Compensation Models: Which is the Most Incentivizing?

Money makes the world go around. Similarly, money makes the law firm go around. In particular, money makes the law-firm lawyers go around.

Based on those somewhat exploited words of wisdom, what is the best compensation model to keep things going around?

Lockstep vs. EWYK

Typically, there are two general models for compensation: "lockstep," in which the firm's overall success each year is averaged out to determine the standard rate of compensation increase for most lawyers at each level of experience; and "eat what you kill," by which all attorneys are rewarded on how much business they personally bring in.

Each has advantages and disadvantages, admirably summed up by attorney Bruce MacEwen in his blog on law-firm economics, "Adam Smith, Esq.," as follows:

• Lockstep is good at building collaboration, developing client service teams, and institutionalizing clients.
• Lockstep is bad at rewarding exceptional performers and penalizing subpar performers.
• EWYK is good at developing new business and new markets and spurring entrepreneurship.
• EWYK is bad at cross-selling services and promoting harmony.

Any firm that encourages lawyers to maximize their individual compensation may have fast near-term growth. On the other hand, approaching compensation as an institution makes for greater firm harmony and longevity.

The problem is that both lockstep and EWYK systems generally depend on the same metrics: hours worked per year, origination credit, supervision credit and other formulaic measures based on the billable hour — and that's not where the money is.

Traditional law-firm compensation models overemphasize billable hours. For the largest law firms and solo practitioners alike, collecting the money you are owed is far more important than the number of hours you bill.

That lesson is hard for lawyers to grasp. Our hunger is to do the work because we can see the billable hours go up month by month, yet our inventory is not billable hours but the cash that those hours represent.

If the firm wants to promote the kind of cooperative effort that increases collections, it must change to a more cooperative corporate compensation model that depends on the success of the organization.

Base compensation must be tied to the effectiveness of involving other law-firm lawyers as part of the team delivering legal services to clients. That allows for blended high and low rates on client work, which maximizes profitability and collections.

The corporate model says that compensation is based on what is generated for the organization, not for any one individual.

Firms grow based on their clients. Thus, lawyers must look for clients who have growth potential. Highly focused and "high-end" work will result in higher revenues and profits.

When clients perceive the work of the firm as having high value, the firm can charge more, even a percentage of the value of the work. That shifts the billing perspective from one of time (hourly rate) to one of value, where the profits are significantly higher. It's simple Business 101.

The corporate compensation model supports that kind of work because it reflects the approach of corporate clients, who live in a world that favors and rewards continuous improvement. The corporate goal is not simply to cut legal costs by a stated percentage. Corporate clients are willing to pay for quality work and efficiency.

The best compensation approach, therefore, gets away from the star system that rewards only the individuals who stand out from the crowd and also rewards those people who helped the crowd perform better by providing better client service.

In the long run, neither lockstep nor EWYK systems are healthy. Profit-based systems are the best solution because they give everyone the incentive to work toward the financial health of the firm.