At year-end, $435,000 is distributed. When a lawyer retires on Dec. 31, the units of that lawyer are retired. The total of the units reassigned Jan. 1 will vary each year.
When a new lawyer is hired, she is paid a salary. She is assigned units on Jan. 1 using last year’s value per unit that equates to her salary paid last year. The total units grow (are diluted), but the expectation is the new lawyer will eventually add to the firm’s profit. If a lawyer leaves the firm during the year, those units are retired so the value of the remaining units potentially becomes greater. Figure 1 illustrates the growing unit value as the year progresses. While a bit whimsical, the changing graphic may capture attention.
A bonus pool gives you the ability to reward individual exceptional accomplishment during the prior year. If no such event occurred, distribute the bonus pool equally. Also, use the bonus pool to smooth small differences in total compensation between partners.
At the outset, assign the units so the resulting budgeted compensation approximates the total compensation of the lawyers the prior year. This retrofit will help to foster the “buy-in” and the trust that must be the foundation of any compensation system.
This unit system engenders a “we are all in this together” culture encouraging the entrepreneurial instincts of today’s younger lawyers and reminds the senior lawyers they must continue to set a leading example.
Potential Horror Stories
What controls are in place that standardize client intake? What prevents a lawyer with a “bleeding heart” from accepting any client? The clients they accept increase work in process and accounts receivable, but may often fall short of adding to profit.
If your firm does not have a legal administrator who can professionally manage the firm’s daily operations, these duties fall to a partner or partners. Does the firm appropriately compensate those partners? If not, you will likely witness a major dip in their morale.
Does the firm now enjoy the revenue from a very large client to the extent the broader practices of the benefiting partners are withering? When that client is gone, what happens to the compensation of those partners with withered practices?
A firm with a major contingent fee practice must address the spikes that occur. Retain some of the spike to build working capital for advanced costs. Use a bonus pool for all the partners. Otherwise, resentment may occur from the other under-compensated partners who “carried” the contingent fee partners until the cases matured.
Circling Back to Thoughtfulness
Can too much thought be put into devising a compensation system? Yes. Complexity obscures transparency, raises obstacles to understanding and can cause mistrust. But please have a healthy discussion with your partners about the several examples, factors and behaviors mentioned in this article as well as other compensation scenarios you may be aware of. Any partner compensation system can evolve over time. A discussion of compensation is, of course, worthy of a comfortable Saturday afternoon off-site retreat!