Determining the Right Law Firm Compensation Model

A successful law firm that wants to retain client satisfaction and its talented team while at the same time achieving sustainable growth and increasing revenue needs to find an effective, tailored compensation-model strategy.

Setting up the right type of compensation model means taking a long, hard look at what types of behaviour the firm wants to motivate. There is no one-size-fits-all approach. Personalities and character drivers can determine the compensation strategy implemented. For instance, if younger professionals value work-life balance, a system that strictly rewards billable hours and increased revenues isn’t going to work.

Earning the stripes

The traditional partnership compensation model, where practitioners are rewarded in proportional increase to years served, can be somewhat ineffective. This is because there is no motivation for performance, client origination, talent or leadership. More significantly, it can drive away talent – the best lawyers will not want to stay on knowing that their lesser-performing colleagues are being compensated simply for being employed at the firm longer.

Some are more equal than others

Alternatively, an equal distribution of profits may be suited to small firms or partnerships where both practitioners are pulling in equal levels of performance. But it is highly ineffective when larger teams are at play as it’s not so obvious when one practitioner is underperforming or trying to hide in the crowd.

Performance management

Then there’s the more subjective set up where compensation is determined by one person, often the managing partner, or by a blend of human resources and senior management. Practitioners are subject to whatever the decision-maker thinks is an appropriate measure of performance given origination, revenues, contribution to management, mentoring and billable hours. The decision-maker can even give weight to factors such as the practitioner’s contribution to marketing, practice development and talent mobility. It also gives scope to the decision-maker to compensate practitioners extra as seen fit, perhaps to a new partner whose name gives the firm a reputational boost and credibility it didn’t have before.

In this system, there are many advantages of negotiation and flexibility. But at the same time, it’s a hybrid model of performance data and subjective measurements, and more aggressive negotiators may win to the detriment of their quieter but overachieving counterparts. This model also has the potential to open up accusations of favouritism.

Dogs to a bone

A model structured on partners getting paid and rewarded simply for every dollar they bill and collect, or for new clients they bring in, can eliminate any subjectivity come performance-review time and help achieve the fundamental KPIs of a law firm’s business strategy. However, at the same time this sort of ‘dogs to a bone’ compensation model discourages teamwork or effective knowledge sharing between partners. At worst, this may actually result in client dissatisfaction.

Adding to the problem is that a bonus that rewards only hours by nature could generate a risk of practitioners inflating hours, knowing there will be little evaluation of personal performance, talent, team management or leadership skills.

Toughening up when the water runs dry

Client origination can become a polemic topic, particularly in a stagnating economy where practitioners can easily become possessive about their clients. At the same time, monetary compensation can mean the difference between a talented practitioner maintaining a high level of performance, or leaving after feeling undervalued and unappreciated.

Ultimately, the right compensation model needs to be aligned with the values, culture, size and growth strategy of your firm in order to ensure the best practitioners are rewarded, motivated and effectively retained.

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