Compensation Models and Incentive

Published April 15, 2014

Choosing the right compensation model is important because compensation models are inextricably tied to incentive.

Lockstep Versus EWYK
There are two general models for compensation: (1) “lockstep,” in which the firm’s success each year is averaged to determine the standard rate of compensation increase for most lawyers at each level of experience; and (2) “eat what you kill” (EWYK), in which attorneys are rewarded on how much business they personally bring in. According to Bruce MacEwen in his blog on law firm economics, “Adam Smith, Esq.,” the advantages and disadvantages of each are as follows:

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

Corporate Model
The problem is that both lockstep and EWYK systems depend on the same metrics, all based on the billable hour. Realization, or collecting the money you are owed, is far more important than the number of hours you bill.

If the firm wants to promote a cooperative effort that increases collections, it must change to a more cooperative corporate compensation model that depends on the success of the organization, not the success of any one individual.

Value-Driven Work
When clients perceive the work of the firm as having high value, the firm can charge more, shifting the billing perspective from time (hourly rate) to value, where the profits are significantly higher.

The corporate compensation model supports this kind of work because corporate clients are willing to pay for quality work and efficiency.

Conclusion
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 for the financial health of the firm.

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Audience type: Administrators, Associates, Small Law Firms, Sole Practitioners