Over the past three decades, compensation issues in law firms have changed much. Back then, benchmarking one firm’s decisions against others across an array of variables such as firm size, location, practice specialty, and experience, comprised much of the analysis. Today law firms must evaluate decision quality for internal proportionality and external competitiveness (both relative to contribution/performance), as well as compatibility with culture and alignment with strategy.
However, one cannot fully understand the broader lawyer pay market if it does not first understand the associate starting salary market. In the 1980s, the profession experienced a rapid increase in starting salaries that cascaded upward throughout the associate ranks beginning a compression problem with younger partners that continues to exist today. The 1990s brought many years of little or no increase in starting salaries as a response to the recession at the start of that decade. However, by the end of the 1990s a hyperactive economy created a demand driven market and increases returned. Then the new millennium brought forth new and daunting challenges and the market slowed yet again. Mid-decade starting salaries again soared, only to be confronted in 2008 and 2009 with the greatest economic collapse since the great depression. This time starting salaries and salaries across the associate ranks were rolled back. Associate layoffs and hiring deferrals reach record levels as the demand for lawyers sank precipitously.
Traditionally, the key metric in lawyer compensation is working lawyer fee receipts. It explains 64% of the change in lawyer compensation over the career of a lawyer. It is almost the exclusive variable for associates, explaining 91.5% of the change in lawyer compensation in the first ten years of practice. After that, the key criterion by which partners are valued takes over – the ability to build relationships in the marketplace that attracts work to the firm. One’s skill at building a practice generally explains 80% or more of the change in a partner’s compensation. A firm’s culture and ownership structure affect the importance of this metric, but only in relative terms. No law firm can exist if its owners are not accomplished business developers.
Let us return to the recession for a moment, which profoundly affected the legal profession as it did nearly all other segments of the economy. Clients push harder then ever on value and there is the perception that pricing power is shifting from provider to buyer. Alternative fee arrangements gain ground over hourly billing as clients demand cost certainty along side of cost reduction. These conditions will likely alter the model for delivering legal services. If it does, then law firms will need to view compensation differently.
Take some time to look at what you are doing:
1. Evaluate partner and associate pay programs to determine if the compensation decisions reflect what is important in your firm (performance, culture, work/life balance, strategy and the like).
2. Examine the profit profiles of your timekeepers (partners, associates, paralegals, etc.) and by experience for lawyers to see if the compensation decisions are economically rational and if the margins are appropriate.
3. Use the compensation process to engage people and seek out opportunities to discuss pay and performance as it relates to strategy and culture.
4. Review your expectations of owners with the owners and consider how your ownership structure affects the vitality of the firm and interacts with your compensation programs and decisions.