Law Practice Management Asked and Answered Blog

Category: Subjective

Nov 12, 2019

Partner Compensation in Law Firms – Objective vs Subjective Approaches

Question: 

Our firm is at a crossroads concerning partner compensation. We are a twelve lawyer firm in Richmond, Virginia with nine partners and three associates. We are in our second generation of partners as the original founders have retired over the years. We do not have a managing partner or management committee – management decisions are made by all the partners. Our compensation is based upon compensation participating percentages set at the beginning of each year based upon the recommendation of a rotating member compensation committee recommendation which must be approved by the full partnership. These percentages are then used to allocate each partner’s share of firm profit. Monthly draws are taken against projected allocations and the calculations are trued up each quarter and at the end of the year. There is nothing in writing and it is unclear what is taken into consideration by the compensation committee. However, in general the primary metric is individual working attorney production collections. Supposedly, other metrics and subjective factors are taken into consideration but no one knows what they are. The majority of the partners have been relatively happy with the system but a few are not due to the vagueness of the system. I am wondering whether we should move more to a formulaic approach. What are your thoughts?

Response:

The trend in compensation, particularly in larger firms, is toward subjective or hybrid approaches and a movement away from strictly formulaic – eat-what-you-kill – objective systems. These systems are fine in “lone ranger” firms but often are unsuccessful in firms that are or want to be “firm first” or “team based” firms. The unhappiest partners that I see are in some of the firms with eat-what-you-kill objective systems. It sounds like your system has worked fairly well and a majority of the partners have been satisfied with the system. However, it may not be reinforcing the behaviors that you would like to instill in your partners if the only metric used, or is perceived as the only metric being used, is working attorney collections. Your firm is very partner top heavy and I would not be surprised if your utilization of paralegals as effective billable revenue producers is minimal. You are encouraging personal production period. What about delegation, new business origination, leadership, contribution to firm management, mentoring and training of associates, etc? Subjective or hybrid approaches often do a better job of dealing with overall contribution to the firm if they are setup properly.

I would suggest you fine tune your existing system. Consider the following:

1. Put your system in writing. Outline the performance factors that are considered and the general importance or weights of each. This includes objective or directly measurable factors and the more subjective or harder to measure factors.
2. Make more of the intangible or subjective factors measurable by requiring that a personal plan be submitted by each partner and reviewed with and approved by the compensation committee. This plan should contain specific measurable goals and objectives that are specific, measurable, attainable, rewarded in the compensation system, and on a specific completion timeline.
3. Require that the compensation committee conduct personal partner interviews each and every year prior to their deliberations on compensation. This interviews should be mandatory. Self evaluations with related narrative should be provided by the partner being interviewed prior to the interview and the approved plans should form the basis for the discussion and reviews.
4. The full partnership should either approve – up or down the compensation committee recommendation – not be allowed to pick apart or modify. If the partnership does not approve the committee’s recommendation the committee starts over and submits another recommendation. There should be a provision for what happens if a decision cannot be make – for example used last year’s percentages, etc.
5. There should be an appeal process if a partner has a complaint with regard to the decision concerning his or her compensation.
6. Consider extraordinary bonus pool for exceptional performance rewards.

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John W. Olmstead, MBA, Ph.D, CMC

Jan 03, 2019

Law Firm Non-Equity Partner Subjective Compensation Factors

Question:

Our firm is a seventeen-attorney commercial litigation firm in Atlanta, Georgia. I am a member of our firm’s management committee that decides raises and bonuses for non-equity partners and associates. Currently our non-equity partners are paid a salary and a discretionary bonus. We would like to stay with this approach however we have had complaints that our system is totally arbitrary. We would like to be able to provide more transparency – a general list of the items that we consider when making our decisions on salary and bonuses. You thoughts would be appreciated.

Response: 

Here is a suggested list of factors with weights that you might want to consider:

1. Fee Production – Client Origination Collections – 25% weight
2. Fee Production – Working Attorney Collections – 25% weight (billable hours in some firms)
3. Profitability of Work – 10% weight – (effective rate per hour, realization, etc.)
4. Delegation of Work  – 10 weight (delegation to paralegals and associates)
5. Client and Case Management – 5% weight
6. Technical and Professional Competence – 5% weight
7. Professional Conduct – 5% weight
8. Firm Management and Leadership – 15% weight

You can adjust this list for your particular situation and what is important for your firm.

Here is a sample list of subjective compensation factors with detailed consideration factors with weights and points.

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John W. Olmstead, MBA, Ph.D, CMC

Apr 17, 2018

Subjective Law Firm Partner Compensation Systems

Question: 

I am a partner in a twelve attorney commercial litigation law firm in Palm Beach, Florida. There are five partners in the firm. We are contemplating merging with another firm in the area of similar size. We have done our due diligence and have come across a possible non-starter – the compensation system. Our compensation system is totally objective – formula-based very close to an eat-what-you-kill system. The other firm has operated under a subjective system and they are pushing for the firm to operate under this type of system. We would appreciate your thoughts and enlightenment concerning subjective-based systems.

Response:

Subjective-based systems are the most commonly used approach to setting partner compensation, especially in larger firms. More and more firms your size and larger are moving to subjective systems as a result of the failure of other systems to account for the full range of contributions that partners make to the law firm. Subjective systems can take on a variety of forms but the central theme of such systems is that they rely on a subjective assessment of partner performance, without reference to specific weighting of factors or a set formula. This is not to say that subjective systems lack structure or predictability, or that they don’t consider objective financial data. Successful subjective compensation systems include these elements and more.

Subjective compensation systems vary widely. Here are some of the most common elements found in subjective systems:

• Prospective vs Retrospective System. Systems can take the approach that sets compensation at the beginning of the year by assigning relative shares of the profits and applying allocations as the profits are earned or await the end of year results before making major allocations of profits. Prospective approaches are more common than retrospective approaches. However, most prospective approaches reserve some funds for year-end allocation.
• Who Makes Compensation Decisions. Since the system is not a simple plug and play using a formula, either a person or a group must be empowered with deciding how profits will be allocated among the partners – how they will be compensated. In most firms these decisions fall upon the executive or compensation committee. Often the success or failure of the compensation system hinges on getting the right people that are trusted by all of the partners on such committees.
• Factors – What Does the Firm Reward. Most subjective systems have defined factors that the system is designed to reward. Some compensation committees have these outlined very specifically in writing and others simply communicate the factors or consideration criteria verbally prior to annual performance reviews or through general discussions of goals.
•  Data Review. The better subjective systems review financial performance data for each partner and subjective data for each partner often in the form of performance evaluation or peer review.
• Client Origination.  Some firms consider client origination as a direct factor,  others simply track client origination, and yet others do not track it all all.
• Point Structure. May firms use a point structure in which partners are moved up or down depending up their performance.
• Bonus Pool. Bonus pools are often used in such systems to reward exceptional performance.

In additional to subjective compensation systems some firms used hybrid systems that employs objective (formula) and subjective components.

Subjective systems are not for all firms. They will fail with out strong, trusted, leadership. In very small firms it is difficult to structure a compensation decision making body.

It sounds like your firm and the firm you are thinking of merging with may come from two very different cultures. Subjective systems work well for firms that are “firm first” firms but not for lone ranger firms that often operate under eat-what-you-kill systems. If you firm is not a long ranger firm and your are in fact a “firm first” firm or aspire to be such you may be able to adapt to a subjective system. However, you may need a post-merger phase-in period. Another comprise approach might be a hybrid system.

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John W. Olmstead, MBA, Ph.D, CMC

Jul 20, 2016

Law Firm Compensation – Moving From an Eat-What-You-Kill System to a Totally Subjective System

Question:

I am a partner in a 20 attorney firm in San Francisco. We have five partners. Two of the five partners are founders and the other three were made partners five years ago. Our firm was started twenty years ago by two partners of our existing partners. From day one our compensation system has been an eat-what-you-kill compensation system based on a formula with two factors – working attorney collections and client origination. While the system worked okay for the founders, it is not working for the present firm. The newer partners are unhappy with the system and believe that it does not consider other factors that a partner contributes to the firm. Some of the partners are hoarding work, refuse to serve on committees, and don't want to do anything but bill. A couple of my partners suggested that we move to a totally subjective system. I would appreciate your thoughts.

Response:

More and more firms are moving to more subjective based systems for some of the reasons that you have outlined – especially larger firms. Success of such a system is dependent upon the compensation committee that is put in place (typically a three- member committee elected by the partnership) and the level of trust that partners have in the partners serving on the committee. With only five partners you don't have a large enough partnership to put in place such a committee. It would have to be a committee of the five which would probably not be feasible. In addition, your culture may not be conducive at this time to such a system. Your founders have grown up under the present system and will more than likely resist such a formidable change. I suggest that you make some changes to the existing system and see how that works. For example:

1. Include responsible attorney as well as working attorney and originating attorney fee collection in the equation with a possible weighting of 60% working attorney, 20% responsible attorney, 20% originating attorney.
2. Factor in overhead or if not have a reduction provision for attorneys that are consuming un-fair share of overhead.
3. Factor in effective rate/realization and reduce compensation for realization that is below a certain threshold.
4. Setup a bonus pool (15% – 25% of firm net income) for exception performance decided by the five partners. If there is no exceptional performance or the partnership cannot agree the funds are cycled back into net income and distributed in accordance with the formula.
5. Provide production credit or paid special compensation for serving on management committee or as managing partner.

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