Certain practice areas at law firms are clearly more profitable than others. Because of this, firms with a diverse practice mix will face more challenges in developing an associate compensation system. For instance:
How should a firm compensate same-year associates working in different practice areas with materially differing billing rates?
Most firms rarely consider billing rates when deciding how much to pay their associates. They focus solely on attorney’s billable hours, making billing rates irrelevant to the compensation equation. We believe these firms need to refocus.
Law firms will benefit when they focus more on the profit an associate generates rather than their number of billable hours. Firms should consider an associate's billing rates and profits contributed for the following reasons:
- Associates who successfully work on higher paying client work will develop skill sets valued by these clients. As their career progresses, they are incented and will be positioned to develop work in these higher rate bands.
- Billable hours may differ among practice groups. For example, certain business practices may have less leverage and less individual billable hours. Usually, the rate differential will overcome the result of less production. Regardless, paying on profit contributed will account for any favorable or unfavorable differences.
- Firms that hire associates based on available roles must consider the economic realities attached to these positions. For example, insurance defense and estate planning will have separate economic models with billable hour and rate differences. Partners need the flexibility to align compensation with the competitive needs of their practice.
- Outlier practices (practices significantly different than the common practice in the firm) must pay their people at the market value for the services they offer. A firm with mostly lower rate practices is vulnerable to losing people doing higher rate work if they do not account for the market realities. This is particularly true when competitors are paying their attorneys based on the economics of that higher rate’s practice.
- Paying based on billable hours may not be feasible in non-hourly billing practices.
Having worked in law firms for virtually my entire career, I can think of individual situations that don’t fit into any of these scenarios. Recognizing that creating policy is an imperfect science, all compensation decisions must be accompanied by sound management judgment.
Associate Pay Posts:
Read our previous post "HOW DO WE PAY ASSOCIATES" for an overview
of the necessary components and processes to develop an effective
associate compensation system at your law firm.
Upcoming blog posts will expand on the topic of associate compensation discussing areas of most interest to law firms including:
- The nitty gritty of an effective compensation system
- Base Pay
- Compensating for profitability
- Additional areas of value to consider
- Managing an effective compensation system
To schedule a FREE Associate Development Webinar for you or your firm that reviews the components of an effective attorney development program,
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