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Rethinking pay day
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Rethinking pay day

If money doesn't make the world go round, it certainly plays its part in attracting and retaining high performing staff. A number of firms - spotting the flaws - have tossed out traditional…

If money doesn't make the world go round, it certainly plays its part in attracting and retaining high performing staff. A number of firms - spotting the flaws - have tossed out traditional remuneration models, and are testing the waters with something new, Zoe Lyon writes.

The value of the traditional law firm partnership model is increasingly being questioned, as a number of innovative firms start to prove that things can be done differently - and seemingly with success.

With the rise and rise of the mega-firms both in Australia and overseas, cracks in the system have begun to show - flaws with time-billing (think Keddies), increasing rates of depression and a surge of disenchanted junior lawyers checking out of the system for good.

Among the many aspects of the law firm model being revisited by these upstart firms is remuneration, which - truth be told - can be make or break when it comes to snapping up top talent. Paying top dollar is one thing, but the brains behind these innovative new firms believe that thinking outside the square, and structuring a remuneration system which properly aligns the incentives of staff and the firm, will be the way of

the future for law firms.

John Chisholm, founder of law firm consultancy Chisholm Consulting, believes that traditional law firm remuneration models have a number of failings.

For example, a problem with the traditional lock-step system - which many law firms have now moved away from, or at least adapted - is that it provides no incentive for partners to perform at their best.

"I really have seen it where you introduce a partner, and he's performing well for a 50-point partner, then he automatically goes to 60 points because that's part of the deal next year and he's doing okay, but at 70 points he's not performing," says Chisholm. "I've seen it where full 100-point partners are a bit miffed that some partners get a free ride. Equally, I've seen it where younger partners say that they're doing all the work and the older blokes are sitting back."

Learning from the free-rider experience, many law firms have moved towards remuneration models that factor in personal performance. However, taken too far, these models can create another adverse incentive - for partners to hold onto work that might be better done by a different practice group.

"Some firms unfortunately still have this formulaic approach where they say: 'If I bring in so many fees then I'm going to get rewarded this [amount].' That promotes an 'eat what you kill' approach," he says. "Firm's talk about hunting in packs and cross-selling their services, but sometimes performance structures go against the grain of that - it just encourages people to hoard work and not share it out ... then they wonder why people get disenchanted."

However, Chisholm believes that some firms are now getting the balance right - developing remuneration models which take into account financial performance as well as a broader range of factors. "The better firms not only [require] partners to meet certain financial levels, increasingly they also have to meet other performance targets. They've got to share work around, they've got to abide by the values of the firm, they've got to generate business for the whole firm - it's a lot more [about] holistic performance. That's been a big change over the last three or four years."

Nick James and Christian Hyland, founders of Sydney-based firm Optim Legal, have created a remuneration system based on several criteria. Firstly, lawyers receive a percentage of the fees they bill (which can be significant - up to 60 per cent for senior lawyers), which is topped up by an additional percentage for work they've personally brought to the firm. As an incentive to share work around, lawyers also receive a percentage of any work done by other practice groups for a client they've introduced to the firm.

"The whole idea is to share," Hyland says. "We've heard lots of stories about what works and what doesn't work in law firms as they grow, and one of the things that seems to trip people up is this idea of hoarding client work. Part of creating better conditions is creating a collaborative team-based approach. We want people to hunt in packs, work closely with their peers and celebrate wins across the whole group."

An additional feature of the firm's model is that clients have the option to pay 20 per cent less or 20 per cent more of the fees they are billed, based on the level of service they receive. This provides an incentive for lawyers to distribute work to the practice group or lawyer best equipped to handle it.

James added that having a remuneration model based significantly on personal performance, but with this added incentive to share, helps drive a high-performance culture, which clearly benefits the firm as a whole.

"We want to create a high-performance culture and a transparent meritocracy ... a set of highly attractive conditions for lawyers who perform very well," he says. "The model is based on a fairly direct principle, which is that an organisation that aligns the interests of the organisation with [the interests of] its people can be very powerful."

Another lawyer bringing something new to the market is Ken Jagger, the managing director of Balance Legal - a Perth-based firm which launched in July last year. Balance Legal operates on a secondment basis, with lawyers working on a project-by-project basis out of clients' premises. Jagger has also done away will time-billing, with clients charged on a fixed-fee basis.

The firm's remuneration model, in contrast to Optim Legal's, is based on salaries (which Jagger says are commensurate with top-tier salaries), as well as a profit-share scheme which all the firm's staff take part in. Jagger himself describes the profit share scheme as "a bit of a communist system". A percentage of the firm's profits are set aside every six months and all staff - legal and non-legal - receive an equal share.

Like the Optim model, Jagger says the idea is to generate a culture of collaboration. "We're trying to drive behaviour that goes towards the general good, not just individual performance," he says. "One of the difficulties of the traditional law firm structure - particularly in the big firms - [is that it] can lead to silo behaviour, where [partners] worry about their individual performance or their discrete team's performance, rather than what's in the interests of the business."

When asked about the possibility of staff "free-riding" off the equal profit-share arrangement, Jagger says he is not concerned. "We simply don't have any lawyers who are not putting in, so there's no need to differentiate as far as we're concerned. And we regard our support staff as just as integral to the success of the business as our lawyers, so we include them completely."

Jagger says the model has been well received by lawyers. "The feedback has been great. They like a model which drives firm success rather than [one which] leads to a searching examination line-by-line against billable targets every year, and then [the lawyers] having to justify why they should get a full bonus."

In a similar vein to Balance Legal, Advent Lawyers - a Sydney-based firm launched in December last year - operates on a secondment basis. However, Advent's remuneration model more closely resembles Optim Legal's, with lawyers remunerated with a direct percentage of the fees they bring in.

The firm's managing director, John Knox, says that lawyers are attracted to the firm's structure and remuneration model because they receive a significantly larger share of the fees they generate than they would in a large firm. In addition, because the firm has minimal office space and therefore saves on overheads, it can afford to charge clients considerably less.

"If you look at the big firm model, if a firm charges a client $100, $20 usually goes to the lawyer and $80 stays with the firm, so the lawyer only gets a very small percentage of the job fee. Whereas, with our model, we don't charge $100, we charge $60, and the lawyer gets $30 and we get $30. ... The lawyer always gets a significant share - at least a 50 per cent share - of the job," he says.

According to Knox, the model is such that lawyers can expect to earn as much as those in a top-tier firm, but with fewer hours' work. "A lawyer with us could make what they'd make at one of the big firms but working around eight to nine months a year, rather than eleven months," he says.

It's still early days for Advent Lawyers, and Knox admits it can't keep lawyers at full capacity all of the time, but he says similar models which have been operating for longer have proven very successful overseas.

"The concept has been extremely successful in the US and UK. [US law firm] Axiom now has 250 lawyers, 95 per cent engaged," he says. "If you were to design a law firm now, you wouldn't - no disrespect - design a Mallesons. You'd design something a bit more nimble, a bit more innovative. People can access everything they need in this day and age over their laptop. You don't need 10 floors of office space and libraries."

Slater & Gordon is one firm proving that it's not just the smaller, younger players that can think out of left field when it comes to remuneration. The firm started up in 1935, but hit the media spotlight in 2007 when it became the first firm in the world to publicly list.

The firm's remuneration model is primarily based on salaries, but increasingly more of the firm's staff - selected on a merits-based assessment process - are taking up equity in the firm under the firm's ownership plan.

According to the firm's managing director Andrew Grech, the number of staff with equity shares has grown from seven to 52 since 2006. "So whilst the firm has doubled in size in that time, it's still a very significant shift," he says.

Compared with a traditional partnership model, staff are considered for the scheme relatively early in their career - lawyers from the five-year post-admission-experience level - and Grech says an even broader-based scheme is being considered.

He believes promoting broader-based ownership is beneficial for both staff and the firm. "The opportunity to be allocated shares early is a realistically achievable goal relatively early in your career. The ability to be allocated equity in a cumulative way over your career creates a lot more flexibility and allows you to have more control over your own destiny. Whilst it requires a long-term focus, it does not require you to make a 'whole of life' commitment. It's very different to the 'all or nothing' approach of a lot of partnership systems."

The firm also benefits, says Grech, because the scheme helps it to retain high-performing staff and manage succession more effectively.

In addition to the ownership plan, the firm offers shorter-term bonus incentives for high-performing staff, assessed on a broad range of criteria.

Grech explains: "It might be someone who does exceptional work in the pro bono area which enhances the brand's reputation. It might be someone that shows leadership in human resources management or in marketing and business development. The idea of that is to try and reflect that people contribute differently, and that there are different ways of valuing and measuring people's contributions, provided you do it in a transparent way.

"Overall it produces a better result, because, at the very least, people understand the criteria against which they're being assessed."

Admittedly, it's probably a little too early to make a comprehensive assessment of how these firms' structures and remuneration systems stack up against those of more traditional law firms. Whether they are better able to attract and retain quality lawyers still remains to be seen.

But they have laid their cards on the table - and at first glace they've got some pretty impressive hands, which will certainly give the legal market something to think about.

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