Hedging bets: How to align compensation with firm strategy

One of the thorniest issues ?facing law firms today is ?lawyer compensation.

This is partly because it is so extraordinarily difficult to achieve a correct balance between the interests of various strata of lawyers in the firm. But, it is also partly because firms are trying to strike a balancing act between rewarding billings and new business development. As a result, many firms are frozen in place and are largely unable to address the issue of how to effectively compensate lawyers.

Lawyers are fond of saying that compensation is the engine that drives the train. That’s agreed, but it is the compensation scheme that affects virtually every aspect of the firm’s operations, including how well and in what manner the firm serves its clients.

Many law firms maintain a compensation scheme that may easily be perceived as having a negative impact on their ability to serve clients to the highest standards. Indeed, the scheme may even detract from risk management in firms.

Compensation models are often at least partially responsible for the rollercoaster of lawyers who have come and gone from firms over the years.

For example, while a compensation scheme may reward lawyers for bringing in new business and delegating it to others, it may also appear to provide a greater reward to an individual for delivering a matter to his work group or department, rather than to the firm at large.

A lawyer outside of that group who may have greater expertise in the matter, as well as the time to manage it properly, could be passed over because of the premium (additional bonus credit) given to the originator’s own work group or to the originator if he handles the work himself (even though he may not have the ideal expertise to manage the assignment).

This particular approach tends to cast a negative light over the firm’s ability to manage work in a way that provides the greatest benefit to the client as well as to the firm’s safety and security.

It would appear that, from an economic benefit analysis, there may be far less incentive for a lawyer to send a file to someone who may in fact have more expertise and/or the time to handle the matter at hand. Since compensation is the engine that runs the train, it is a critical element in the safety and security of the firm and can be very much a double-?edged sword.

A problematic compensation scheme may create other concerns. It may add a burden to the efforts of the firm to successfully cross-market itself (including, probably, the general development of an associate population). Depending upon the firm’s types of clients and their longevity with the firm, this is an important element in the growth and development of the lawyer population. It also has a significant impact on the firm’s ability to get and keep new lawyers at every level of experience.

In firms where the emphasis and the basic benefits of the compensation scheme are very heavily weighted ?towards older equity partners, it is a primary reason why they stay more as a confederation than a true partnership in the traditional sense and have difficulty sustaining growth.

Compensation is used as a means to accomplish a number of goals in a law firm including, obviously, the development of new client business and concomitant general economic benefits. Again, in a firm with a relatively large institutional client base upon which several of the firm’s most senior lawyers may rely for an ongoing flow of new matters, compensation is mostly geared towards maximising that revenue stream, including the way in which origination payments are derived.

However, while this works to the advantage of the core equity partners, it does little else to stabilise the firm construct, grow the business or increase the firm’s ability to compete in a modern environment where efficiency and productivity are held in such high esteem. For all of these reasons, a periodic exploration of how compensation is tackled is in order for every law firm.

Testing your compensation scheme

1. Has the current compensation scheme created stability among the lawyers who have been a part of the firm over the past few years?

Fundamental questions must be asked in evaluating the firm’s compensation scheme, including two threshold matters:

1. What is the basis for the compensation scheme?

2. What contributions to the law firm’s success should the scheme provide?

First and foremost, the scheme should be the basis for stability among the firm’s lawyers. A program of compensation should work towards the accession and retention of good lawyers and it should work in a defined manner so that lawyers are providing legal services at the highest level to clients.

2. Does the compensation scheme allow the firm to properly administer itself at the highest level?

Compensation should allow for the proper administration and operation of the firm. Just as the firm needs to excel in lawyering, it also needs to excel at creating an environment in which the basics of good administration are in place. If compensation isn’t handled properly, problems will ensue.

In order to further economic gain, there must be appropriations geared to the highest level of administration, in the same way that the firm aspires to that level in the practice of law. Building a strong and effective infrastructure allows the firm to grow and prosper.

3. Does the compensation scheme allow for the building and development of a strong and vibrant firm?

A firm’s compensation scheme should help it to build a future. It must allow for the core senior population to make room for others at the top. It must also reward younger lawyers and entice them to build the firm, not just in terms of aggrandisement of economic gains.

Building the firm ensures that, over the long haul, everyone will benefit from the actions taken towards that development by those at the top.

4. Do most lawyers, particularly those who are not senior partners, view the current compensation scheme as fair and equitable?

A compensation scheme should be perceived as being fair to all. Even though it may bean impossibility, most of the lawyers must see the scheme as affording them the opportunity to succeed. This may of course work to the detriment of some, but the theory is that if the firm is the primary beneficiary, then, at the end of the day, everyone will come out ahead.

The development and discussion of the compensation scheme must be open and above-board and include more than just the most senior lawyers. The goal is to attain a scheme which is seen as fair and is as straightforward as possible.

5. Does the compensation scheme allow for the strategic planning and development of the firm’s future?

The compensation scheme must work towards the attainment of the firm’s strategic goals and be adjusted as ?those goals or plans change. A programme of compensation may work well at one point in the firm’s development, but be deficient in attaining the firm’s overall long-term plan.

The firm should, in any case, take the time and devote the resources to developing a long-term plan, including case focus, economics, population growth and individual lawyers’ goals. The compensation scheme must match that plan and those goals.

6. Do the lawyers who perform the majority of the firms’ legal services find that the compensation scheme works to their advantage?

Although considered as a given, it should be noted that a compensation scheme must have some benefit for those who used to be termed as the ‘grinders’, as well as the ‘finders’ and the ‘minders’.

This is to say that the lawyers who do much of the work must be part of the rewards matrix, as well as those who develop the work and those that ?preserve the client attachment by performing the work.

7. Does the compensation scheme allow for the firm to make strategic changes in response to differing economic climates?

In the most pragmatic of terms, the firm must take measures to ameliorate compensation in special times, such as those in which we live and work right now.

As has been made so clear in the past few years of economic downturn, partners who are less adept at the development ?of their own business may have a ?tendency to accept files which they might not accept in a different economic environment. This leads to other ?difficult circumstances, including ?problems with accounts receivables, the subsequent effort to file lawsuits for fees and so forth.

For that reason, law firms should place more emphasis on regulating the manifestations of their compensation model. This means that, in order to provide for their safety and security, they must:

• exercise real-time control of case intake;

• scrutinise and manage write-offs in a neutral and objective manner;

• place serious emphasis on accounts receivable; and

• oversee the practices of their lawyers.

???In this way, firms will be able to maintain an emphasis on new client development, case management and individual lawyer compensation, but with the confidence of knowing that they are addressing the potential downsides as well.

8. Does the compensation scheme maximise risk management efforts in the firm?

Law firms should review their compensation programmes to determine if they operate for or against organisational risk management.

The ability of a firm to practice in a safe and secure manner, with emphasis on the important elements of a solid practice management structure, often requires effort and time.

Therefore, the compensation scheme should, in some fashion, reward lawyers for their efforts in developing effective conflicts determination practices, for example, or ensuring that the firm practices within appropriate ethical bounds.

Managing the risks

For the overall benefit of the firm, it is always recommended that every compensation scheme be revisited regularly, with an eye towards achieving the general objectives of risk management.

Every scheme of compensation will have its strengths and weaknesses. Every law firm should, however, be certain that it accomplishes the most important of the above criteria and be flexible enough to introduce changes as necessary to advance those ends.

Thomas Berman is a principal at Berman & Associates