Archive for the ‘Associate compensation’ Category

Should performance evaluations be linked to pay decisions?

April 22nd, 2014 by Jim Cotterman

There are a variety of views on this topic of linking pay and performance evaluations.  My general response is to link the two because pay proportional to performance(r) is a critical element of best practices in lawyer compensation.  They are both part of the ongoing cycle of plan, train, do, coach, assess, reward.  The plan and assess elements often occur concurrently — assessing prior performance and planning for future (including career development).  And it is important that the feedback from the performance evaluation and the compensation decision be consistent and understood by all, including the individual’s team leader.  

 

But to decide, first assess a number of factors.  Ask:

 

1. To what extent are the compensation decisions based on performance evaluations?  For example, if the associate compensation system is entirely an automatic lock-step and bonuses are tied exclusively to a billable hour formula — then there is little reason to connect the two.  The subtleties of a proper performance evaluation are not connected to changes in pay in this example.  

 

2. Are there other dimensions to the pay decision outside of the individual’s performance (team, practice group, department, office, firm performance) and how important are each in the overall compensation philosophy?  In this situation, the performance evaluation and the pay decision should both assess and discuss the same dimensions, how they interrelate and the relative importance of each in the overall compensation decision.

 

3. Is there sufficient flexibility in the compensation program for material differences in pay between high and low performers?  Even if pay decisions are heavily influenced by the performance evaluation, if there is an immaterial pay differential opportunity between those judged high performers and those judged low performers, there is little reason and high risk to connect the two.

 

4. Is the performance evaluation process properly designed, implemented and supported so as to be effective?  Are both performance and career development properly balanced?  Is the review cycle the proper interval?  Is there a need for a mid-period formal check-in and/or are there opportunities for informal review available?  Are the metrics sufficiently descriptive to mitigate against differing views of performance (this generally rules out the simplistic “Does Not Meet, Meets and Exceeds Expectations” systems).  Is the evaluation thorough, yet focused (remember that the partners have many. many of these to complete)?  Are the reviewers trained in completing the evaluations?  Are the individuals who aggregate the individual evaluations into a comprehensive assessment trained?  Are the individuals providing feedback trained?  Are prior year evaluations available to note progress and to provide continuity?

 

5. Have the stresses that highly integrated performance evaluation and pay programs create (tendency for less open communication, more conservative setting of performance goals, heightened focus on short-term performance rather than career development, grade inflation to achieve a desired compensation result — protection of ones key team members) been considered and mitigated to the extent possible?

 

Searching for better associate bonuses

March 4th, 2014 by Jim Cotterman

Recent questions regarding changing associate bonus programs prompted me to note a few thoughts for all to consider.

 

1.  Associates generally like an objective effort driven bonus that they can control (at least to some extent) that reflects their production.  The objective measure of their effort is the billable hour.  The problem is that hours only recognize effort.  Other production-based approaches that could be used, such as time value recorded, billed time value or collected time value are also possible, but involve attributes that the associates cannot control – assigned billing rates and partner pricing decisions, partner billing adjustments and client value adjustments and payment practices.  Better programs recognize that production effort really requires a multi-faceted look.

2.  When firms better align compensation practices with client interests they look to factors such as work quality, competencies, efficiency and effectiveness rather than production.  This requires greater effort and judgment, but certainly improves on the process.  Yet, firms still need to differentiate based on quantity.  Two otherwise excellent associates (equal on all other factors), one with 1,700 hours is unlikely to be paid the same as the counterpart who has 2,200 hours.  And the higher hour associate is unlikely to perceive that the pay program rewards proportional performance if they are paid the same.  It is hard to eliminate this from the pay program.

 

3.  The professional services model remains premised on highly utilized timekeepers to generate high profits.   Lower effort is quite likely going to result in lower profit and lower compensation.  Changing a bonus program from production to other factors should be accompanied by efforts  reinforcing production expectations consistent with the firm’s business needs and desired work environment.

 

4.  It is important to recognize that a bonus should represent performance above and beyond what has already been compensated for in the base pay of salary and benefits.  To the extent that some portion of a bonus is for quantity, that portion should not kick in until a threshold is surpassed.

 

5.  Moving the associate bonus programs beyond a math exercise provides opportunities to recognize and reward the associate for growth and development that is critical for career success.  Associates should benefit from a more thoughtful overall approach to their development and pay — ie. Going beyond hours to include a focus on quality, efficiency and other intangibles is much better aligned with a longer view on development that also benefits the firm and clients.

Compensation season coming to an end

February 17th, 2012 by Jim Cotterman

About now most firms should have finished their compensation deliberations and possibly their communication efforts.  Assuming no Spring surprises, there should be a lull before the next round kicks off.  But before you set your compensation committee free, we recommend one more request on their time.  Take a few moments to reflect on this year’s process.  What went well?  What challenges did you have?  Think over the entire process – economic data review, partner written input, partner interviews, input from administrative leaders, personal study, committee deliberations, feedback to/from partners and the like.

It is all fresh in your minds, so capture that knowledge now.  This does not need to be laborious.  Just a quick memo to the committee chair with bullet points and short narratives.  Capture both positive and negative aspects of this year’s efforts.  The Chair can organize this and determine how best to proceed.  The conclusion might be to continue as is, but I suggest there is always room to improve and ongoing incremental improvement should be integral to your operations.

Slower billing rate increases may limit compensation adjustments

December 10th, 2010 by Jim Cotterman

The 2010 NLJ Billing Rate Survey results indicate a 2.7% increase over 2009.  This is a significant departure from pre-recession increases.  But it is roughly consistent with inflation, which may offer some measure of solace.

In the past, rate increases alone were sufficient to largely fund increased compensation levels.  Absent rate increases, lawyers will need to work harder (more billable hours), work more efficiently (better realization), and discount less (also better realization) to fund equivalent pay hikes.  How likely are each of these? 

Peak billable hours for lawyers occur during the 6th or 7th year of practice and exhibit a steady decline for the remainder of their careers (rate increases largely fuel the ever rising revenue curve of a lawyer over a career).  Add an aging lawyer population and the increased effort required to develop business to that hours profile and working harder is unlikely.  It is also unlikely that associates can sustain a much more aggressive work routine.  Many would argue that the job already has extreme hour expectations at all levels.  And there needs to be sufficient additional work to absorb the additional billable hours.

Improving practice skills and methods is an ongoing process.  Legal project management and more aggressive use of technology will aid in this area.  Some experts have postulated that 15% greater efficiency is achievable.  If you charge on an hourly basis this benefit inures to the client, unless you can raise rates.  Alternative fees may offer the provider some means to retain some of that benefit without an obvious rate increase. Otherwise the full revenue loss from efficiency gains must come from more work volume.

How about fewer discounts?  An argument can be made that increased efficiency should allow the provider to hold the line on discounts.  But this is a market populated with aggressive clients eager to negotiate discounted rates.

To increase compensation, revenue must increase or costs must decrease. Revenue increases are going to be harder to obtain when the primary driver — rate increases — is constrained, and the remaining drivers are significantly more difficult to improve.  My bet is on improved efficiency, greater use of AFAs and restructuring.

Cost reductions are also going to be harder to realize.  During the recession firms cut everywhere they could.  Much of what’s left to exploit will likely primarily benefit clients — the outsourcing of certain legal services.

The forecast for increased per timekeeper revenues is probably the bleakest it has been in some time.  The easy adjustments have been made.  In this environment, compensation expectations need to be equally muted.  And the job of making compensation decisions will be equally more challenging.  Or as one partner told me, “Playing Vegas is easier then making some of these decisions.”

Compensation Perspective

March 29th, 2010 by Jim Cotterman

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.

Moving away from associate lockstep?

January 15th, 2010 by Jim Cotterman

Ok, so you have made the decision to change from your lock-step associate compensation program.  What next?  Here are five areas and key considerations to ensure success.
 
First, understand how much you have modified your program from a pure lockstep approach.  Did you retain the right to hold associates at any compensation point along the way?  Were bonuses tied to factors other then class year?  It is likely that you were already incorporating some “merit” concepts in your existing program.  This is important because it simplifies the transition somewhat and provides anchors of familiarity for the associates.  It also may provide some of the elements of the new program.
 
Second, determine the elements of your performance evaluation program.  What is the frequency — project or time based such as quarterly, semi-annual or annual?  Is it a multi-factor evaluation incorporating both objective and narrative ratings?  Is it tied to a set of increasing competencies, skills and experience that are level-, practice- and job-specific?  Does it relate to promotion criteria?  If a partner track position, does it integrate with partner expectations such that it logically builds towards a successful candidacy?  Are assessments correlated across the practice group, office and firm to look for grading anomalies?  Are the evaluators trained and given feedback on their evaluation skills?  Good evaluations need to have a consistent grading perspective — one person’s “A” should not be another’s “C” — which is often a problem. How do you communicate the results of the assessment?  Is it a written summary, oral or both?  Who provides the feedback and are they provided training at performance counseling?  And how does feedback mesh with forward looking individual, practice, office and firm planning efforts?  Are your compensation and promotion decisions consistent with the conclusions reached in the evaluation?  Moving away from lock-step only enhances the importance of a very robust performance monitoring and feedback program.
 
Third, provide transparency, which is an attribute of lockstep programs that is well received by the associates.  Transparency may be available by publishing (at least internally) the pay scales associated with each grade or tier that you build into the program.  This is quite common in wage administration everywhere else.  A second means to build transparency is to create a documented bonus program that actually rewards performance well beyond the expectations for the position, and/or rewards group (practice, office or firm) performance in some sort of profit sharing.  Remember, simply meeting expectations is what the salary is for.   You may have much of this piece already embedded within your lockstep program.
 
Fourth, stress the importance of communication.  There is no reason not to invite associates to participate in this process.  They can provide meaningful guidance about what they like or dislike about what you are doing currently and what they would like to see.  This provides you with a mechanism to then respond, acknowledging their concerns and addressing each either with a change or an explanation of why the status quo is preferable.  They can “test drive” options so that much of the necessary fine-tuning is done before a big roll-out.  And finally, this provides a way to ease the concerns that arise when something this important is under review.  It takes some time to do this well and an ongoing participation and communication effort will assist to keep it all in the proper context.
 
Fifth, look at the economics of what you are doing.  Are the salaries and bonus appropriate?  How will you be positioned in the market?  Will the new cost structure allow you to profit on work associates do for clients?  Will the clients be willing to pay for these individuals to work on their matters at a sufficient hourly rate or effective hourly rate for an alternative fee arrangement?  What is the cost/benefit to the firm of making the change from lockstep to merit-based pay?  Model the economics of the program based on your best assumptions and plan elements.  Will the partners support the investments contemplated in money, time and training?  Continue to monitor and update financial models as experience develops.
 

Responsibility

July 16th, 2009 by Jim Cotterman

Interesting post on the Legal Watercooler yesterday that demonstrates the tension between making sharp business decisions and doing right by people.  We see this play out in a variety of ways from firm to firm.

Changing the Rules on Associate Compensation

June 26th, 2009 by Jim Cotterman

Maybe this time the profession is serious about associate pay changes.  I’ve been a bit skeptical because the clamor for change is not new.  What is new is the breadth of the realignment of pay scales and the corresponding announcements of apprenticeships (the boldest moves to address client resistance to hiring newly minted lawyers), training programs and other activities.  All of these are positive steps.

However, associate compensation still appears out of line.  The reductions announced so far are about half of what is probably required (i.e. going from $160,000 to $145,000 should probably go much further to $125,000 or even $100,000); thus resetting the wage scale by a decade.  This is a painful reality and one that surely will fire up emotions.  But the tide has changed; clients are moving quickly and assertively to reduce legal spend.  This goes beyond alternative fee arrangements (AFAs). Costs of outside legal bills are going to come down, and from the early signs — down dramatically.  Services will be competitively bid, outsourced, off shored, converged, internalized, re-engineered, and even forgone.  Now add the AFAs to create greater certainty regarding total cost along with a healthy measure of risk transfer from the client to the law firm.  All of this will bring the major line item in any law firm — the cost of people — under assault.  This will affect total employment, wage scales and job expectations.  The pace of the salary change is directly affected by the pace of change in what clients will pay for legal services.

Once the scale is in line, what’s next?  Pay packages are likely to be less generous on the upfront money (say goodbye to signing bonuses), with reduced salaries and more modest benefits.  Bonuses, possibly semi-annually or quarterly, will ease some of the pain.  But expect the eligibility performance thresholds to be rigorous.  There is likely to be more emphasis on skills and competencies, particularly as they relate directly to delivering valued advice and counsel to clients.  But do not for a minute think that those criteria will overshadow revenue generation.  It’s where the money to pay associates comes from.  There is also going to be a concerted effort at looking beyond what associates know and do to how they conduct themselves.  All three (skills/competencies, revenue, behavior) will be expected.

To do this firms will define what they want from an associate over many years, build metrics and methods to grade performance, and determine what that performance is worth.  Hopefully this will set milestones for career progression and even multiple career paths.  Time to rethink up or out, tiered ownership and the array of tactics deployed over the past twenty years.  The trade-off for associates — lower remuneration hopefully mitigated by better career development and opportunity.

The Two Forces Raising Rates and Compensation

April 27th, 2009 by Jim Cotterman

I discussed the strong alignment of associate billing rates, the time value associates generate and the compensation paid associates during the recent Altman Weil Webinar, Financial Strategies for the Current Economy.  In fact, the correlation is so strong that during those associate years one can explain 92% of the variability in associate pay looking only at time value as I mentioned in my 4/9 blog post.
 
During the presentation I also used the analogy of this progression as being driven by two forces — the elevator and the escalator.  The elevator is the general rise in rates and compensation that law firms have traditionally engaged in year-after-year for the past three decades.  Generally each year the starting salary for new graduates is adjusted upwards.  The exceptions have been during and immediately after recessions.  But the competitive forces of supply and demand usually take hold and the elevator rises again.  Once the starting salaries are set there is a ripple effect throughout the associate ranks with each class increasing to maintain the lock-step progression so entrenched in associate pay programs.  The same holds true for billing rates.  Each year law firms generally increase rate schedules usually for at least at the rate of inflation or a bit more.  The billing rate schedules largely resemble the lockstep pay programs in that each year of additional experience garners a billing rate higher then the last.  Thus the elevator lifts all upward.  It is a perfect description of inflation adjustments.
 
The escalator effect is the progression as one gains experience.  The first year associate becomes a second year associate.  Her rate and compensation increase simply with this passage of time and the accompanying increase in experience.  The escalator is the lockstep program.
 
In almost all years the associate benefits from both the elevator and the escalator.  First  there is an increase because the firm says : “Inflation was 3% last year and our costs have increased — rates must go up 5%.  And we must increase our starting salaries - another 5%.”   Thus the elevator ride up.  Then the associate gains experience  –  the escalator –  and she benefits from the pay differential in the lock-step program for 2nd year associates.
 

What To Do About Associate Compensation

April 9th, 2009 by Jim Cotterman

Yet another article today about associate compensation (see How Low Could Associate Salaries Go?).  If its not complaining about how high they have gone; its talk about how low they might go.  Then there are the ever-present pieces on moving away from lock-step compensation programs; or clients forbidding the use of 1st and 2nd year associates on their matters.  Enough talk already!  How about some action?

First, the market bid up associate compensation because large law firm hiring demands put severe pressure on the limited supply of new law school graduates. 

Second, billing rates increased well in excess of inflation for three decades.  Pretty easy to have significant real wage growth in that environment.  And it permeated throughout the associate and partner ranks.

Third, the clients went along with all of this.  They paid the ever increasing rates and did little about it.

Fourth, the associate lockstep compensation programs are well matched to the metric they are measured against.  No, its not billable hours but the value of their time (hours times rates — again the ever increasing rates).  The strength of the relationship between the value of their time and compensation is remarkable at .92 where 1.0 is the maximum value.  Can you get more merit driven than this?  Not if you want any ability to consider other aspects of the associates’ contributions.  In professional services where the model is selling the value of your experience and expertise, then the foundation of any compensation program has to measure time value.

Fifth, if associate compensation free-falls, then it most likely does so for the same reason it climbed so high in the first place.  It is following the revenue!

What is wrong with this picture?  Well if you are an associate who has paid or is paying the debt on a six figure law school education there better be significant earnings or you made a bad economic investment.  If the change is permanent then the change will cascade back to the law schools who will see their own economics come under assault.

Now here is the game changer.  If clients are really serious about getting value for what they pay in legal fees, then they need to get serious about containment of billing rate increases (maybe even rolling them back — Wal-Mart anyone?).  We will leave alternative fee structures for another day.