Compensation plans are wrecking law firms

What’s killing law firms these days is their lawyer compensation systems.

Law firms incentivize their lawyers to act in ways that are counter-productive to lawyers’ happiness, clients’ satisfaction, and the firms’ effectiveness. They do this by rewarding lawyers for bringing client business into the firm and billing hours to the firm’s clients, and for hardly anything else. In the vast majority of firms that I’ve encountered (and in the mini-survey below), these two activities account for at least 75% of lawyer compensation; in more than half those firms, they account for 90% or more.

Law firms seem to believe that by paying lawyers to do almost nothing beyond finding clients and billing work, they’re supercharging the firms’ productivity and profitability. I believe that instead, firms have unintentionally bred a host of negative behaviours — or at best, neutral behaviours with negative consequences — that poison law firm culture and sabotage client interests.

(Note that I’m not talking about the fact that law firms sell their work on an hourly basis. This isn’t about how law firms sell their services, but about how they pay their lawyers. Despite appearances, they’re not the same thing.)

Here are nine ways in which the priorities of law firm compensation systems are antithetical to sustainable law firm success.

1. Lawyer effort > Client outcome. This is the clearest impact of disproportionately paying lawyers for billing hours. The lawyer’s financial priority — maximize personal time and effort — is disconnected from (and frequently in direct opposition to) the client’s priority, which is to address its issue quickly and affordably. A lawyer whose bonus (or salary, or continued employment) hinges on meeting a billable quota will subject a client matter to intense scrutiny and repeated review, well beyond what is necessary to ensure the competent execution of the matter. When you pay lawyers for hours rather than results, hours are what the client will get. This happens in virtually every law firm, every day, all over the world. It’s as close as you’ll get to a universal law firm experience.

2. Customer sales > Customer service. And this is the clearest impact of disproportionately paying lawyers for bringing in clients. Most law firms reward successful sales efforts by their lawyers, as they should. But these rewards are so outsized — in terms of money, prestige, and power — that they lead lawyers to prioritize finding clients over serving clients. The longer the period of “origination credit,” the worse this tendency becomes: Everyone wants to land clients, but hardly anyone is equally motivated to actually serve them. The myth of the rainmaker has captured lawyers’ imaginations; the humble “service partner,” equally as vital to the firm’s success, is undervalued. That’s why clients are very familiar with great sales efforts by lawyers, but much less familiar with great lawyer service.

3. Personal success > Firm success. I’m not arguing that “clients landed” and “hours billed” aren’t important to law firms’ success; obviously, they are. But most compensation systems don’t pay lawyers to do anything else, or they pay them in much smaller amounts. In most law firms, there are few if any financial rewards for managing people or processes, maintaining strong client relationships, marketing and promoting the firm and one’s colleagues, mentoring juniors, building the firm’s knowledge base, and countless other aspects of truly well-run and well-rounded legal services enterprises. Compensation systems see law firms as entities that require only clients and hours to survive; if that was ever true, it no longer is.

4. Financial gain > Personal well-being. The rates of depression, substance abuse, and even suicide within the legal profession are significantly higher than in other walks of life. Certainly, law is a stressful and demanding career no matter where you work. But compensation systems intentionally incentivize lawyers to work as hard and as long as they can. Virtually every law firm sets a minimum number of billable hours as a condition of employment; I don’t know of any that set a maximum, a cap on the number of hours that will be rewarded. The only limit to your earning power is how many hours of your life you’re willing to burn. Magnifying and exploiting lawyers’ weakness for individual achievement and financial gain is simply shameful.

5. Individual achievement > Collaborative activity. Law firms (almost) universally pay lawyers for their individual efforts rather than for group accomplishments. It’s the culmination of a lifetime of lawyer incentives, beginning in law school (compete against other students for top grades) and continuing through the associate years (compete against colleagues for top assignments and lanes on the partnership track). Law firm culture is notoriously competitive, a zero-sum game in which someone else’s gain will come at your expense. The numerous benefits of internal collaboration — for cross-selling, for quality control, for morale, and above all for client outcomes — never materialize, because firms don’t pay lawyers to collaborate. They pay them to work hard and achieve on their own.

6. Partner billing > Associate billing. I’ve never fully understood why partners are incentivized to bill hours; I always thought half the reason to become a partner was that you didn’t have to labour in the billable salt mines anymore. But because firms compensate partners for hours billed, partners are conflicted when assigning work: Give the task to an associate or keep it for yourself? Partners are motivated to choose the second option, especially in lean times, because they directly benefit financially. In the result, the junior doesn’t get enough work to stay busy and become more skilled, the firm doesn’t benefit from the profitability of associate leverage, and the client gets associate work performed at partner rates. Nobody — not even the overworked, under-challenged partner — truly benefits.

7. Billings > Collections. While we’re on the subject of the mystifying aspects of law firm compensation, let’s talk about the fact that most systems pay lawyers on the basis of the hours they’ve billed, not on the number of hours the firm actually collects. You’d think that law firms would at least line up compensation with revenue; but no, it’s enough in many firms merely to bill the hours, regardless of whether the client pays them. This incentivizes lawyers to bill beyond the client’s wants or needs since the consequences of the inevitable write-downs won’t materialize for many months, if at all. Paying lawyers for their realized bills, not their issued bills, as Ivy Grey suggests, would be a simple first step towards rationality here.

8. Men > Women. There are myriad reasons why men continue to outnumber women in most law firms by about 65% to 35% — and in the equity partner ranks, by about 85% to 15% (and out-earn them, too). But chief among those reasons are law firm compensation systems — and related advancement and promotion systems — that pretend everyone is equally able to bill hours and bring in business. In a world where women still disproportionately bear the burden of child-raising and home management and are resented for being as aggressive and entrepreneurial as men, that pretence is insupportable.  As I’ve written before, the men who built, own and control the law firm benefit directly from time- and effort-based remuneration. It’s an unconscionable waste and abuse of (female) human capital.

9. Client isolation > Client peace of mind. Lawyers paid to bill hours are motivated to turn ordinary time into docketed time. The easiest way to do that is to pick up the phone when the client calls: Every minute spent listening to and answering a client query, no matter how trivial, can be converted into cash. Clients have responded logically, by not calling unless they absolutely must, because they know the meter goes on at the first moment of contact. Rather than be charged a huge hourly rate to ask a question, they’ll stay silent and anxious about the answer. Good lawyers don’t want anxious clients afraid to call them; but compensation systems don’t care. (And the corollary is even worse: When you pay lawyers for their efforts, you also train them to make no efforts unless they’re getting paid for it.)

Can law firm compensation be fixed? Only with immense difficulty, I suspect. If you’re touching a law firm’s compensation system, then you’ve made your way deep into the heart of the law firm machine, into the belly of the beast. If the law firm’s fundamental purpose is to generate short-term profits for its equity partners — and I’ve argued in blog form and in book form that at most law firms, it is — then you’re tinkering with the most important and sensitive aspects of the firm. I frequently refer to compensation as “the third rail” of law firm management: everyone is afraid to touch it. And as we’ve seen above, many people in law firms have a deeply vested interest in ensuring that it is not touched at all.

I am not, emphatically not, a compensation consultant. (Here’s someone who is.) But unless you’re starting an entirely new law firm from scratch — or you’re performing a tear-down and rebuild of an existing firm so complete that it amounts to a new start — I’m highly doubtful that you can change an entire compensation system in one go.

But I do think you can change just one element of it. And if you can manage to do that successfully, then in time, you can change another, and then another — until one day, like the proverbial shipwright who keeps replacing individual parts of the vessel, you’ll find that you’ve effectively produced a brand new ship.

Here are a few quick suggestions about that one initial element to change.

• Place a hard cap on the number of annual billed hours for which any lawyer (especially an associate) will be rewarded. Beyond 1,300 or 1,800 or 2,150 hours (choose a number that works for your market and is consistent with strong but not superhuman effort), the lawyer can bill all she likes, but she won’t receive any greater bonuses or remuneration. If for no other reason than to save your lawyers from burnout, cap the incentives that make them work harder.
• Place a much lower limit on the number of annual billed hours for which partners will be rewarded. The whole point of law firms is that work should be driven down (where appropriate) to lower-cost talent so that (a) their leveraged work can generate partner profits, (b) they can gain experience and become more skilled, and (c) partners can devote their time and energy to sales, service, management, and personal improvement. Stop rewarding partners for behaving like associates.
• Tie a small (but annually rising) percentage of lawyer compensation to the results of client satisfaction surveys conducted during and after a client matter. Law firms say they want satisfied (if not delighted) clients. Well, you get what you pay for. Incorporate “client’s assessment of service and care” into the lawyer compensation formula, and be amazed at how quickly you develop a solicitous and service-oriented legal workforce.

The first step in this whole process, and maybe the most important step, is to break the longstanding law firm assumption that there is a direct and equal correlation between revenue and compensation. If you’re running a sole practice, that correlation makes perfect sense. But if you’re running any kind of multi-lawyer enterprise, then your goal is to maximize not individual revenue, but sustained enterprise profitability. That requires a completely different approach to, among other things, the types of behaviours and activities that you are motivating your lawyers to do and rewarding them for performing.

One lawyer might bring in lots of clients that don’t stick around or bill lots of hours that get written off, while another lawyer keeps people motivated and clients engaged with little fanfare. Which lawyer is creating more value for your firm, today and down the road? You need to know the right answer to that question — and then you need to adjust your firm’s compensation priorities accordingly.

One final thought, and a note of caution, on this whole subject.

There are limits to what you can or should ask a compensation system to do for your law firm. Because really, in very practical terms, a lawyer compensation system has exactly one purpose: to compensate lawyers. That’s it. Trying to use it to modify lawyer behaviour, or to signal strategic priorities, or to bring about cultural change, will work up to a point. But it’s like propping a chair up against a door to keep it closed: That’s not really what the chair is designed for, and it’s not going to do the job terribly effectively or long.

In a recent conversation, Felix Rackwitz of TPR Legal in Frankfurt pointed me to Herzberg’s Motivational Theory, which identifies salary as an extrinsic “hygiene” factor that doesn’t really drive employee satisfaction or motivation (although it can create dissatisfaction if managed poorly). If you want to positively affect employee behaviour, you should provide motivational factors like challenging work, personal recognition, growing responsibility, involvement in decision-making, and a sense of importance to the organization. (Here’s an article applying Herzberg’s model to law firms.) Law firms can’t always (or don’t always want to) provide these factors, so they ask compensation to play the motivational role instead. That’s more than it can realistically handle.

So when it comes to your law firm’s compensation system, I’d like to suggest these two pieces of advice:

1. Identify all the negative outcomes that your current system unwittingly generates — compromised clients, damaged lawyers, poor collaboration, lousy diversity, etc. — and strive to change the system to diminish if not eliminate them altogether. Running a law firm is hard enough in the best of circumstances; undermining both your clients and your lawyers with a self-sabotaging compensation system makes it far more difficult than it needs to be.

2. Identify all the positive incentives that your current system is supposed to create, and dial back your expectations of what can be accomplished this way. If you want to motivate your lawyers, give them interesting work, praise their accomplishments, involve them in organizational decisions, and so forth. Throwing money at them, trying to push them one way or another with the promise of more money (or the threat of less), likely won’t get you all that far.

Your firm’s compensation system doesn’t have to be the cause of all your problems or the answer to all your woes. Maybe it can just be a good way to pay your lawyers without simultaneously wrecking your firm.

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