Question:

I am a partner in a five lawyer firm in Columbus, Ohio. There are two partners in the firm and four associates. Our practice specializes in corporate business law and is one hundred percent transactional. We do not do any litigation work. Several of our associates started in BigLaw. All of our associates have been practicing for over ten years and some longer than that. None of our associates bring in – originate any client business. They are paid salaries and discretionary bonuses. While we have a billable hour requirement of 1600 hours none of our associates are even close – they are not even hitting 1200 hours. Their salaries are pushing $200,000 and their fee collections are no where they need to be. Any suggestions?

Response: 

Looks like you have some real challenges. The salaries that you are paying are what we are seeing for associates and non-equity partners in firm’s your size and that have been practicing for the number of years that your associates have. For years the guidepost has been that an associate’s fee collections should be three times salary/compensation – one third to cover an associates salary, one third to cover overhead, and one third for profit. That was back when overhead was running at thirty percent. Many firms today have much higher overhead than thirty percent. Using three times salary the fee collection bonus threshold would be fee collections of $600,000 for an associates being paid $200,000. The salaries you are paying are in the ballpark with what many other firms are paying. Your issue is not so much what you are paying your people as is their fee production and collections.

Obviously the billable hours are to low as well as the fee collections and this is eating into the profits of the partners. While 1600 annual billable hours is appropriate, based on where your associates are now it may be an unreachable goal and you may want to consider taking baby steps and setting a billable hour expectation of 1400 hours. For years the national average annual billable hours reported in surveys has been 1750 and this was the expectation for many firms for many years and still is for many firms. In the past few years, due to lack of work, work life balance, and other factors some firms have lowered the annual expectation minimum to 1600. Litigation firms, especially insurance defense firms, currently have minimal expectations ranging from 1800 to 2000 hours. Firms that represent individual clients such as general practice firms, family law firms, and estate planning/administration firms currently have minimal expectations ranging from 1400-1600.

I suggest that you look into your situation and determine the reasons for the low billable hours. It could be that they are not putting in the work because the firm does not have enough work for them to do. Look into the following possible causes of their low billable hours and take corrective action:

  • Not enough work available
  • Poor time management habits
  • Poor timekeeping habits
  • Poor work ethic (9-5 attitude) and not putting in the hours

An approach that many firms are taking is to incorporate performance bonuses such as the following to motivate additional production. Usually these are on top of a base salary. Here are some examples:

  1. Base salary plus 5% of base salary if the billable hour expectation of 1600 is attained, discretionary bonus, and a 15% client origination bonus for bringing a client to the firm. The bonus is for the first year only.
  2. Base salary plus $50.00 per billable hour actually billed to clients that exceeds 1600 annual billable hours. 10% bonus on the collected revenue from other timekeepers that work is delegated to.
  3. Base salary plus 20% bonus for collected working attorney fees in excess of three times salary during the year. For example, an associate that is paid $200,000 would have an working attorney collection expectation of $600,000. If the associate had collections of $700,000 he or she would receive a bonus of $20,000. The associate also is entitled to receive a client origination bonus of 10% for business brought to the firm.
  4. Base salary, 1600 annual billable hour minimum expectation, quarterly production bonus of 40% of working attorney collected fees less salary paid for the quarter, and 20% client origination bonus for work done by others in the firm.
  5. Base salary plus 1/3 of hourly billing rate for hours billed to clients that exceed 1800 annual hours billed to clients.

Some firms have lowered base salaries when incorporating new performance bonus systems when the current expectation is far below expectation. Other firms are terminating under-performing associates.

Many firms are finding that many associates in small firms that have salaries of $200,000 or more are content and are not motivated by the bonuses available to put in the time to earn the bonuses. Work life balance is more important that earning additional income for some associates. The bonus systems works better for associates that are still hungry or have lower base salaries.

Firms that have had the most success in getting associates past the “entitlement mentality” are those that incorporate goal setting, accountability, and individual twice a month coaching meetings with associates in addition to the performance bonuses.

You might want to consider the following approach to associate compensation:

  1. Base Salary at current level or lower.
  2. Working attorney bonus of between 20-40 (one or the other) percent of fees collected in excess of a threshold of 3 times salary.
  3. Delegation bonus of ten percent for fee collection from others working on matters for which an associate is the responsible attorney.
  4. Professional and practice development bonus based on results rather than activity. (Maximum bonus of 10% of salary.) For example:
    1. Two speaking engagements during the year for attorneys or other professional groups with quality PowerPoint presentation approved by the managing partner. $1,500.
    2. Writing article in Bar Assoc. Section News Letter-ANNUAL. $500.
    3. Writing article in Bar Journal or other professional Journal (Ohio Bar Journal, American Bar Journal). $1,000.
    4. Writing Chapter in Legal Professional Book, i.e. 1,500 author – as a c0-author $750.
    5. Bar association or Non-Bar association (if prior approved) leadership position such as chair, etc.(not just membership). Maximum 1 leadership position through 1 year duration of the position. $2,000.

Good luck with the challenge.

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

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