There are essentially 4 roles in which attorneys can bring value to a client file and contribute to the profitability of the firm:
1. Bringing the client in (Originator)
2. Managing the client relationship at the file level (Client/File Manager)
3. Managing other timekeepers (Workload Manager)4. Working the file and providing legal services (Worker/Producer)
While every firm considers a different set of functions into their compensation index, most law firms focus their pay structure on only Originations and Production. Firms rarely consider managing client relationships at the file level or managing other timekeepers into their compensation equation.
We believe valuing all 4 roles will increase firm profits, benefit existing client relationships and incentivize firm collaboration.
1. Bringing the client in (Originator)
In the current marketing legal model, it is our experience that only about 20% of lawyers in private practice can consistently develop new business. It requires skills and extra effort that many do not have or won’t invest the time to develop. Because most law firms rely on rainmakers to support their operations, they cannot afford to alienate them, since it can lead to a vicious cycle at compensation time.
Firms that pursue collaborative approaches and use a system based marketing focused driving business to a team can weigh the incentives towards client service and relationship growth. We will talk more about system based marketing in a later post. For now, we will assume origination is a dominant compensable factor.
Originator pay is widely varied, but in terms of cash in the rainmaker’s pocket, the market is usually willing to pay 15%-25% of gross fee collection from the originator’s files depending on billing rates and production costs. Firms who use profit based approaches adjust the percentages from the anticipated margin on the work. For example, assuming the profit margin on the work is 40% and the firm wants to award a profit credit equivalent to 20% of gross fees, about ½ the profit goes to the originator (s).
Compensation systems are often complex and profitable practices wind up subsidizing the unprofitable ones, so it is often not this precise. That said, we suggest checking your system to see how it stacks up to the market.
The more difficult part is when origination credit is not clear or derivative of existing client relationships, but successful firms and rainmakers realize that keeping the team happy leads to much greater success.
2. Managing the client relationship at the file level (File Manager)
Lawyers who independently work and manage files directly with client personnel deserve some share of the credit. In many firms, these efforts are under-recognized and improvements would help morale and client service. In the same light, lawyers who manage case assignments they did not originate must handle these clients as if they originated them. Assuming this basic bargain is met, we suggest the client/file lawyer receive up to 20% of the credit in the reward system.
In many instances, the lawyer who brought in the client also works and manages the client files, so they would also receive this portion of the credit. In other instances, the originating lawyer brings in the work and depends on another lawyer to handle it. Most firms distinguish between non-owner lawyers and equity owners when sharing the client/file credit. Some firms begin to share client/file credit and the related benefits when an associate is promoted to non-equity partner. Equity owners who manage client relationships for another equity owner typically receive some credit for it.
Most firms who use formula based compensation systems only consider working attorney production and origination when allocating the objective portion of the compensation. In these systems, the client/file credit is treated as an origination credit. Some claim referring to client/file management as an origination credit is a misnomer, but it does not matter so long as the appropriate recognition and credit is received.
3. Managing other timekeepers (Workload Manager)
Another essential element of creating profit in a law firm is the management of timekeepers assigned to files. Distributing work and ensuring the efficient production is a challenging task, and many originating lawyers with substantial books of business do not have time to do it correctly.
It is not unusual for originating lawyers to manage the client relationship and manage timekeepers, but as they grow they must enlist the help of others. To do this successfully, credit sharing is essential. We suggest timekeeper management is worth up to 20% of the credit in the reward system. If the same lawyer manages the client/file relationship and manages the timekeepers, they could earn up to 40% of the credit in the reward's system. If none or minimal timekeepers are used on a file, the credit would stay with the originator.
4. Working the file and providing legal services (Worker/Producer)
Production credit is the dollar value of the amount of revenue received as the result of a partner’s personal production. For example, if a partner records $10,000 in time dollar value, which is billed and collected, he or she would receive production credit in the amount of $10,000. If a partner is designated by the originating partner to be the responsible partner for a client or matter, the former will receive production credit for all billable hours he or she devotes to working on that client matter (during the time he or she is managing the work on that client matter.)
Overwhelmingly employee lawyers receive a base salary and a bonus for their efforts as a working attorney. Hourly and contract lawyers usually receive a share of the fees or an amount per hour. Production, experience, and expertise are the factors given most weight when compensating working attorneys. Most equity owners also receive pay for working attorney production, but it is typically through a compensation system that may or may not directly attribute pay to timekeeping.
In terms of market pay, working attorney compensation typically ranges from 25%-40% of the gross fees from their work. To compare your compensation structure for non-owner lawyers to the market, arrange your salaries by bar year (experience) and compare them to these ranges. Compensation should generally scale with experience. Almost every firm has exceptions, but we encourage firms to take an objective look at any inconsistencies. Finally, these are only ranges, and we recommend firms balance market benchmarks with their own compensation strategy.
Equity owner working attorney compensation may not easily translate into these ranges, and firm profitability will dictate how much compensation is available for equity owners. These market based percentages are a reasonable guide for judging the competitiveness of your firm’s compensation results.
When dividing up the client credit, it is helpful to consider the 4 main roles that contribute value to the client relationship and the profitability of the firm.
Here is a handy table to help visualize the credit for each role: