Re-designing Associate Compensation

Authors: Steven Campbell and Richard Stock - National, Vol. 5, No. 1 (January/February 1997)

Last month's column, "Partner Responsibility and Associate Performance" suggested four ways in which law firms and law departments can mitigate professional dissatisfaction, and perhaps stem the departures, of associates and partners.

Last month's column, "Partner Responsibility and Associate Performance" suggested four ways in which law firms and law departments can mitigate professional dissatisfaction, and perhaps stem the departures, of associates and partners.

These days, it is common to find smaller and mid-sized firms with no articling students, no associates for three or four years of call, and no new partners admitted in a given year. This generates uncertainty about employment and income prospects, uncertainty that dwarfs many otherwise viable strategies intended to retain and motivate associates and partners.

The Vicious Circle

Two law firm practices: hourly billing rates and lockstep compensation for associates, deserve a thorough overhaul in a great many firms. The hourly rate practice has been a popular subject in the last 30 years but brings with it certain structural flaws and paralysing side effects.

Between 85 and 90 per cent of legal services are still billed on an hourly basis. Law practice management structures, fine-tuned in the '80s, relied on legal research, document creation and other tasks being performed extensively by students, paralegals and junior associates. Experience soon taught partners that adherence to defined ratios was needed to obtain the necessary leverage if associates were to contribute to profitability expectations.

This leveraging of the human "production line" gave rise to the early theorem in legal economics dubbed the "Rule of 3", which required associates to generate three times their annual compensation in billable time. But that was before rents and associate salaries began their climb in the '90s. Today, some firms require still higher multiples as billing rates are negotiated downwards and new clients and files become harder to obtain.

The resulting wave of frustration quickly washes over both associates and partners:

• Partners are locked into a cycle of frozen billing rates, fewer new clients and files, and increased salary and benefit costs for the firm's non-partner professionals and support staff.
• Associates are assigned a billing rate and a lockstep salary, are asked to find more of their own work earlier on, and are confronted with a compensation system that does not adequately reward merit and share economic risks and benefits.

Back to Basics

A truism in compensation, and for that matter, of human nature, is that one usually excels in response to what is measured and what is rewarded. The challenge is to make that truism support rather than undermine your approach to compensation.

Too many associate compensation systems are not structured to encourage a healthy balance between individual initiative and teamwork. They are usually based on a straight salary, or a salary plus a discretionary bonus, or are tied to production / billings in excess of a given figure. Few associates know in advance what they must contribute to secure a given bonus. For those on a percentage, the focus is on billable effort as a foremost consideration, often to the detriment of professional and client development obligations.

Provided the law firm is committed to introducing individual performance plans, practice group initiatives, and group rather than individual profitability objectives, then it makes sense to re-configure the associate compensation system.

The realities of the '90s require a better balance between billable work, client development and the other elements of the individual performance plan. A better approach is to vary the weighting of the components of the "associate compensation formula" to compliment the firm's business strategies and internal structure.

A Proposal

Base salary: after the third year of call, 60 per cent of the market base salary provided the minimum billable work level for the year is attained.

Practice group income: calculated on the practice group's profitability against pre-established objectives in the firm, equal to as much as 30 per cent of the average market base salary for the year of call. This portion of income encourages work intake and allocation procedures, good delegation and communications, and efficiency rather than individual efforts. This income could be paid out twice yearly.

Performance Fund: valued at 10 per cent or more, of the average market base salary, this amount is determined at year end by the partners using pre-established appraisal criteria and the development objectives found in the individual performance plan.

A great number of fundamental changes in priorities and attitude must occur for a law firm to adopt an associate compensation system resembling the one described. But, partners should give serious thought to the underpinnings of their own compensation system and consider:

• a more modest entitlement for base income level;
• a much greater sharing of clients, better work intake and allocation protocols, and success based on practice group initiatives and profitability;
• a commitment to personal and professional development;
• improved communications during the year, especially on the success of the practice groups and the firm as a whole.