Is Your Firm’s Compensation Aligned with Your Goals?
by Barbara Lewis MBA and Dan Otto MBA

Having your firm’s compensation formula aligned with the firm goals is the best method to ensure timely completion of the firm’s objectives. However, if compensation does not reward the accomplishment of the goals, the lack of a motivating factor will, oftentimes, leave the goals unfulfilled.

Take, for example, a law firm whose goal is to increase its number of attorneys. Adding attorneys will result from an increase in business, which can occur in two ways: through current clients that require additional services or through new clients. However, the compensation formula for the law firm only rewards attorneys for the hours that they work, not for their originations. Consequently, when it comes to growing the firm there is very little incentive. Instead, the partners spend their time only on billable work, with no regard to new business, since that is the only way to increase their individual compensation. The result is that the number of attorneys has remained static. However, once the compensation formula is changed to reward partners for their originations, suddenly partners are out generating new business.

Research indicates that many law firms are rewarding their partners for all the wrong reasons. Some reward their partners for their seniority in the firm, although the partners may not generate any business. Law firms who maintain this type of compensation formula have found themselves in a lot of trouble, especially when the younger partners begin generating business for which they are not paid.

Action Step:

Several factors should be included in the compensation formula. One is the billable hours. Attorneys need to bill hours and be rewarded for doing so. However, the true reward should be for collecting the money that is billed. Many law firms compensate attorneys for billable hours and not collections.

The second important factor for a firm, whose goal is to grow, is to have a compensation formula that includes rewards for originations.

The third area of compensation that is important for growing a firm is delegation. If you have not linked reward to the objectives of new business development and delegation, then the key ingredient of motivation is absent and the chances of success are diminished. "What gets rewarded, gets done."

A fourth compensation area is for administration work. This includes work done by the managing partner, the marketing partner or the partner in charge of continuing education. Those types of responsibilities in a law firm should be rewarded, because it is time spent away from developing new business and earning revenues.

Take a look at your firm's objectives and analyze whether or not your compensation formula encourages your partners to achieve those goals. If we can help you develop a compensation formula, please contact us.