Firms Should Approach Compensation as an Institution

Clients clamor for alternatives to hourly rate billing because they want lawyers to have an incentive stake in the outcome of a matter.

Such is the case with contingency fees, when lawyers get a flat percentage of the value earned for the client.

Contingency fees are often used in litigation, from personal injury cases to high-stakes corporate disputes. But this raises major problems when other lawyers in the firm still bill hourly rates. The hourly rate lawyers in effect cover the costs of the contingency fee lawyers until the matter is resolved.

If the contingency fee lawyers win and the dollars flow in, how should the income be divided?

That issue was apparently at the heart of the recent demise of the global law firm Howrey. In March, the firm, which once employed as many as 750 lawyers, dissolved after many attorneys had already left.

A major factor in the departures appeared to be that, as a litigation-focused firm, up to 11 percent of Howrey's billings were devoted to contingency matters.

According to its CEO in news interviews, many lawyers grew increasingly impatient waiting for the contingency matters to pay off.

Every firm's situation is unique, but Howrey's dissolution appears to raise some major questions for advocates of value billing as an hourly rate alternative. Value billing strategies, such as contingency fees, generally put the fee decision in the hands of the buyer of legal services.

There are various scenarios on how this can work:

• pure contingency — lawyers are paid a fixed percentage of the result;
• pure-value billing — lawyers get paid based on what the client thinks the law firms effort was worth; and
• hybrid-value billing — combines some form of hourly rate with a bonus billing based either on results or the client's perceived value.

Apparently, Howrey partners wanted pure hourly billing and were uncomfortable with advancing costs for matters in which they were at risk.

Another consideration is that contingency fees reached 11 percent, probably a high number for those partners wanting immediate gratification and profit distribution from their efforts.

When one client exceeds 10 percent of a firm's revenue, you tend to be dependent on that client — a dangerous situation. Eleven percent contingency, in this case, may be deemed equivalent to having one client past the 10-percent threshold.

I suspect, however, that the 11 percent was made up of a number of different clients, thus changing the threshold issue a bit.

To further reduce the danger of this threshold, while continuing contingency billing and its ambiguity, the firm must be accurate in its case selection, taking only cases with outcomes that are reasonably assured.

That may reduce the potential of a major payoff, but more lawyers may be more comfortable with accepting the narrower window of ambiguity and uncertainty.

Creating a unified compensation system that is fair to all, despite the fact that contingency billings are paid irregularly, is the best way to preserve a firm with such cases.

A contingency compensation system that fosters an environment of solo silos in which some lawyers receive a great deal of money on an irregular basis — as opposed to an environment in which everyone is pulling for the whole — is one fraught with potential for unhappiness and ultimate dissolution.

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