May 26th, 2009 by Jim Cotterman
Firms wrestling with alternative fee arrangements (AFAs) often raise the question about how these arrangements will affect compensation decisions. They raise concerns about how to recognize performance if hours are no longer indicative of contribution. But hours are not the primary consideration in most owner compensation programs in US law firms. We know that fees collected as working and originating lawyer are the top two performance metrics for compensation purposes. This is not likely to change in the short term.
But in the context of AFAs, the affect of the initiative on profitability is as key a consideration as winning the engagement and generating the revenue. Determining an effective means to assess profitability is critical.
AFAs are likely to involve risk, innovation and possibly some trial and error to ultimately bring a successful approach to market. All three (risk, innovation and trial/error) are appropriate to consider in compensation decisions along with the profits and fees ultimately created.