Law Firm Articles

How to Pay Your Practice Leaders

Law firm leaders often ask us: “How do other law firms compensate their practice group leaders?”

There are four main options:

  1. Pay them a fixed amount or stipend.
  2. Give each practice group leader (PGL) credit for management hours as if billed and collected.
  3. Take the PGLs’ service and performance into account in the compensation process.
  4. Do not compensate them for their service as practice leaders.

The four options can be described as follows:

1.  Stipend

Paying a fixed dollar amount, as agreed by the partnership and the practice leaders, lets everyone know in advance what the job is worth to the firm. It also helps each PGL calculate the cost and value of their management hours and discourages them from spending more management time than is necessary—as defined by their partners.

In our experience, the stipend amount usually fails to adequately compensate the most effective practice leaders. In other words, the best PGLs end up spending more management time than is compensated by the stipend.

2.  Hour Credits

Some firms allocate management hours to their practice leaders for compensation purposes. This might take the form of an agreed-upon number of hours, where each PGL is credited with, say, 150 hours as if billed and collected at the partner’s average effective rate, or the number of hours might vary from PGL to PGL based on group size, scope, and degree of difficulty. Alternatively, some firms ask their practice leaders to record their management time and compensate for the actual hours spent, up to a maximum number.

Generally, we prefer to see firms setting forth goals for each practice leader, evaluating the PGLs based on performance vs. goals, and compensating results, not just effort… which leads us to the third option.

3.  Subjective Assessment by the Compensation Committee

Subjective compensation of practice leaders allows the Compensation Committee to reward highly effective practice leadership where the PGL has clearly added value or achieved outstanding results. In the event of ineffective leadership or inattention to the job, we encourage firms not to penalize poor PGLs financially (which would discourage others from taking on the role) but to remove them from the practice leadership position.

In firms where the PGL role requires a substantial time investment, the firm should design a pay program that identifies the critical success factors for the position (generally and for each specific practice group), collects reliable information about efforts and results, delivers useful feedback, and compensates each PGL appropriately.

4.  No Compensation

In our experience, the best practice leaders don’t do it for the money. Nor do they take the job for the title, prestige, authority (as if!) or business development benefits. They take on the role because they recognize its importance, realize that they are the best qualified person in their group to do the job effectively, and see it as part of their obligation to the firm. They do the job without expectation that they can or will slack off in other areas of their work life; rather, they add the management time on top of everything else they already do. The busiest lawyers in the firm become busier.

Firms that seek to create good leadership through compensation incentives will find themselves disappointed. Becoming an effective leader takes time, experience, dedication, and a willingness to learn. Individuals who want the job for the extra money are often not qualified to excel at it and have not developed the kind of practice that engenders their partners’ respect—which is required to be successful.

How a firm decides on practice leader pay depends on the scope and scale of the job—which may vary from group to group—and how the partnership values the role and function of the practice leader. In a highly autonomous law firm culture (more common in smaller firms), partners who do not want to be managed will tend not to value the practice leadership role and won’t want to pay for it. In larger firms, partners tend to recognize the need for additional structure, policies, coordination, communication, consistency, and predictability, and are more willing to pay a “tax” to create and maintain effective structures.

Which of the four options do firms tend to choose? In our experience, most firms—by a large margin—make a subjective assessment of practice leader performance at compensation time.

Altman Weil’s 2011 Practice Group Performance Survey (the most recent available data) reported results that were consistent with our experience then and now:

  • 67% of firms had their compensation committees assess practice leader performance on a subjective basis;
  • 22% of firms did not compensate their practice leaders directly for their management responsibilities;
  • 6% provided management hour credits; and
  • 5% paid PGLs a stipend.

Notably, that survey also found that the factor that most significantly correlated with strong practice group performance was the amount of time spent by practice group leaders in the role. Firms in which PGLs were spending more than 250 hours per year in their leadership roles were much more likely to report superior practice group performance.

There are a variety of ways to compensate practice group leaders and each of them can be effective if put in place for the right reasons and administered fairly.