requires partners to bill 1,800 hours and expects the managing partner to devote at least 40% of his or her time to the position. Accordingly, the MP receives “credit” for 720 billable hours. The balance of the MP’s compensation is based on producing 1,080 billable hours. However, factors such as firm growth or profitability might also be included in determining the MP’s compensation.
Similarly, if the same firm’s practice group leaders are expected to spend a minimum of 20% of their time on that role, they would each receive credit for 360 billable hours. The balance of compensation, apart from individual billable hours in practicing law, might be based on additional factors such as the performance of the practice group.
The second basic approach to management compensation involves designating a portion of the compensation on a “base salary” without reference to specific billable hour goals. The amount of salary would be determined based on several factors including:
- The responsibility and authority the firm assigns to the position.
- The time commitment expected or required for the position.
- The goals or plans the firm expects the partner to achieve.
- The partner’s compensation history.
For example, a firm requires its MP to devote at least 40% of his or her time to the position. If this partner was earning $500,000 while in full-time practice, an appropriate base salary for assuming the MP role could be $200,000. The balance of compensation would be calculated, at least in part, based on the firm’s partner compensation system. The same approach could be applied to practice group leaders or other designated leadership roles in the firm.
In either approach, there is a growing trend to have the partner submit a plan and, after the plan is approved by the partners (or a committee delegated authority by the partners), to base part of compensation on how well the objectives listed in the plan have been achieved.
Another example would be if a MP’s plan might include two objectives: 1.) To increase the firm’s full realization from 90% to 93% and 2.) To increase revenues per lawyer by 10%. If those goals are achieved, the MP would receive additional compensation, calculated either quantitatively or subjectively.
What happens when it’s over?
Whether or not there are term limits for each position, many partners desire to return to full-time practice after serving in management. Long-term service in management, however, usually results in a partner losing some of his or her client base. Because of this, most firms provide some type of compensation “cushion” while the partner rebuilds his or her practice. This amount is usually equal to the compensation the partner received for management services and is provided for a specified period, usually two years.
Despite the sluggish economy and increased competition in the legal profession, the good news is that law firms are recognizing that leaders and senior managers must be compensated—just like in any business or organization.