How should I be paying my associates? It’s a question that is often asked by law firm owners. It isn’t easy to find the right formula –the sweet spot—that ensures your associates are compensated enough that they are happy and unlikely to leave with your inventory, while also ensuring you aren’t paying more in compensation packages than you should.
So, how can a law firm owner keep the pot sweet enough for associates to want to stay, while also not paying far more than is equitable given the heavy expenditures, risks, and overhead that is on the backs of law firm owners? How can the firm owner protect himself or herself without being a veritable Scrooge?
After being burned one time too many in his law firms, and nearly having a heart attack over a painful firm split with an associate who he had elevated to equity partner, PILMMA’s founder and President, Ken Hardison, devised a system that proved to be successful. He continues to share this method with attorneys across the country who are also finding it to be a win-win for their associates and their firms.
In a nutshell, for most firms, the best method for compensating associates is by percentages, with an “Eat what you kill,” 20 percent of gross revenues, computed and paid after fees are deposited. The percentage is increased to 50 percent for any business the associate can show that they brought in themselves.
With the traditional flat rate/bonus associate compensation plan, the benefits flow mainly to the associate, who makes the same base salary, whether he or she is giving 100 percent to the firm or not.
The firm owner is stuck paying the same salary whether the employee is giving 50 percent,80 percent, or 100 percent effort. The various base salaries that can float around in a firm can also breed ill will amongst the ranks, as one associate feels he or she isn’t being treated as fairly as another.
In contrast, the “eat what you kill” percentage system of associate compensation is a win-win situation for everyone involved. Numbers don’t lie. Compensation based on numbers ensures fairness to everyone involved, both to associates and the firm owner.
It may sound harsh at first, particularly for associates who have gotten used to knowing exactly what they are making each month.
But here’s the kicker: The hard-working associate stands as much to gain by the percentage system as the firm owner. When Ken switched to this percentage compensation system in his firms, he found that:“ The best and brightest associates, the real hustlers in the firm, which are the ones you want to keep anyway, LOVE it.”
Associates in the Percentage system like knowing that the harder they work, the more they are compensated. They can see a direct correlation between what they do and what they earn. They know that the more they bring into the firm, the more they earn. They know that everyone else is working under the same agreement, so everyone is treated equally.
Productivity is increased, and there’s less need for management to have to push cases along; Associates have a strong incentive to keep cases moving, and to get them resolved, liens paid, etc., since compensation isn’t computed until after the funds are deposited, not at initial settlement.
As the Associate matures, if they begin pushing for firm Partner status, consider making them a Non-Equity Partner. This distinction is critical.
It is your expertise, your risks, your blood, sweat, and efforts to grow and market your firm that has formed this successful business. The last thing you need is to hand over the ultimate decision-making authority to someone else or to have to share it with those who may not share your vision for how your firm moves forward.
For the Associate who feels that Partnership status shows they have “made it,” then the status of Partner can be easily bestowed based upon their years of dedicated service. But there is nothing that requires you to make them an equity partner.
For most attorneys, the benefits from this non-equity partnership arrangement far out-weigh the need to be a voting/equity partner. For those that feel this arrangement won’t work for them, it is better to part ways than to find yourself embroiled in disagreements or toxic show-downs and negative power plays in the years that come.
Another word to the wise: Make sure that you add a non-compete clause to all your employee contracts! You will need to look to your individual state’s laws in this area, but it is important to protect yourself and your firm, up front if possible.
Have all associates sign an agreement that states that if they leave your employment, they will NOT take or entice any of your staff to go with them. Likewise, have all your staff sign non-compete agreements as well, indicating that they will not work for any Personal injury law firm within a 100-mile radius for the next 2-5 years, or whatever your state allows.
Treating your employees with dignity and respect is important. Creating a working environment where they feel valued and appreciated is critical. Compensating them well for the hard work they provide is one of the ways you can ensure that your associates and staff are happy and that you enjoy a work environment that is a win-win for all involved.
