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Law firm compensation systems balance business goals and fairness

When putting together a compensation plan for lawyers, firms have to ensure it’s fair, on-market, and motivates them to perform well, says Toronto legal management consultant Mark Dormer.

“Ultimately, compensation systems should support the firm's goals and promote growth so lawyers can evolve with the organization,” he tells AdvocateDaily.com.

Typically, says Dormer, owner and president of Cosgrove Associates Inc., there are three components to a compensation plan: a fixed amount because people need a base salary; a portion to account for performance or measurables to add on top of the base; and a bonus.

“A base amount encourages a team approach because people are all making the same,” he says. 

“Measurables look at production — if a lawyer works hard, bills and collects, there could be a compensation based on that. Similarly, is a lawyer generates work and brings in clients, there could be a calculated amount based on fees collected from clients they brought in.

“A bonus can be a discretionary amount that goes for factors that can’t be measured.”

When it comes to discretionary amounts in a plan, it’s important to note there are many contributions that one could make to the firm that aren’t measurable in terms of profitability or billable hours, things such as the firm’s profile, Dormer says.

“The firm shouldn’t ignore those.”

As the economy gets tighter, some law firms are moving towards more formula-based compensation and less on a fixed amount, Dormer says.

“That’s good as long as the firm shares the success with the people who are contributing towards it. That’s usually a fair way to do it,” he says. 

Dormer notes that a lawyer’s role in a firm generally evolves over the course of their career, often moving from associate to partner, and their compensation reflects that evolution.

“The associates who are just coming out of law school often need more of a guarantee about the income they will have coming in,” he says. 

“They usually have student debt, living expenses, little savings and few financial buffers. So for the first several years, many associates are paid a fixed amount. There may be a small bonus attached to that, depending on certain factors.”

As a lawyer gains more experience and is more independent, especially when they start attracting clients, their salary formula can move towards a fixed amount plus a higher portion can be based on results, Dormer notes.

“Ideally, a good compensation system would morph that into a partner’s compensation so you take the basics of an associate’s plan and move it into a partner’s salary,” he says. 

“That way, the associates can understand how they would be compensated as a partner. Sometimes compensation shifts drastically when a lawyer makes partner; they could be making the same or less when they first become partner if the associate package is strong. That could discourage them from joining the partnership.”

Dormer says some firms make the mistake of moving to a system that is completely formula based.

“That can discourage lawyers from teamwork and have them operate in a silo,” he says. “If you build a plan that’s based too much on lawyer production, you can get those who hoard work and don’t pass it around to colleagues.”

To develop a well-rounded compensation system, a firm really needs to assess the areas in which it wants to grow and reward lawyers accordingly, Dormer says.

“For example, if the partners want to build the business, rewarding client generation would be great,” he says. 

A compensation plan must also be simple and understandable, Dormer says.

“It can’t be too complicated. Otherwise, people just don’t get it,” he says. 

In addition to money, it must take into account other factors, Dormer adds.

“I don’t think people are as attracted to positions because of money as they used to be,” he says. 

“Firm culture and profile can bring new associates in, and the compensation system should support those factors. Do you want to foster a hard-working environment? Do you want to focus on a collaborative workplace? You can work all those considerations into the system.”

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