Beyond Revenues: A Better Way to Compensate Partners

DANIELLE WINKLE, CPA

As law firms increasingly move away from the traditional lockstep (seniority-based) approach to compensation, various alternative compensation methods are emerging. Some of these, however, are proving less effective because they emphasize revenue. Compensation should be aligned with your firm’s short and long-term goals. Employing a profit-based approach is more likely to facilitate the achievement of these strategic goals.

Pushing Profits Forward
Focusing on revenues can present a distorted picture of a partner’s contributions. For example, a firm has one partner who generates $600,000 in billable revenues, performing all of the work herself. A second partner generates only $450,000 in revenues at the same hourly rate, but also supervises four associates who each bill 2,000 hours annually. The second attorney clearly brings more profits to the firm, even though he personally generates less revenue. However, in this scenario, a revenue-based compensation model would reward the first partner more.

Moreover, a focus on revenues fails to account for the impact of overhead and collections. The partner who generates staggering billable hours but incurs a significant chunk of overhead may be less profitable in the end than one who bills fewer hours. And billed hours have no value to the firm if they are not collected — all they have done is increase overhead. (See the Sidebar “Ideas for Motivating Collections.”)

Finally, revenue-based compensation can encourage a partner to focus on billable hours to the exclusion of other activities that would support the firm’s strategic goals. If, for example, the firm wants to build from within, partners will need to spend time training and mentoring associates, but partners might be unwilling to do so if it eats into their billable time, and therefore, their revenues and compensation. If compensation instead recognizes contributions to profitability, partners are more likely to sacrifice their own billable hours to supervise a team of associates.

Finding Objective Metrics
If your firm chooses a profitability model for partner pay, your compensation committee can use one or several objective metrics, including:

• Realization;
• Collections, including both whether and how quickly bills are paid;
• Work in progress; and
• New business from new or existing clients (regardless of whether the partner ultimately handles it).

Customizing your System
Fortunately, your law firm should be able to adopt a profit-based compensation system without needing to completely overhaul your current compensation approach. Profit-based measures usually can be incorporated into the most common compensation systems. For example:

Percentages or Units of Participation — Many firms pay partners a share of the net profits by assigning each a percentage or units of participation. The assignment of percentage or units of production to each attorney should consider more than just ownership interests, seniority and billable hours. Profit-based metrics can play a role in the assignment by taking into account factors like consequential non-billable time, accounts receivable aging, and write-offs or write-downs.

Reserve Systems — Some firms use percentages or units of participation plans that include a reserve of a set percentage each year. That reserve can be allocated using a profits-based approach by allocating the reserve based on the factors described above.

Formulas — A firm’s compensation plan may distribute net profits based on a simple or weighted formula. A simple formula might account for originating work and producing work on a 1-1 ratio, while a weighted formula assigns increased weight to the most important elements, ideally according to the firm’s strategic goals. Firms with these types of formulas can increase the weight for elements associated with profitability.

Lockstep — Even where the lockstep approach lingers, firms can incorporate profitability. Rather than advancing partners to the next level based on the number of years they have been partner, a firm could require them to first satisfy specific profit-based metrics.

As important as profits are, your law firm’s ultimate survival also depends on functions such as management, administration and planning. An effective partnership compensation plan should also acknowledge contributions in these areas. For questions on this profit-based approach, contact Danielle Winkle at [email protected] or call her at 312.670.7444. To learn more, visit our Law Firm Group page.

Cross-Selling Phobia? Turn your Attorneys into Successful Marketers

STEVE LEWIS, CPA

Most lawyers are not born salespeople. Even some of the toughest trial attorneys and savviest corporate dealmakers cringe at the thought of “pushing” additional services on valued clients. But cross-selling is essential if your firm is to capture all potential revenue and remain competitive. Here are some ideas for motivating your firm’s attorneys.

Continuing Education
Before you involve lawyers in cross-selling, be sure they have the necessary experience and training. Train associates and partners about your firm’s specialties and services — and which attorneys provide them — so they can easily identify cross-selling opportunities and promote the services effectively. A one-size-fits-all sales pitch is usually less effective with clients, so be sure to specify which services to promote and to which clients.

Practice makes perfect. You can help your associates and partners become better at cross-selling by having them role play real-life scenarios at department meetings. This will help prepare them for the types of situations they will encounter and give you the chance to evaluate their cross-selling techniques.

Motivation Strategies
Although there may be partners who struggle with cross-selling, associates will likely need the most help. An effective cross-selling program should increase associates’ confidence and provide a supportive environment where they can try out new strategies and methods. It also should have a strong incentive system based on recognition and financial reward.

For example, include cross-selling objectives in associates’ annual reviews. Make sure they understand such goals and how they fit into your firm’s overall plan. Objectives should be specific (for example, the associate must participate in several pitches to clients with a partner) and you should work with them to develop a plan to achieve these objectives.

Similarly, cross-selling results should be tied to compensation. Be clear about your firm’s method for calculating compensation — whether it involves a bonus structure or a merit-based percentage that is built into associates’ annual increases. To foster cross-selling as a team effort, recognize the entire team’s contributions. This may include dividing the bonus among all of the lawyers involved in achieving a cross-sale.

In addition to receiving monetary rewards, your associates will appreciate being recognized for their cross-selling achievements. So feature news about successes in your firm’s newsletter, annual report and internal e-mails.

Finally, be sure to track and benchmark cross-selling outcomes. Doing so will allow you to make changes as necessary. Store case histories in a centralized database or knowledge management system.

Client Participation
Client feedback is always invaluable. It lets you know what you are doing well — and not so well — and provides insight into your clients’ needs and challenges so that you are able to provide solutions. So when it comes to developing your firm’s cross-selling program, be sure to ask your clients:

• In what areas are we excelling?
• In what areas can we improve?
• Have there been changes in your business or industry that we should know about?
• How else may we be of service?

You can get client feedback formally by conducting a survey or informally by having your lawyers talk with clients when they meet on other matters. Putting a questionnaire in each client file is a good reminder for lawyers to bring up the subject.

One way to track client feedback is to use a knowledge management system that enables you to easily access, evaluate, organize, filter and distribute information. In addition to helping you consolidate this information, it reduces the time it takes to perform various functions, such as drafting documents, conducting research, and accessing work products and information.

Making it a Priority
Cross-selling efforts often encounter obstacles. Lawyers may be reluctant to engage in selling activities or share their clients with other firm members. Or clients may be unable to effectively communicate their needs or they may feel more comfortable keeping some of their business with another firm. To overcome such roadblocks, design a formal cross-selling program, requiring all attorneys to participate — and make it a priority. For more information, contact Steve Lewis. Visit ORBA.com to learn more about our Law Firm Group.