The Evolution of Law Firm Compensation: Adapting to Industry Trends

A law firm's compensation system is heavily influenced by equity partners and the predispositions they have about work ethic and rewards.  By definition, those lawyers who thrive in a system have learned to work it to their advantage. While many lawyers may sense that a better way is needed, self-interest is a formidable foe.   

More than ever before, law firms are feeling the internal and external pressures forcing them to change. Aging equity owners, philosophical differences between junior and senior lawyers,  increasing client demands, and technological innovations have put pressure on a law firm’s compensation system. 

Sure, many of these challenges are foreseeable -- but most law firms prefer to wait until adverse events occur to address the need for change. “We have no choice” is a favorite phrase of equity owners. Unfortunately, this phrase is typically followed by “we waited too long” since firms that don't recognize the need for change usually fail.  

An Opportunity for Law Firms

We see an opportunity for law firms willing to toss out some of the old conventions and remake themselves. 

Imagine transforming your firm into an organization that draws strength and success from the efforts of many rather than the overachievement of a few.  

Setting the Stage for Strategic Change

Before making forward-thinking changes to your firm's compensation system, it is important to understand the broader shifts reshaping the legal industry. By examining key industry trends, you can assess whether your firm is truly adapting and evolving to meet these challenges.

Critical Industry Trends

There is no doubt that the legal industry is in a period of rapid change, most of which is brought on by technology and the resulting changes in behavior and attitudes.  Compensation for lawyers is affected by these changes. Some of the most significant of these changes are as follows:  

Changes in client buying criteria

One of the main developments in buying mainstream legal services¹ over the last decade has been a move toward using a data-driven approach in selecting lawyers. The availability of online information, public ratings, and decision support tools (algorithms and metrics) injects significant objectivity into buying decisions. When this occurs, the personal relationship factors that previously dominated legal counsel selection become less potent².  

To compete, law firms must create 1.) organizational approaches to marketing and 2.) data-driven systems for service delivery. Being a good and likable lawyer is no longer enough.  The overall quality of your team and the process you offer now matter more.  

Heavily weighted origination-based compensation can conflict with these strategic moves.

Is your firm's compensation system equipped to handle this change? 

 ¹ Mainstream legal services in this context refer to a robust demand for and ample supply of lawyers. As the need for legal services becomes more unique, fewer lawyers are available and supply is limited. Personal reputation and track record outweigh other factors. We are not referring to the market for these services.    

² Clients in many practice areas are taking fewer cases to trial, which will create a shortage of experienced litigators. Many law firms will have to rely on superior systems and processes instead of rockstar litigators who attract business based on reputation.

   Changes in service delivery requirements

Service delivery is also evolving to meet client demands for more efficiency, faster turnaround times, and increased communication frequency. Rate pressures and task-level management are driving margins down. 

Case and project management tools are available to help law firms modernize their operations, reduce waste, and efficiently manage workloads. 

Law firms must look beyond the current definition of case management that mostly aggregates information into a matter record. Using task-based budgeting, real-time variance reporting, deadline management, and results tracking are all necessary.

Law firms also must meet the need for increased focus on collaboration, workload distribution, and attorney development. 

Heavily weighted billable hour-based compensation models can conflict with these essential strategic moves.  Smart law firms will create systems that will continuously monitor performance.

Is your firm's compensation system equipped to handle this change?

  Generational transitions and changing attitudes

Many first-generation firms still rely on their founding members to bring in clients. Predominantly, these lawyers have developed large client bases by working long hours and making many sacrifices in their personal lives and even their health.

Many of these senior partners wonder how they can successfully transition their practices to a younger generation with a different approach. These younger attorneys make less time to entertain clients, attend events, and join social and professional organizations. 

Law firms must consider the fact that career and personal priorities for younger generations have evolved. Today, many lawyers value a more balanced work/personal life schedule and flexibility. 

Success in this environment will require a firm culture that values collaboration and a wider sharing of benefits and responsibilities.

  Is your firm's compensation system equipped to handle this change?

Compensation must support strategic planning

At various points in a law firm’s existence, it is necessary to plan and implement strategies to grow or maintain viability.  Strategic initiatives related to growth, retirement, talent acquisition, and operational modernization require detailed planning and diligent implementation. 

When developing strategic initiatives, firms should consider whether their compensation systems stand in the way of change. For example, a firm strategizing how to transition from one generation to the next will likely require a different suite of incentives than its current compensation system offers. 

Does your compensation system enable your firm's strategic goals?

Creating a collaborative culture

With all the developments in technology and the changes in both buyer behavior and generational attitudes, firms must incentivize collaboration and teamwork.  Individual contributions still matter, but managing underachievement and overachievement are equally important.  

Moving away from the simple metrics related to billable hours, originations, and individual accountability is often a tectonic shift. After all, hard work, new business, and significant personal recognition all help firms to succeed. 

We aren’t suggesting that the critical success factors are not relevant now and won't matter in the future. New business is essential.  Lawyering is competitive, and getting results requires incredibly hard work.  Without great people, law firms have nothing. 

Closing the gap

We believe that the typical gap between underachievers and overachievers is unhealthy. Closing it will require three essential systems:

1. System based marketing and firm brand building
2. An attorney relationship management system
3. A supportive compensation system with a broader approach to rewards and consequences. 

Implementing these systems will create a foundation for building a collaborative organization that can compete in the modern legal marketplace. 

PerformLaw is a law firm management consultancy that specializes in law firm performance improvement. If you want to find out more about how we can help fast-track your firm's continued success, please contact us.