We are continuing our legal series focusing on topics related to growth and profitability for law firm owners. In The Legal Series, we have covered staff productivity and efficiency KPIs and the importance of industry-specific software. In this episode, we are joined again by Katina Peters CPA, CGMA, and co-owner of PJS & Co. CPAs to discuss a partner compensation model that encourages firm growth. Katina has an extensive background working with the legal community, from single owner firms to multi-partner firms. She discusses the complicated issue of partner compensation and what can be done to design a system that encourages collaboration amongst your team.
What we cover in this episode:
- 01:48 – Why is partner compensation important?
- 05:43 – Changing your compensation model
- 07:14 – Considerations when creating a compensation model
- 12:50 – How to establish a system in a real-world example
- 15:09 – Implementing compensation based on core values
- 22:20 – Establish a system focused on growth of the firm (which means growth for your team)
- 25:44 – No compensation system is perfect
Why is partner compensation important?
There are many different ways to approach compensation and there can be large consequences to a compensation model that does not work well. Poor compensation models can bring feelings of tension and bitterness into the firm, and we have even seen instances where this issue alone will drive a partnership to dissolve. Potentially, it can also stunt the growth of a firm. To avoid this, everyone needs to be in agreement upfront about a compensation plan. Traditional compensation models have trained attorneys to compete with each other rather than serving the interest and growth of the firm as a whole. We want to foster positivity and growth while also incorporating accountability and compensation that makes sense.
First, we need to understand the firm is a business, and focus on what is best for the business as a whole, not an individual practice for each partner. Within that understanding, you need to account for both billable and non-billable time. The managing partner will put in a significant amount of administrative time just to run the business. This time, though not billable, is valuable to the firm’s stability and growth and the managing partner needs to be compensated accordingly. Without compensation for attending to the business end of the firm, feelings of resentment will bud within the partnership. A compensation model that only focuses on billable time can also train lawyers to compete with each other with regard to the number of clients and client work. This mindset does not train the next generation of attorneys on the value of also running your business well.
Changing your compensation model
If you are part of an established firm, it can be difficult to change a compensation model you have in place. However, if you recognize that there is a problem, you need to revisit your strategic plan and readjust to fit the goals you have in mind for your firm. We need to let go of egos and be open to change. We need to embrace what is in the firm’s best interest. Ultimately, that will trickle down to everyone in the firm. So, just being open to having that conversation will go a long way toward achieving your goal.
Considerations when creating a compensation model
Establish core values
The best way to begin the discussion around compensation is to first consider your why and your core values are as a firm. Think about what you stand for, and your ultimate goals as a team and firm. When you design the compensation system around those core values, you can encourage actions that will advance your goals and discourage actions that detract from those values. Centering a discussion around what the firm’s values are can be a good platform for hashing out differences and coming together toward a common goal.
There is more than one path to success
You also want to make sure that everyone is committed to the principle that there is more than one path to the success within the firm. Maybe one person is great at bringing clients in the door, while another has a passion for digging into the work, and another has a strength for the operational side of the firm and keeps the work moving; We want to acknowledge that all of those roles are important within the firm. A successful trial lawyer, transaction lawyer, business developer, the rainmaker, the managing partner may all be paid the same compensation. They will simply have different expectations for where they spend their time and effort. Now, if something does change throughout the year, it needs to be authorized by the firm decision maker. This helps everyone to stay accountable and push the firm forward.
Policies and procedures that serve the goals of the firm
From a management perspective, you can’t let your team members do whatever they want. This is where having good policies and procedures for billing, time and attendance, and client flow keep your team members accountable. The most successful firms, who achieve growth and profitability, have ease of operations and balanced lifestyles. Pro bono work is a good example of establishing a policy and procedures around how you want to approach this aspect within your firm. A firm needs to decide if and how much pro bono work the firm will do. You will need to determine what fits within your values and strategic plan and then decide how much pro bono work the firm can afford to do. These decisions need to be made strategically, and ideally approved by a committee within the firm.
Reviewing and analyzing numbers
In establishing a partner compensation system that supports our values, you want to examine both numeric and nonnumeric statistics. Since much of the information is evaluated subjectively, there must be some consistency imposed on valuation of the subjective contributions. Again, a single, or committee, valuator will help determine how best to level out those contributions throughout the year.
How to establish a system in a real-world example
Establishing your core values as a firm will lend itself to outlining your policies and procedures and a fair compensation plan. To give an idea of what this looks like, we will run through a real-world example of a firm, first by establishing their core values.
This firm has decided they want to have a reputation for and dedication to the highest standards of ethics and professionalism. They also want to be a good place to work for partners, owners and employees. They want to be a leading firm in the profession and in service to the public. They want to make sure they have dedication to good and active management, with consistent policies and operating as a team. As with any business, they want to accomplish these things while also being profitable.
Implementing compensation based on core values
We will now take the core values of this example firm and apply a compensation model that will lend itself to the overall success of the firm. While this may not be an exhaustive list, it’s a starting point for setting expectations within the firm.
Defining management policies
- Every lawyer is expected to devote full time to the business of the firm. Full time must be defined, so your team understands expectations.
- All non-billable activities for the firm must have the approval of the firm.
- The amount of time spent on non-billable activities must be authorized by the firm through a similar decision maker.
- Client development is the business of the firm. When there is a reason to choose between one client and another, those are firm decisions made by a designated decision maker.
- There is more than one way to achieve success at this firm. The successful trial lawyer, the successful transaction lawyer, and the successful developer of business may be paid the same.
Tracking data (numeric and non-numeric)
Moving to the next phase, we need to talk about data. We talked about numeric data and nonnumeric data. This is like tracking KPIs, but we have different goals for each individual or class of individuals. Previously, we have talked about industry-specific software. Some of that data is going to be easy to collect, such as time tracking. We can see what is billable, what is not billable, where time is being spent, and holding people accountable for that. Other data such as how many clients have been developed in the year, or how many clients an attorney has expanded services to, may also be important to the firm.
Looking at profit before compensation will indicate what is available in the firm for compensation. For example, 50% of the profit may be given as the base salary assuming full-time employment, with another 25% being given for quality of client service, and the last 25% awarded for extraordinary performance. Extraordinary performance may be awarded with bonuses for going above and beyond for the firm. In theory, you want to incentivize your team to excel, not just focus on billable hours. Some firms will establish a point system, assigning points for different achievements. Then using points to allocate the remainder of the pool to the partners. Whomever has the most points will get a larger share of the profit. You can determine what that looks like at each level of the firm and set a baseline for how profits will be allocated.
Establish a system focused on growth of the firm (which means growth for your team)
We always want to keep the focus on what is best for the firm, not the individual, at all levels. That might include training the next group of attorneys to take over for those aging into retirement. The next generation of attorneys needs to have the knowledge and experience to maintain continuity of the firm in years to come. The idea is that you approach this holistically in a way that is fair and equitable, and keeps the firm growth, ease of operations, and overall success as a top priority.
A good compensation system allows people to excel in their strengths. We have discussed how putting people in the right seats can really push your business forward. Some people are natural born salespeople, others want to dig into the law. When you allow people to be in that space where they love what they do, it will exponentially increase the ability of the firm to service more clients and to be more profitable. You want to design an income stream to benefit the whole firm and to reward collaboration, training of new comers, and effective client work.
No compensation system is perfect
No compensation system is perfect, but the goal is to avoid the terrible compensation systems that can stunt your growth and lead to tension among partners. And while you may be creating a new model or establishing your system, it’s great to allow room for bonuses and some flexibility that may not be laid out in your original compensation plan. You want to be open and flexible enough to address the needs of your firm. Starting with your core values will allow cohesiveness with your strategic plan for the business and reward what is good for the firm.
We want to leave you with a few principles to follow while you’re establishing your partner compensation model:
- Remove impediments to good management.
- Remove impediments to increasing the quality of the firm’s client base.
- Remove impediments to fairness.
- Remove impediments to long-term planning for the firm.
- Remove impediments to good loss prevention practices.
In this episode we have covered how to design an effective partner compensation system for growth in your law firm. Ineffective compensation structures can create tension and bitterness in a partnership. In an effort to create a cohesive work environment, the partners need to establish a set of core values that their compensation package will adhere to. Using your firm’s core values as a guide to outline policies and procedures, and subsequent compensation of the team members, will create a fair and equitable work environment.
Remember, we are not only a practice, but also a business. Sometimes we need to set aside the old way of doing things. Instead build your structures, including partner compensation, around achieving those values and goals as a cohesive firm, instead of focusing on the individuals within the firm. That’s really what is going to make the firm grow, make the firm profitable, and give the firm that ease of operations and lifestyle that you are looking for as a firm owner.