Asked and Answered

By John W. Olmstead, MBA, Ph.D, CMC

Q. We are an 8 attorney law firm in Evansville, Indiana. We have five members and three associates. We started our firm four years ago. Each member has an equal share for both ownership and compensation purposes. We cut the pie equally. After four years some of the members feel that the equal sharing approach is no longer working and we need to consider a different approach to compensation. I would appreciate your thoughts on how we might get started on modifying our approach.

A. Virtually all successful compensation systems feature two common qualities that are linked to each other and stand the test of time.

First, a successful system must be fair and be perceived as fair by the partners who
are essential to the firm’s economic success and reputation. The perception of fairness is critical. To determine if a system is fair, partners can ask the following questions:

1. Do I understand the system?
2. Does the system recognize what individuals contribute to the organization?
3. Are the rules clear?
4. Are the rules followed and applied in a consistent manner from person to person from year to year?
5. Are the compensators individuals who are trusted and respected?

A second quality of successful compensation systems is that of simplicity. Research has shown that there is a direct correlation between the simplicity of compensation systems and the degree to which partner understand how their compensation is determined.

The challenge is structuring a compensation system for a law firm is in selecting the best mix of appropriate compensable criteria and the right amount of participation that is consistent with the firm’s needs and its culture.

Before you go very far you should address what type of firm you are trying to build - Lone Ranger (a group of individual practitioners) or firm-first (a team-based firm). In other words "are we in this together." The answer to this question will provide a clue as to whether eat-what-you kill or other approaches to compensation will be appropriate.

Changing your compensation system is difficult and should be approached carefully and thoughtfully.

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John W. Olmstead, MBA, Ph.D, CMC,(www.olmsteadassoc.com) is a past chair and member of the ISBA Standing Committee on Law Office Management and Economics. For more information on law office management please direct questions to the ISBA listserver, which John and other committee members review, or view archived copies of The Bottom Line Newsletters. Contact John at jolmstead@olmsteadassoc.com.