Law Firm Compensation Models & Formulas

This small law firm compensation guide will teach you the models, formulas, and modern practices for paying your staff and yourself.

Client origination credit, matter origination credit, hours billed, non-billable firm activity, non-billable administrative responsibilities… The list goes on and on. Even so, it’s clear the traditional law firm compensation models aren’t working. Firms must adopt compensation models that reward everyone who is working to advance its core values as well as to improve the client experience, while managing profitable growth.

Traditional law firm compensation models often result in drama that firms both large and small can’t bounce back from. They create competition between associates, partners, and staff, instead of building a culture of collaboration. 

Health and life outside the firm go out the window as attorneys struggle to reach the required level for monetary reward. Attorneys must focus on winning clients instead of serving them, resulting in lackluster client experience and overloaded staff. And still, this is only scratching the surface.

By adopting modern law firm compensation models, you can reward your lawyers, partners, and staff for the high-quality, valuable work they do each day, versus the number of billable hours they can bring in. 

Traditional Law Firm Compensation Models: Why They No Longer Work

In the typical traditional payment model, someone receives a third of the profit for the introduction of a client, another person receives a third for introducing the matter and someone else receives a third for doing the work. Add in the need to bring in a set number of billable hours each month and what you have is a mess.

Traditional law firm compensation models don’t incentivize your team to do their best work. Instead, they:

  • Emphasize the individual member. Individuals may start to place their financial interests over the profitability and welfare of the firm.
  • Hurt the client. Even if another attorney in the firm might be better suited for the client’s needs, the attorney who brought in the client fights to keep them to fulfill their financial needs. Rainmaker attorneys may feel the need to focus their attention on finding new work instead of serving each client they bring in.
  • Cause unnecessary competition. When a firm lands a client, attorneys are left to fight over who receives what percentage of the revenue, causing competition and friction within the team. A toxic work environment is always the result.
  • Leave non-attorney employees behind. Instead of rewarding everyone’s efforts to meet firm goals, traditional law firm compensation formulas and models only reward the attorneys bringing in the most work.
  • Ignore success beyond new clients and billable hours. Sure, these are critical to a law firm’s success. Yet, so are building relationships with clients, marketing, networking, and other tasks involved in a successful law practice.

A more modern compensation model rewards your entire team for staying consistent with your firm’s values and discouraging what detracts from them.

Understand Your Values

Your firm’s values are the fundamental beliefs that guide your firm forward. They describe what’s truly important for your firm and may include integrity, client service, collaboration, commitment, respect, honesty, etc. 

To truly reach your law firm’s goals, you must first define your values. Then you must stay true to them. This requires everyone on your team to be dedicated to the cause. The best way to motivate your employees and staff to stick to what matters most is by rewarding them for doing so.

Factors for Lawyers, Partners, and Staff

Small firms typically include firm members with varying responsibilities. For example, you might have partners as well as paralegals and secretaries. Even as a solo attorney just starting out on your own, you must decide how you’ll choose to compensate these individuals as you grow.

Following a new model, your responsibility is to first pay each of your employees, including yourself, a fair market salary. This means paying attention to factors such as:

  • Position. Fair market salary varies greatly depending on the employee’s position within your firm. For example, a paralegal’s salary will be less than a partner’s salary.
  • Industry. The industry you serve affects your market salary numbers. For example, family law and personal injury are two distinct industries with different market salaries.
  • Location. Your compensation will need to follow the fair market salaries in your area to be competitive.

Wages, Salary, Bonus, and Commission

Regardless of a firm member’s position, they have a unique role to play in your firm. To build a successful, modern compensation model, you must view your firm as a whole and reward employees for sticking to the firm’s values. Additionally, each member on your team, regardless of position, wants their compensation to:

  • Help them meet their financial obligations outside of work
  • Apply to all their work, not just the big successes
  • Send a message of their importance to the firm

Pay a Fair Market Salary First

As mentioned above, your first step is to pay everyone in your firm a fair market salary. With a fair salary, your employees won’t feel the need to take on too much work or give in to negative work practices to simply meet their financial obligations. Instead, they’ll know exactly what they’ll receive each month.

To understand fair market salary rates in your industry and location, you’ll want to perform some research using sources such as the Bureau of Labor Statistics to find salary statistics for those positions. From your research, you’ll gather a fair market range you can use when negotiating a firm member’s salary. 

Bonuses & Commission

In traditional payment models, a rainmaker (the attorney who brings in the work) is often the highest paid due to bonuses and commission structures. Unfortunately, employees incentivized in this way will continue to bring in any type of work, regardless of your firm’s ideal client or goals.

We recommend dropping the commission structure altogether and implementing a fair bonus system that takes your entire firm into consideration. First, you must determine specific goals and objectives that align with your law firm’s values.

For example, if one of your values is client service, you might create a goal that includes a specific client satisfaction rating. Or, if you value community service, a certain number of hours of pro bono work may be a goal. As your entire firm contributes to meeting these goals, each member of the firm receives a bonus when the goal is met.

Sample of a Modern Compensation Model

As part of your compensation model, each employee receives a salary with bonuses tailored to fit your firm’s goals. This not only pushes your firm forward but creates an atmosphere of collaboration instead of fostering the damaging “eat what you kill” mentality. 

To see how this type of modern compensation model may work in your firm, take a look at this sample:

  • Determine fair market salaries. Pay each individual on your team a fair market salary depending on factors such as their position, including your partners.
  • Set firm and profit goals. Set general and profit goals in alignment with a firm’s values and growth goals. Then, communicate these goals to the firm.
  • Identify clearly each firm member’s individual roles. Each member of your team should understand their individual roles in meeting your goals. This means everyone has their own responsibilities and no one is taking the brunt of the work.
  • Explore incentive-based bonuses (not “fee sharing”). Consider developing profit-based or goals-based incentives for your team, recognizing the potential limits of fee-sharing rules.

The secret to creating a modern compensation model is this: there’s more than one path to success. You can start here and make changes to create a plan that fits your firm’s needs.

Fee-Sharing

Under the Model Rules of Professional Conduct Rule 5.4 (a), the American Bar Association clearly states that legal fees should not be shared with non-lawyers.  The rationale for this rule is to make sure that non-lawyers don’t have undue influence in having a stake in the outcome of a particular case. The theory is that it would be unethical for a paralegal to want to settle a case in order to earn their portion of a fee, but that a lawyer, as a “professional,” will always and only act in the best interests of their client. The rule is fairly absurd, but for now we all must live with it.

Following modern law firm compensation models, however, often encourages finding ways to incentivize  non-attorney employees the same way you do the attorneys. We firmly believe this is not unethical, as what you’re sharing isn’t legal fees but instead profits or operating expenses. This is best understood by tying profit sharing or bonus systems to your firm’s key performance indicators (KPIs).

Rewards Based on Key Performance Indicators (KPIs)

For non-attorney employees, you can choose to offer a base salary and a set bonus every quarter for meeting key performance indicators (KPIs). Using this method, not only do your attorneys receive their reward when meeting quarterly goals, but so does everyone else.

Although we believe this arrangement is a great choice and not tied to fees, we recommend reaching out to your local ethics authority and researching the rules in your jurisdiction to determine how to best proceed.

Incentivizing & Motivating Staff

True incentivization must occur across the board for your entire team. For example, if growing your business is your goal, the attorney who closes the deal isn’t more important than the marketer who created the campaign that caught the client’s attention. To achieve the best success, your team must work together.

Employee Responsibilities & Success

Employees want to be recognized, noticed, and appreciated for the work that matters to them. One of the best ways to motivate your employees is to give them responsibilities they excel in. When you begin understanding that every task contributes to the success of your firm, you can begin to see the true value of employee talent.

For instance, you may have an employee that doesn’t excel in client meetings yet excels at creating marketing material for your firm. Both tasks contribute to your bottom line. Incentivize that employee for delivering exceptional work in the area where they perform best. 

As a result, you’ll motivate them and keep your firm moving forward. In fact, 25% of employees say that more opportunities to do what they do best increases their overall satisfaction.

Methods of Motivation That Don’t Require Money

Even solid law firm compensation models can benefit from additional methods of motivation that don’t cost a dime. To further motivate your employees, you can:

  • Focus on employee growth. Give constructive feedback and provide helpful performance metrics that communicate how your employee is performing. Around 68% of employees who receive accurate and consistent feedback feel fulfilled in their positions.
  • Give recognition where it’s due. Don’t forget to tell your employees “thank you” for their hard work. Recognition is the number one thing employees need to inspire them to keep producing great work.
  • Offer work flexibility. A healthy work/life balance is critical for happy, healthy employees. As a small firm, you have the ability to offer flexible work schedules and environments. Flexibility is cited as one of the top features employees want in a job.
  • Communicate. Nothing ruins projects quite like lack of communication. Plus, solid communication keeps your employees engaged with their work. Businesses with engaged employees bring in approximately 21% more profit than those without.
  • Provide learning opportunities. Allow your employees to dedicate some time each week or each month to additional training. For example, give employees the opportunity to attend conferences or take online courses to further their skill. Around 68% of employees say training and development are the most important policies in the workplace.

Traditional law firm compensation models lead to unnecessary competition and unmotivated employees. Each year, disengaged and unmotivated employees cost the workforce between $450 and $550 billion in lost productivity. The bottom line is this: sticking with traditional law firm compensation models will eventually cost you. 

Start Paying Your Attorneys & Staff What They Deserve

We know that straying away from traditional law firm compensation formulas and models isn’t something you can simply do overnight. You must completely shift your focus, placing emphasis on team collaboration. The first step lies in reaching out to experts who have done it all before.

To learn from other attorneys with years of experience about how to start paying your team what they deserve, become a Lawyerist Insider today.

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