Why Reducing Underperformers’ Compensation Doesn’t Work
Despite generally favorable law firm financial performance in 2018 and 2019, most firms are still dealing with issues of overcapacity (too many lawyers for the amount of work available) and underperformance (individual lawyers with not enough work or not meeting expectations). Even though nearly 80% of US law firms reported in 2019 that prior-year revenue was up1 …
- 40% of firms said they failed to meet their total annual billable hours target2
- More than a third said their equity partners were not sufficiently busy, and more than half said their non-equity partners were not sufficiently busy3
- 84% of firms said they have chronically underperforming lawyers4
- 56% of firms said overcapacity was diluting their firm’s overall profitability5
What are law firms doing in response? By far, the tactic that firms have used most frequently to address the problem of chronically underperforming attorneys is to reduce their compensation – 90% of all firms said they had tried that approach6.
There are four main reasons why it doesn’t work.
First, even after multiple downward adjustments to an individual’s compensation, the person is likely to deliver about the same level of performance as before. Most people have already decided how hard they want to work or have reached their ceiling in terms of how much work they can generate. Worse, you may find that underperformers decrease their efforts to match their lower pay, creating worse overall performance than you started with and new morale problems to potentially contaminate others.
Second, pay reductions tend to be timid, so even after multiple reductions in pay, underperformers may still be overcompensated relative to their contributions. Many firms have a “slow up, slow down” principle embedded in their compensation philosophy, requiring several years of gradual reductions rather than one swift recalibration.
Third, we observe that firms do not always deliver a clear message at the time the compensation adjustment is made. The lawyers on the receiving end should receive candid feedback and instruction as to whether they can restore all or part of their lost compensation, and if yes, by doing what, over what period of time. In fairness, each lawyer should be given an improvement plan with clear metrics, milestones or required outcomes that, if achieved, will result in greater compensation. The time frame for such a plan should be short – 6 to 18 months – and resources and support should be made available to give the person an opportunity to succeed. If the targets are not met, it should also be clear what consequences will result.
Fourth, when lowering an underperformer’s compensation, firm leadership is often hoping that the person will get the message and decide to leave. The reality, however, is that chronic underperformers may not have anywhere to go. Other firms have their own underperformers – they don’t want yours too. So your underperformers stick around and take their lumps.
The more constructive approach, if improving your firm’s overall performance is the goal, is to remove underperforming lawyers from the firm. If your firm has a mission statement, core values, or standards for partnership, your underperformers most likely aren’t meeting them. Fairness requires that they meet or exceed minimum performance standards or experience certain consequences.
Our survey data has clearly shown what works in this area and what does not.
- Reducing underperformer compensation: In the 90% of firms that tried to address underperformance problems by reducing the compensation of the underperformers, only 39% of those firms experienced a resulting improvement in firm performance7.
- Removing underperformers: However, in the 62% of firms that removed chronic underperformers, 84% reported a significant improvement in firm performance as a direct result – making it one of the most effective management tactics we have ever surveyed8.
In our experience, most firms are aware that they have more lawyers than they need, based on likely demand, but it’s hard to fire people. They’re good lawyers, they’ve been with you for a long time, they’re your friends, and they have families. That may all be true. But you were elected to management to make hard decisions that benefit the firm and your partners. The bottom line is that your firm probably employs one or more attorneys whose contributions to firm profitability is repeatedly substandard and their other contributions do not argue for a permanent spot on the roster. You have an obligation to everybody – to your partners, to the associates looking up, to the underperformer – to deal with the situation by actually dealing with it. Very often, attempting to address chronic underperformance through reductions in pay fails to address root causes and only delays the inevitable.
NOTES
1. Altman Weil 2019 Law Firms in Transition Survey, page 54. 78% of firms said Revenue was up and 77% of firms said Revenue per Lawyer was up. 362 firms of 50 lawyers or more participated in our 2019 survey of law firm leaders, available for free download at www.altmanweil.com/LFiT2019.
2. 2019 Survey, page 13. Among firms of less than 250 lawyers, 44% failed to meet their target.
3. 2019 Survey, pages 11 and 12. In firms of 250 lawyers or more, 48% said their equity partners are not busy enough and 61% said their non-equities are not busy enough.
4. 2019 Survey, page 15. 82% of firms with less than 250 lawyers and 90% of firms with 250 lawyers or more.
5. 2019 Survey, page 14. In firms of 250 lawyers or more, 74% of firms said overcapacity was diluting profitability.
6. Altman Weil 2018 Law Firms in Transition Survey, page 31.
7. 2018 Survey, page 33.
8. 2018 Survey, pages 32 and 33. Most of the remaining 16% said it was “too soon to tell” if there was any improvement, so the success rate could still go higher.