Law Firm Sales and Compensation Incentives – A Case Study
Family Business: Case #7, Chapter 3 – The Hurst and Howard Family Law Firm
David and Tim were happy with the outcome of the two Saturday sessions and even more pleased at the compliments received from Raymond and Colleen at their post seminar meeting. After the compliments and some feedback about the response from others (Raymond and Colleen had decided not to use any type of participant evaluation form as recommended by David) so just had the benefit of informal comments from partners and associates as they saw them in the office. Actually, not all the comments were positive. One associate thought David’s altering table positions at the bank seminar was “underhanded” and “unethical”. He went on to say that “he did not go to law school to be a sneaky salesman”. Raymond was quick to say that this opinion was not shared by the other lawyers.
David and Tim knew, however, that much more was possible if they could encourage Raymond and Colleen to form a marketing committee comprised of several of the most respected lawyers in the firm. One responsibility of the committee would be to develop a monitoring system to capture progress made by the firm’s attorneys in seeking new clients. Raymond did not want to go as far as asking for each attorney’s list of targets or a record of the calls they were making or the appointments secured. They did, however, make changes to their existing new client forms to add information about which lawyer(s) were responsible for obtaining the new client and an indication of how the new client was obtained.
The Compensation Plan
Hurst and Howard, even in 1998, still used the historic compensation system of equal pay to associates who joined the firm at the same time and equal raises to those same associates until they became partners. The partner compensation was essentially the same as each partner received the same percentage interest in the partnership as others becoming a partner at the same time. Almost all increases in partners’ ownership percentages were also done equally to partners becoming a partner in the same year. Firms like Hurst and Howard did not have a mandatory retirement age and did not want one. George and Raymond had started to worry about this system as the ability to increase the compensation of younger partners had to come from increased firm profits (and that was not happening), freed up ownership percentages of a retiring or deceased partner , or diluting the ownership of the more senior partners. George and Raymond at ages 57 and 58 had no intention of retiring so they had to develop another way to fairly compensate the younger partners.
It was also the tradition of law firms in their area to admit partners to the partnership without requiring any payment for their partnership interest. That factor was balanced by not paying a retiring partner for their partnership interest. It was sometimes akin to life –come in naked and go out naked.
David spent long hours with George and Jack, the members of the compensation committee. It was important to first understand their current system and then carefully understand what they wanted a compensation system to do. The idea that the lawyers were entitled to equal compensation based upon time in grade was a sticking point but George and Jack agreed that it was not working and needed to be changed. George was also very willing to hear ideas about using a compensation system to provide an incentive to develop new clients. They also wanted advice on how to compensate lawyers who spent time on administrative matters and/or were on the firm’s management committee. It took several weeks of working together to be able to present the following plan first to the firm’s management committee and then to the partners for a vote.
The Compensation Plan Outline
THE ASSOCIATES’ PLAN
- The starting salaries have to be at marketplace levels (base compensation). It is the role of the Hiring Committee to determine what the market is for each year’s recruiting season. This was done quite well already.
- Annual raises would be based upon the demonstrated capability of the individual associate as decided by the management committee
- The management committee will use a formal, written performance appraisal system to rate associates, seeking input from the senior attorneys who most closely work with each associate.
- Raises could vary from zero to up to 15% of current compensation
- Each associate would participate in the client development provisions of the firm’s incentive compensation plan.
THE PARTNERS’ PLAN
- Partner’s current “pay” would be frozen as their base pay. (not fair to reduce current pay as that could affect a partner’s personal obligations (funds for educating children, divorce obligations, mortgage payments, etc.)
- Increases in base partner compensation would also be subject to the decision of the management committee predicated upon the results of a formal, written performance appraisal system with input to the committee as appropriate. Factors such as membership on the management committee or important firm administrative responsibilities were to be taken into consideration.
- Increases are not expected for just being a good partner.
- Each partner would participate in the firm’s incentive compensation plan.
THE INCENTIVE COMPENSATION PLAN
- Business development component.
- The lawyer responsible for gaining a new client will receive 10% of the collected fees from that client for three years. If more than one lawyer participated in gaining the client the fee would be split.
- The receipt of this money is conditional on the lawyer being with the firm at the time such payments are made.
- Productivity component (Just for partners).
- Each partner shall receive 70% of the collected fees from their individual work, net of any business development payment. Each attorney’s total production component shall be reduced by their base pay and the net amount paid to them. If the amount, after being reduced by the base salary, is a negative number no production payment will be made.
This plan was designed to energize the firm’s lawyers to work hard to grow the practice. It worked. Over the next several years the plan was amended several times as the needs of the firm changed. For instance, two partners were asked to move to new office locations and, for their accepting the challenge, were awarded increased compensation and an increase in their partnership ownership.
In the first year of the plan several partners left the firm citing the unfairness of the plan noting ,in part, that there were two three year associates (last names of Hurst and Howard) who made more than several of the partners because of development fees. The four lawyers who left the firm had never received a development fee or had their personal production exceed their base pay.
What incentives have you tried in you firm that have worked or failed? Comment below.