In the legal industry, demand for high-performing attorneys rarely ebbs and flows substantially with the legal job market. If anything, contracting margins across the industry means highly profitable attorneys are more valuable than ever. If a firm has an especially skilled and successful attorney in a sought-after practice area, it can assume he or she is regularly courted by rival firms.

Any firm would be troubled to lose a top revenue producer unexpectedly—whether to a competitor, disability or death—but small and mid-size firms that rely on a few “rainmakers” for a large portion of their revenue are especially exposed to this kind of risk.

Consider the hypothetical example of Brookhaven Law Group (BLG), which has 20 attorneys. Unfortunately, the attorney who led its health care practice unexpectedly leaves to join a competitor. While BLG’s portfolio of clients is relatively diverse, the health care practice accounted for more than 30 percent of the firm’s overall revenue, and now the practice finds itself in crisis mode.

To counter this risk, firms like BLG need to be proactive, identifying their “rainmakers” and developing a strategic compensation package aimed at retention. Firms also need to be able to insure against lost revenue should select attorneys experience a health challenge or other event that leaves them unable to work.

Top attorney retention

Compensation alone cannot guarantee that attorneys will stay at a particular firm, but the decision will be more difficult if they leave guaranteed money behind. Deferred compensation packages are an increasingly attractive tool for firms because they provide a powerful disincentive to leave and can be tailored to the individual needs of the firm and partners.

Non-qualified plans (NQPs), a type of deferred compensation, are a common and effective way to reward top performers. Unlike 401(k) plans, NQPs can single out key attorneys and offer premium benefits, such as a pool of money invested on their behalf. Access to the funds can be contingent on certain conditions, similar to stock options.

Two types of NQPs well-suited for law firms are salary continuation plans and restricted partner bonuses.

Salary continuation plans allow attorneys to be compensated after they leave a firm or retire, provided they meet certain conditions. BLG, for example, could continue paying top performing attorneys 40 percent of their salary for two years after they retire, as long as they meet performance goals and stay at the firm for a set period of time. There is also flexibility with this plan; money could be paid to attorneys or their families in the event of disability or death.

The restricted partner bonus, another tool used to retain attorneys, often defers compensation through the funding of a life insurance policy with cash value. Using this type of plan, the firm pays money into a life insurance policy as an attorney meets predetermined conditions, such as performance or tenure goals. In order to encourage the attorney to stay, the policy can be structured so that the firm receives all or some of the vested value of the policy if the attorney leaves before a set date.

A less common but nonetheless effective incentive to stay is a substantial long-term care or supplemental disability insurance policy. For attorneys considering retirement within a decade, a high-value policy that would normally be financially out of reach for them could be an important factor in deciding to stay.

Insuring capital

As with most professional service companies, key employees are the firm’s capital. When a firm is heavily reliant on a small group of attorneys, there is tremendous exposure to risk and it makes sense to insure them adequately.

The financial risk posed by an attorney’s disability or death can be mitigated through key person disability insurance covering highly compensated producers. This type of policy is similar to a restricted partner bonus, except that the firm is the beneficiary of the life insurance policy.

A typical policy of this type might cover 50 percent or more of a decline in revenue resulting from the loss of an attorney. This policy could also be combined with elements of a nonqualified deferred compensation plan to provide the attorney or his or her family with a portion of the benefit in the case of disability or death.

Retaining and incentivizing high-performers who bring in substantial revenue and maintain major client relationships is an important way to protect and grow a firm’s bottom line. Lucrative compensation packages that attract top performers and encourage them to stay—or insurance that protects the firm if they are disabled or pass away—are significantly less expensive and risky than trying to unexpectedly replace a key member of the firm.