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Chapter 5/6

A New Approach to Law Firm Compensation

Hiring, Staffing, and Growing a Law Firm

8 min read

For years, firms have come up with everything from simple to very complex formulas to determine law firm salaries and compensation. These formulae consider metrics like client origination credit, matter origination credit, hours billed, non-billable firm activity, non-billable administrative responsibilities. The list goes on and on. For most, these traditional law firm compensation models aren’t working. Firms must adopt compensation models that reward everyone who is working to advance its core values and improve the client experience while managing profitable growth.

Revisit Your Law Firm Compensation Model and Benefits

Traditional law firm salary and bonus models often result in drama. Instead of building a culture of collaboration, they create competition.

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. Nevertheless, this is only scratching the surface.

Traditional law firm pay structures don’t incentivize your team to do their best work.

Instead, they:

  • Emphasize the individual member. Individuals may 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 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.

Creating a Law Firm Compensation Model

Adopting modern law firm pay structures rewards your lawyers, partners, and staff for the high-quality, valuable work they do each day. Instead of rewarding them for the number of billable hours they can bring in. It starts with a written compensation philosophy that establishes the how and why behind your compensation. The philosophy creates transparency. It sets expectations. Team members appreciate it.

It also forces the business owner to understand their salary, bonus, and benefits  package. Too many firm owners piece together comp based on what they’ve seen at other firms. Often there is little thought about why they are paying this way and what behavior they are incentivizing.

Law Firm Salaries and Base Compensation

Your first step is to pay everyone in your firm a fair market salary. Author and TED Talk speaker Dan Pink argues that companies should strive to pay team members sufficiency so that they aren’t worried or struggling. “The best use of money is to take the issue of money off the table… Effective organizations compensate people in amounts and in ways that allow individuals to mostly forget about compensation and instead focus on the work itself.” Drive, pg 170.

You should understand fair market law firm salary rates in your industry and location. 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 for each position. From there, you might decide if you want to be at the top of the market or more in the mid-range.

Bonuses or Incentive Pay

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.

At Lawyerist, we believe that every member of the team contributes to a company’s profitability. That’s why we coach firms to consider setting aside a percentage of their profits and into a pool and divide it by the number of people on the team. For more details on how this might work, listen to the Lawyerist Podcast, Episode #360, Leading You Team with Empathy, with Sherry Deutschmann.

Go Deeper: Podcast Episode #360

Leading Your Team with Empathy, with Sherry Deutschmann

Listen to Episode

Why Bonuses and Incentives Aren’t 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 to earn their portion of a fee. But that a lawyer, as a “professional,” will always and only act in their client’s best interests. This rule is fairly absurd, but for now, we all must live with it.

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

Reward Your Team 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.

Note: Although we believe this arrangement is a splendid 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.

Next, we’ll cover how to create law firm culture that supports mental health (Yes!).

Benefits As Your Special Sauce

Don’t forget to think through what benefits you’ll offer and why. Employers often think about benefits in the traditional sense to be health and dental insurance. The reality is this category can be much more. And, employees love them! In fact, one study found that 80% of employees wanted perks and benefits over a pay raise. 

Of course, it is worth first thinking about which traditional benefits your firm can offer. These often include:

  • Group health insurance plans
  • Group dental plans
  • Group vision plans
  • Short-term and long-term disability insurance 
  • Life insurance

A benefits broker can help you wade through the myriad of options available to determine which plan/s you might offer. Most times, it only takes two employees (and one can be the owner) to qualify for a group health insurance plan. Employers unable to offer a group health plan can contribute to employees’ health care costs through a Qualified Small Employer Health Reimbursement Arrangement (QSEHRA).

Similarly, there are many retirement plans available for small businesses. The American Bar Association and many state bar associations have retirement plan options for small firms. An investment advisor can walk you through your options and costs.

Finally, don’t forget about perks that you can give the team often at little to no cost. Many of these can be fun ways to show your values in action and can help you set yourself apart from other firms. 

Ideas include:

  • Paid time off 
  • Flexible work schedules 
  • Work from home or remote work options
  • Lunch stipend or team meals
  • Healthy snacks in the office  
  • Professional coaching
  • Financial Coaching or Advising Services
  • Cell phone and data stipends
  • Charitable matching 
  • Gym memberships 
  • Wellness or fitness apps 
  • Use of a firm bicycle at lunch 
  • Book clubs 
  • Employee Recognition programs like Bonusly
  • Home office budget 
  • Paid parental leave
  • Tuition Reimbursement 
  • Child Care Assistance
  • Commuter Assistance
  • Free services like a free estate plan

The point is to have fun and find the combination that works for you! Finally, don’t forget to remind your team about these benefits. It’s easy for team members to overlook things like a flexible work schedule as a benefit. So, find ways to remind them about these perks! 

Now that you have a plan for how to keep your team happy, we’ll cover how to create a law firm culture that supports mental health (Yes!).