How compensation plans are wrecking law firms

The greatest threat to the survival and success of law firms today is not client empowerment, or Big 4 accountancies, or artificial intelligence, or even generational change. These and other trends will have a significant impact on law firms in the years to come — but none of them is actively working to undermine law firms’ productivity, hobble their strategic efforts, and compromise the health of their lawyers.

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.

Small sample size, yes, but still….

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.

I’m sorry, but I’m not allowed to argue unless you pay me.

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 writedowns 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 to 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.

Some lawyers’ payments are simpler than others.

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.



8 Comments

  1. John

    What you have not grasped is that there is a small group of people in any human population who are incredibly driven and are motivated by working long hours, billing lots of hours, and making good money. They enjoy it. You may not, but they do. Others may tell them to do more exercise and sleep more, but they like their work. They are wired that way. These people are attracted to high-status, high-paying careers such as those at the top end of the legal profession. They will put up with the stress, the aggro, the drinking, the arguments with the wife, the sleepless nights, because that’s the tradeoff. They figure that those things can happen in any job, you might as well choose one that pays well.

  2. Gary Luftspring

    Bottom line is the compensation system must align with the behaviours you wish to encourage. If it doesn’t then you will get the behaviours it does encourage. Not that complicated but hard to change. Of course once upon a time partner comp was lock step in many firms where all partners over time equalized regardless of hours and billings etc. Such systems are therefore necessarily outward focused but depend on trust between the partners that everyone is pulling their weight. Of course with the increase in size of firms such systems broke down and were replaced with Hale and Doehr systems that had the ostensible virtue of being objective. Unfortunately it bred personal achievement over the collective and other such behaviours. There is no perfect system but give me back the days when one of my former senior partners when asked what his hourly rate was uttered “I have no such thing I am not a plumber”

  3. Jordan Furlong

    John, I’m delighted to hear that this small group of people has found an outlet for their driving need to work incredibly hard and make tons of money despite the emotional and physical costs. I just don’t think they should set the behavioural pattern for the majority of lawyers who don’t share these particular qualities.

    When you make outliers the default setting, your system is not going to perform well.

  4. James Bliwas

    It’s a serious issue but the reason nothing changes may have been explained by Sinclair Lewis when he ran for governor of California in the 1930s: “It’s difficult to get a man to understand something when his salary depends on not understanding it.”

  5. Mike O'Horo

    I agree with most of your analysis. However, I think the root cause of all these negative effects is the lack of division of labor. Basically, all partners are expected to do five jobs: 1) Sell the work; 2) perform the work; 3) manage the work; 4) train the next generation; 5) help manage the firm.

    While everybody is good at something, nobody is good at everything. Nobody can do all those jobs well. In an age of specialists, expecting this array of skills and performance is madness. Lawyers’ clients would laugh if it was suggested that they embrace this outdated operating style. Corporate salespeople aren’t also expected to produce the product they sell, and those who produce it aren’t expected to sell it.

    If lawyers could instead opt into a contributory career path that exploits their strengths and interests, they’d have no need to compare earnings. A company’s accountants and product designers don’t expect to be paid as much as the salespeople who take the risks and bear the constant performance pressure.

    Many BigLaw firms are billion-dollar businesses. They can’t justify operating as if they’re guild artisans, occasionally performing the business’s other critical functions as a sideline by well-intended amateurs.

    Division of labor would be hard to achieve within the partnership model, though, where the only high status role is “equity partner.” In a more corporate model, lawyers who just want to practice law could do that, as salaried employees, but they couldn’t expect to be paid $700,000 per year, and enjoy decision-making authority, for what would essentially be a production job. Despite that, I’d bet that a big percentage of now-partners, experiencing constant pressure to do things they’re not good at and don’t enjoy, would gladly trade a big chunk of their compensation to be freed of the unwelcome aspects of today’s partnership.

  6. Adam Pekarsky

    Jordan,
    Once again you nailed it. In my spare time when not running my executive search firm, I’m teaching a course at the law school in Calgary – the unofficial title for which should be ‘all the things you never learned in law school that you should have learned in law school that you’re now finally going to learn in law school’ and this topic is core to our curriculum.

    I recall when working at my firm many years ago cautioning partners about a young associate who was clearly burning out – way too many hours, diminishing quality, massive stresses on his personal life, the usual – so I emailed the entire partnership and paraphrased Neil Young; that it may be better to burn out than to fade away but I prefer this associate do neither. I got lambasted by one who said his performance and commitment should be rewarded with a huge bonus on one of those golf tournament-style cardboard cheques and that all the other associates should be invited to the ceremony. He wasn’t joking. That behaviour still persists; we’re trying to change it, one law student at a time. Thanks again for writing a superb piece.

    Adam

  7. Timothy B. Corcoran

    Excellent article, Jordan. I spent most of time these days on transforming partner compensation, and you’ve succinctly laid out many of the challenges. I’d add succession planning to the mix — referring both to the delicate balance of a senior partner and junior partner sharing a client relationship (and credit) until the senior partner steps down, and the sustainability of the firm and its clients without undue reliance on an individual partner. Too many firms are built to maximize and protect partner portability rather than to sustain the law firm enterprise. The migration from today’s mess to tomorrow’s more appropriate incentive systems is, surprisingly, not as complex as it might seem. Defining the future state and the desired behaviors that should be rewarded isn’t as hard as it may look. Migrating from here to there is the real challenge. It’s hard to navigate this change while minimizing disruption, but it can be done. Of course, it starts with strong leaders who are willing to tackle it, warts and all. What was once the 3rd rail of law firm management science is now a topic suitable for discussion in many firms. But alas, for too many, it’s still not a topic suitable for action. I hope your article shakes out some of these who might be ready to act.


Leave a reply