B&B_logo_red_sm


Thinking Outside the Black Box: Reimagining attorney compensation for the 21st Century

By Paul Floyd and Nick Ryan

0420-Peak-in-box-150

Traditionally, due to the fact that lawyers cannot be restricted by non-compete agreements, attorney compensation has been a major part of the glue that kept lawyers tied to their firms and vice versa. Inertia, uncertainty, and reluctance to assume the risks of leaving the firm without the next steady paycheck in view have also acted as incentives for lawyers to remain at their current firms, even if the compensation system was less than ideal. Sometimes “If it ain’t broke, don’t fix it” is a good strategy, especially when it comes to attorney compensation. 

But since before the end of the 20th Century, long-term loyalty on the part of lawyers and firms has become a thing of the past.1 Given its demise, and the elimination of the concomitant rewards of seniority and increased compensation for length of service in the firm, attorney compensation models are continuingly changing, a shift further complicated by the recent question of pay transparency. As a result, attorney compensation is undergoing some profound and rapid changes. Since compensation models by their nature reinforce the values and culture of the law firm and its lawyers, the handling of attorney compensation is evolving as values change. And in some cases, the old compensation models are slowing giving way to new ones.2 

Purposes of attorney compensation plans

Attorney compensation can serve any number of purposes in a law firm, including to:

  • reflect the law firm and attorneys’ culture and value;
  • reward producers who generate revenue for the firm; 
  • return to the owner their “risk and reward” investment in the firm;
  • redistribute revenues to accomplish firm goals and values; 
  • rouse and reward work incentives, team incentives, and business development incentives; and 
  • recruit new attorneys, both associates and partners, to the firm.

The actual compensation model employed at a law firm may change over time as the values and purposes that inform attorney compensation change. Currently, there are six or so basic compensation models, from the “black box” (no pay transparency and compensation amounts set by a management committee) to complete pay transparency with 360-degree attorney and staff input in both job performance and compensation. The latter approach is a new development in attorney compensation and merits a bit more discussion before summarizing the various compensation models and concluding with a few pros and cons of each plan. 

Next generation thinking: Pay transparency—the open model

Enter the next generation of lawyers, which is rethinking the “hows and whys” of attorney compensation by using more state-of-the-art business compensation models to set the attorneys’ paychecks and determine how to reward contributions to the firm’s culture and values. One major topic of interest is pay transparency in law firms. This trend is being influenced by tech companies that have upended business as usual by embracing pay transparency, which has resulted in an increase in productivity and performance, especially among top performers, as well as in firm hiring.3 

As David Burkus, a proponent of pay transparency, notes:

The idea of sharing salaries tends to make people uncomfortable, and privacy concerns quickly follow. However, research suggests that pay secrecy may actually lower overall employee performance and produce more distress in the workplace. In my new book, Under New Management, I look at the research on the effects of pay secrecy and sharing salaries, and the findings are very supportive of transparency.4

While fear is probably the main reason that firms are reluctant to adopt pay transparency, Burkus argues that fear is beginning to melt away thanks in part to more robust research on pay transparency and new regulations on pay equity in many states.5 Yet pay transparency is not the panacea for productivity that some would argue. Todd Zenger, in a 2016 Harvard Business Review (HBR) article entitled “The Case Against Pay Transparency,” cautions that pay transparency may reinforce what the business studies already demonstrate that people tend to do:

Widely publicizing pay simply reminds the vast majority of employees, nearly all of whom possess exaggerated self-perceptions of their performance, that their current pay is well below where they think it should be. Transparency creates an expanded playground for our comparisons, potentially heightening our attention and obsession with it and elevating the negative emotions and behaviors that result.6 

It is easy to see how self-aggrandizement and its effects play out in many law firms. Being aware of this tendency among attorneys as a profession should help when realistically evaluating individual attorney compensation in light of others in the firm. 

Moreover, top-to-bottom pay transparency can be a stronger motivator than simply offering peer disclosures of compensation, since it encourages those aspiring to move up in the firm.7 As a recent HBR article pointed out:

The effect of knowing manager salary was more substantial for employees who learned about the pay of managers who were only a few promotions away, whose shoes they could realistically aspire to fill. We find that, when the boss is fewer than five promotions away, for each 10% increase in the perceived salary of the boss, employees spend 4.3% more hours in the office, send 1.85% more emails, and sell 4.4% more. We also found that, after realizing that these managers get paid more, employees became more optimistic about the salaries they will earn themselves five years in the future. On the other hand, we found no effects on effort, output, or salary expectations when the employees learned about managers several promotions away (e.g., an analyst learning about C-suite salaries).

There is a caveat, though. While employees seemed perfectly capable of handling this vertical inequality, they did not handle horizontal inequality nearly as well.8

In short, it seems that for now the viability and effectiveness of pay transparency, especially in law firms, remains an open issue. 

It matters, too, that advances in technology have made moving law practices easier today than ever before. Law firms of the past may have been less transparent about compensation because they were not as concerned about lawyers actually packing up all of their paper files and trying to find a new office. Today, however, a lawyer leaving a law firm only really needs a computer and a cell phone. Attorneys can easily access client files, meet with clients through video calling services like Zoom, and often do not even need a permanent office space. Younger lawyers who feel left out today are in a better position to grab their computer and start their own remote firm than attorneys who were locked into a physical office. Thus, firms would be wise to consider whether increasing transparency might prove beneficial in keeping younger lawyers from leaving. 

Finally, the use of frequent, brief, personal check-ins by management can greatly reduce attorneys’ anxiety surrounding job performance and compensation reviews. Research has shown that even something as simple as “How you doing?” or “How can we/I support you?” can greatly impact a person’s feeling of “belonging” at the law firm.9 Simply put, investing in your attorneys so that they feel a genuine sense of belonging is crucial to being competitive in the marketplace in the next decade. 

What didn’t seem to matter for belonging? 

Face time with senior leadership that wasn’t personal. Being invited to big or external events or presentations by senior leaders, as well as being copied on their emails, was simply less meaningful to employees when it came to feeling a sense of belonging.10 

No real surprises here. Personal relationships, even in brief check-ins, matter much more than well-intentioned overtures from senior management. 

Current attorney compensation models

Today, attorney compensation models run the gamut from a primary focus on the individual lawyer to a team or firm-wide focus; from an objective system using only fee revenue factors to a totally subjective system using both billable and non-billable factors; and from no pay transparency to full pay transparency—including, in some cases, not only evaluating each attorney’s contributions to the firm, but allowing all attorneys to participate in setting each other’s final compensation for the year. 

Is fee generation (billings and receipts) on client files the primary or sole consideration when setting an individual attorney’s compensation? Or is it only one of many factors used in setting the compensation, along with such non-billable items as marketing, CLE, business development, attorney self-development, etc.? In the end, it is important for the attorneys who are determining compensation to be clear with all of the attorneys what factors are being used to set each attorney’s final compensation. 

The various plans used to set attorney compensation usually fall within one of the following categories.


The black box/subjective model

The “black box” is the least transparent of all compensation models, since the management committee sets the compensation for each attorney and no one outside the management committee knows what any other attorney received or the factors that figured in the decision. 

The advantages of this model lie in its simplicity and finality. Only the management or compensation committee members know everyone’s compensation, and the management committee’s decision is usually final and non-appealable. This model is problematic if the attorneys do not trust firm management, and attorneys who do not agree with their total compensation for the year have little recourse other than leaving the firm. While it may help to keep “kvetching” about the compensation of others to a minimum, it usually falls short as a competition motivator among attorneys. Still, a number of large law firms continue to use this model. 

This system can lead to frustration and confusion for attorneys who feel like the “goal post is moving.” For example, an attorney with a consistent book of business that brings in just about the same amount from one year to the next may become upset if bonuses vary without explanation. If it is not clear what factors were looked at in determining the compensation, then an attorney might feel the management committee was unfair or the process was arbitrary and capricious. This may well lead to an attorney moving to a firm where the factors are more clearly defined at the start of the year.


The lock-step model
The lock-step compensation model has been used in a number of large law firms to compensate associates and partner attorneys at the same specified levels based upon tenure and seniority and without regard to merit or production. It allows for complete transparency because each attorney knows where he or she falls within the firm’s seniority. One primary advantage of this model is that client matters are more likely to be handled by the attorneys in the firm most competent to handle the matter; contrast this with the incentives of a 100 percent eat-what-you-kill compensation model (described below). One disadvantage is that attorneys who are major rainmakers or who are driven to seek productivity rewards will likely feel held back and inadequately rewarded. For example, an associate with five years at the firm who believes he produced more or was a more important member of his team might feel discouraged by the fact that all fifth-year associates receive the same compensation. Some large firms have fixed this concern by using exceptions that award extra bonuses to those that the management committee feels went above and beyond. Others have elected to use a multi-factor model, as discussed below.

The finder/minder/grinder model

This approach rewards those who generate and maintain clients over those who simply work the files. It employs some set percentage formula for each category, such as 10 percent to the originator, 15 percent to the responsible or relationship attorney, and 75 percent to the attorneys who work on the client matter, after deducting a percentage of firm overhead from all gross receipts. The overhead percentage is usually determined based upon historical data, which is trued up at the end of the firm’s fiscal year, and may or may not include any partners’ base salaries.

This model usually has some element of disclosure and transparency. If the attorney has an issue about whether he or she should be the originator or responsible attorney on a client matter, the management committee is the final arbiter of all disputes. This usually means that each attorney is provided with firm-wide or at least department-wide data regarding productivity, receipts, and write-downs and write-offs so that each attorney can know how their compensation was determined. 

The primary disadvantage of this model is that unless some net profits are set aside to reward non-billable contributions to the firm, then productivity, billings, and receipts override all. This can sometimes morph into the next compensation plan, the eat-what-you-kill model.


The eat-what-you-kill model 

“Eat-what-you-kill” rewards the individual’s work on her own client matters or work she brought into the firm. It is a siloed method of attorney compensation, rewarding or punishing each attorney based upon the receipts paid to the firm on that attorney’s client files. If the firm’s overhead is narrowly limited to fixed expenses and customary accounts payables incurred in the ordinary course of business, the EWYK model will exclude other staff and attorneys’ non-receipt-based solo or team contributions to the law firm. 

In short, this model undervalues the central question of “what is the glue that keeps this firm together?” If it is only the individual’s receipts that matter—and even more critically, if each attorney is rewarded for only those client matters the attorney works on—then an attorney may be tempted to refer work to an attorney outside the firm instead of cross-marketing within the firm. If the attorney refers work that could be handled by the firm to another firm (that is, to an attorney who is likely to reciprocate by sending work back to that individual attorney), the firm suffers at the expense of the individual attorney’s gain. A true EWYK approach can quickly erode firm loyalty and culture. Thus, many firms have moved to a multi-factor model for compensating attorneys—one that uses both billable and non-billable factors in deciding each attorney’s final compensation.

The multi-factor model

Multi-factor approaches use any number of agreed-upon factors in setting individual partner and associate compensation. These factors can number as few as four or five (e.g., origination, billings, mentoring, marketing, etc.) to as many as 12 or more. Here are a few factors currently being used by firms, as noted by Joel A. Rose in his article on new trends in partner compensation:

  • client origination;
  • client retention;
  • quality of work product/timeliness;
  • partner productivity;
  • seniority;
  • firm management and leadership;
  • compliance with firm policies;
  • personal relationships and teamwork; 
  • partner participation in firm activities/functions;
  • lawyer development and delegation of work;
  • professional and community activities.11

The advantage of the multi-factor compensation model is that the management committee and the firm as a whole can allocate different percentages to each factor and adjust those percentages over time to reflect the firm’s values and goals. The primary criticism of this model is that what might appear at first blush to be a more objective compensation model than the old black box still involves many subjective judgments. It is, after all, still a matter of management’s judgment as to how an attorney’s job performance and behavior fall within the categories the firm uses. Still, a multi-factor compensation plan usually allows the attorneys to feel in the end that their compensation supports the law firm’s culture, values, and mission. 

This structure also permits the firm to create and promote a culture that encourages lawyers to buy in and stay with the firm long-term. In the end, if the lawyer feels connected to the firm, she is more likely to continue with the firm. This connection to the culture of the firm may be a much more important factor than whether individual attorneys feel that they have been paid exactly what they want.


The full transparency (and full transparency coupled with a 360-degree review) model 

The full transparency model is coming into its own in the 21st Century with the next generation of managing partners. There are two varieties. Variety One is full disclosure of all factors used to determine total compensation as well as all final payments made to each attorney, both associates and partners. But only the management committee or senior partners are involved in setting the amounts of final compensation. The advantage of the full transparency model is that each attorney knows where he or she stands in comparison to their seniors, peers, and juniors and will have a sense of what financial rewards are possible if he or she is motivated to achieve those results. This model can be a motivator, as well as providing clarity with respect to the firm’s valued competencies. 

Variety Two, less used among law firms, has the added element that every attorney evaluates, discusses, and plays a role in determining each other’s final compensation for the year (sometimes using a 360-degree review or similar evaluation tools). This evaluation is then used to determine each attorney’s compensation based upon his or her job performance and ability to further the firm’s agreed-upon objectives and goals. 

The 360-degree12 overlay focuses on online and interview-based reviews from all attorneys and staff who work with the attorney. While there remains some disagreement in the marketplace as to the effectiveness of 360-degree reviews, John Behr argues in his recent HBR article “Getting the Most Out of 360-Degree Reviews”:

[T]hese tools are only effective if the feedback is kept confidential, respondents are encouraged to be candid, and everyone is transparent about the purpose behind the 360.13

But the 360 needs to be customized to reflect the particular law firm’s ethos, values, and brand. For law firms that rely on the more common business strategic plan using vision, mission and values, these should be integrated into the 360. There are many 360-degree review tools available online for management to use, but the key, as Behr points out, is that the 360-degree review “should never be delivered in a vacuum.”14 There needs to be appropriate context and support for the attorney to process and develop an action plan. This can be accomplished best by using the information to build a feedback loop between management and the attorney. Finally, for some firms and especially with key attorneys, the use of an outside consultant may be most beneficial for both the firm and the individual attorney. 

Conclusion

In the end, attorney compensation plans reflect the values and culture of the firm. There is no right or wrong way to structure attorney compensation. It is a balancing act between a firm’s bottom-line business goals and its cultural aspirations. For some, the balance might lean toward the importance of keeping the rainmakers happy. In other firms, building and retaining a connected culture might be viewed as more important. At the end of the day, a firm is usually best advised to consider what it wants for its attorneys. If it feels like the firm is not moving in the right direction, maybe a change to the compensation structure could provide a needed boost. But before making a change, a firm should conduct research by asking other firms with different structures what they like and dislike about their set-up. 

Management committee members and those setting compensation should be slow to adopt another law firm’s model without getting input—and, more importantly, buy-in—from most, if not all, of the attorneys in the firm. The firm’s compensation model rewards and motivates specific and measurable attorney behavior and allows management to recognize through pay those who are contributing to help the law firm better support its staff and attorneys and better serve its clients. 

A firm should also consider whether a change in the transparency of compensation might benefit the firm in reaching its goals. If retaining younger lawyers and forging a connected culture are important, then more transparency may prove useful. 


PAUL FLOYD is a lawyer’s lawyer, advising attorneys on numerous firm-related matters. One area of primary focus for Paul is advising solo and small firm attorneys on the creation, management, and succession planning of their law practices. He also teaches business associations and business planning at the University of St. Thomas School of Law and business and strategic planning in the MBA program at Bethel University.

NICK RYAN is an associate attorney at the Law Office of Eric T. Cooperstein, where he represents and consults with lawyers facing legal ethics issues. Previously, Nick was a law clerk at the Office of Lawyers Professional Responsibility.


Notes

 

1 Reid Hoffman, Ben Casnocha, Chris Yeh, “Tour of Duty—The New Employer-Employee Contract,” Harvard Business Review (June 2013).

2 For an overview of traditional compensation models, see Michael Moore, “Untying the Gordian Knot: Attorney Compensation,” Wisconsin Lawyer (March 2012). For a discussion of the pros and cons of pay transparency on worker behavior, attitudes and performance, see Zoë B. Cullen and Ricardo Perez-Truglia, “The Motivating (and Demotivating) Effects of Learning Others’ Salaries, Harvard Business Review (10/25/2018) and Todd Zenger, “The Case Against Pay Transparency,” Harvard Business Review (9/18/2016). 

3 Tanza Loudenback, “More tech companies have stopped keeping employee salaries secret — and they’re seeing results,” Business Insider (5/3/2017). https://www.businessinsider.com/why-companies-have-open-salaries-and-pay-transparency-2017-4 

4 David Burkus, “Forcing Employees to Keep Their Salaries a Secret Could Hurt Performance,” Inc. (6/22/2016). https://www.inc.com/david-burkus/how-salary-transparency-impacts-employee-performance.html 

5 David Burkus, Under New Management: How Leading Organizations are Upending Business as Usual, Houghton Mifflin Harcourt (2016).

6 Id.

7 Zoë B. Cullen and Ricardo Perez-Truglia, “The Motivating (and Demotivating) Effects of Learning Others’ Salaries,” Harvard Business Review (10/25/2018).

8 Id

9 Karyn Twaronite, “The Surprising Power of Simply Asking Coworkers How They’re Doing,” Harvard Business Review (2/28/2019). 

10 Id. It is also worth noting that research is demonstrating that a sense of belonging is critical for diversity and inclusion to be successful in companies. See, Evan Carr, Andrew Reecem Gabriella Rosen Kellerman, and Alexi Robichaux, “The Value of Belonging at Work,” Harvard Business Review (12/16/2019).

11 Joel A. Rose, Newer Trends In Determining The Most Appropriate Partner Compensation System For Your Firm And Standards To Assess Partner Performance (1999-2017) (defining each of these factors in some detail) at: http://www.joelarose.com/articles/newer_trends_partner_compensation.html 

12 Jack Zenger and Joseph Folkman, “Getting 360 Degree Reviews Right,” Harvard Business Journal (9/7/2012) (“[t]here is one 360 rater that is highly unreliable and rarely predictive at all… that person is you.… For leaders to get an accurate picture of their own effectiveness, they need feedback from their manager, peers, direct reports, and others in the organization.”). 

13 John Behr, “Getting the Most Out of 360-Degree Reviews,” Harvard Business Review (11/22/2019).

14 Id