Cotterman on Compensation: Associate Compensation

First launched in 2007, Cotterman on Compensation is a blog authored by Altman Weil’s Jim Cotterman, the preeminent expert on law firm compensation in the United States.  For 30 years, Mr. Cotterman has advised law firms on compensation system design, capital structure and other economic issues. He is the lead author of the definitive book on law firm compensation, ABA’s Compensation Plans for Law Firms.

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 client 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 — i.e. 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.


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.


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.

What To Do About Associate Compensation

April 9th, 2009 by Jim Cotterman

Yet another article today about associate compensation. If it's 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, it's 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.

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