Question: 

I am a member of a three member management committee in a sixteen lawyer boutique litigation firm in downtown Chicago. The firm has been in business for over forty years. We have sixteen lawyers in the firm of which ten are equity partners and six are associates. The original founders are retired and we are in second generation.

Until five years ago all partners were involved in all aspects of firm management. At that time we made the decision to put in place a three-member management committee that was charged to handle certain aspects of firm management with the full partnership only participating in major decisions. We hired a firm administrator to handle the day to day administrative responsibilities. Our administrator reports  to the management committee. This structure has worked very well for us. We are currently paying our administrator a base salary and a discretionary bonus. After five years of salary increases our administrator is making more than our associates. Is our present approach to compensating our administrator the best approach or should we be looking at a different method of compensation?

Response: 

Base salary with discretionary bonus is the most common approach that I find being used to compensate firm administrators. The problem with discretionary bonuses is that many law firms don’t tie these bonuses to measurable performance and as a result they become expected and end up being an entitlement. However, I have worked with many firms where we have put in place alternative bonus systems that have either replaced or supplemented discretionary bonuses. This has allowed firms to put more emphasis on performance as opposed to continuing large salary increases for just showing up. While administrators still receive salary increases they are at a lower rate of increase, performance bonuses take on a larger role, a larger percentage of the compensation is variable rather than fixed, and administrator performance is aligned with firm goals.

A few approaches that firms have taken:

  • Goal Attainment Bonus – Goal attainment bonuses can be devised many different ways such as  completion of specific projects (for example development and completion of an employee handbook, procedural manuals, etc.). In one firm each year the administrator and the firm agree on four goals – two of which are firm goals and two a personal goals. For example, firm goals might be a certain level of profit, revenue, expense, staff turnover, etc. Personal goals might be educational or improvement areas identified in a performance review. A personal goal might be attainment of the CLM certification awarded by the Association of Legal Administrators. Each goal is worth 2.5 percent and for each goal attained the administrator is paid a performance bonus at the end of the year of 2.5 for each of the four goals attained times their current salary. For example, if an administrator being paid $100,000 a year salary attains two of the four goals he or she would be paid 5% performance bonus of $5000.00.
  • Percentage of Firm Net Profit – This in an approach used to align an administrator’s performance with the net profit of the firm. Sometimes expenses that are not under the control of the administrator are eliminated from the calculation.
  • Attainment of Firm Budget
  • Firm Attainment of Certain Benchmarks (i.e. Staff turnover)

These approaches are just a few examples. The key is to align your administrator’s performance with firm goals and pay for performance.

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

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