The matter of fairness in law firm compensation is a fraught one. Issues of transparency, partner origination, the gender wage gap, and lockstep vs. merit-based systems can all feed a firm’s anxiety when it comes to determining who gets how much. Add to this mix the issue of associate origination. How should firms compensate associates (or any nonpartner employees) who bring in business? The short answer is, most large firms don’t.
Typically, when associates bring in clients, the origination credit is passed on to a partner, with the associate receiving little more than a “Well done” from the partners—and sometimes they don’t even get that. There is also no guarantee that associates who land clients for the firm will be rewarded with an extra bonus at the end of the year. There are few large firms with mechanisms in place to assign associates origination or billing credit. How smart—or shortsighted—a strategy that is depends on your perspective.
Philip is a fifth-year M&A associate at an Am Law 100 firm in Dallas. (Lawyers are presented here with their names changed to protect them from professional repercussions.) He’s a powerhouse networker who, even at a young age, knew how to parlay personal and professional relationships into business. As a rising fifth-year, Philip cultivated a relationship with the manager of a hedge fund and convinced him to use Philip’s firm to represent the fund on an array of M&A transactions. The firm received in excess of $800,000 in fees from the hedge fund. Philip not only received no additional compensation that year, he wasn’t even thanked for his efforts. His response, unsurprisingly, was to take himself—and his hedge fund client—to a firm that acknowledged his contributions and compensated him with 10 percent of the revenue generated by the hedge fund. He was also promised that once he reached partnership level with the firm the client would be fully passed to him.
Jeffrey is a paralegal with a top 50 Am Law firm in San Francisco. While vacationing in Mexico, he met the general counsel of a Fortune 500 company who was in the market for legal representation. The two hit it off, and over the course of the next several days, Jeffrey convinced the GC to consider his firm as a contender for outside counsel. The GC had already identified a few firms with which he might do business. But he was sufficiently impressed with Jeffrey and his portrayal of his firm that he agreed to consider his proposal.
Jeffrey presented the client to the office managing partner when he returned, noting that legal fees in the first year could exceed $2 million. Jeffrey smartly asked for some type of origination credit; he proposed an end-of-year bonus or a small percentage of the company’s billings as recognition for his business-generation skills. The firm balked—and refused his request—simply because he was a paralegal. “In the end, it all came down to turf battles and egos,” Jeffrey said. “The partners couldn’t stomach that a nonpartner—much less a paralegal—had landed such a big fish.” Ultimately, he was so incensed over what happened that he left the firm. And the GC found representation with a competitor.
When it comes to nonpartner business generation, why is it so difficult for big firms to give credit where credit is due? From the outside, this looks like a no-brainer. After all, when business is brought in—no matter the source—the entire firm benefits. However, most large firms don’t feel as though they owe associates anything extra for bringing in clients, given the combined costs of salary, bonus, benefits and overhead per associate. In that light, any business brought in by associates is considered surplus for partners who have spent years cultivating their own books from which the associates are now benefiting.
Jenny, a fifth-year litigator in Chicago who brought a huge client to her Am Law 50 firm, doesn’t agree. “Like most Big Law associates, my hours bring in substantial revenue for the practice—and I’m pretty sure I’ve already covered my own overhead. In 2017 alone, I billed 2,400 hours with a work value of just over $1 million and collections that totaled $800,000. Still, I received no additional compensation when I brought in a Fortune 100 client to our group that had massive billings. I’m still trying to get my head around the justification for it.”
Sarah, a sixth-year banking and finance associate in Los Angeles, faced a similar situation at two different firms. She left one Am Law 25 firm after it refused her origination credit on business from a hedge fund client she personally brought into the firm (after multiple failed attempts by the partners to secure the fund’s business). In one year, the client generated $1.3 million. Her compensation? An extra $5,000 in bonus.
Sarah took the client to another top firm on the condition of being compensated for business generation. In the interview, she received multiple assurances from a partner that she would be fairly compensated and would be given origination credit for the fund. Soon after joining the firm, the fund brought in two massive deals. And the very partner who had given Sarah assurances regarding fairness and credit was the same partner who tried to steal origination credit from her. When it came time for bonuses, Sarah was awarded 2.5 percent of collections. She has since that left firm, as well.
Admittedly, small and midsize firms are more versed in addressing associate origination than their Big Law counterparts. However, a few big firms do have policies in place to compensate associates who bring in clients. Below are some of the compensation options that have been explored (though few consistently) by some large firms.
The End-of-Year Bonus
This is a compensation approach with two different formulas. The first involves providing a subjectively calculated bonus amount that is offered to the associate over and above salary and the standard annual bonus. It does not factor origination credit into consideration and is a bit of a black box approach, as the dollar amount and the determining criteria are left entirely up to the partners’ (or the compensation committee’s) discretion.
The second option involves consideration of origination credit and bases the associate’s bonus on a percentage of the total profitability generated from the client. This practice is exceedingly rare in large law firms, but a few firms have been known to offer this type of bonus to associates who landed highly lucrative clients for the firm.
The 10 Percent Rule
A handful of large firms have opted to allocate 10 percent of overall profit generated by a client to the originating associate. However, of the firms using this approach, a few don’t provide associates any credit for business generation until they reach their fifth year of practice.
Counsel or Partner Title
In situations where associates have consistently demonstrated their capacity to cultivate business, some firms have offered an early promotion to counsel or nonequity partnership. In such arrangements, there is likely to be a more equitable origination compensation model in place when clients are brought in.
I’ve worked with attorneys for most of my career, including as an outplacement and career counselor, coach, professional development consultant, diversity trainer and now recruiter. I’ve heard associates complain about not being compensated for business generation at every stage of my career. What I hear most consistently from partners is that their two most pressing concerns pertain to fostering associate professional development and stemming the tide of associate attrition. Research has consistently shown that the two are very clearly linked. So why is it that firms cannot see that paying associates for business they originate is paramount to keeping them?
This is not necessarily a high-volume retention strategy, per se, although a generous associate origination policy could certainly engender associate loyalty. Rather, this is about keeping the keepers—the superstars who’ve demonstrated early in their careers that they have that oh-so-rare spark for relationship building that eludes so many associates and partners alike. Having an associate origination policy in place is a strong indication that a firm and its partners genuinely support attorney professional development, and aren’t just providing lip service to what associates often view as an overused catch phrase.
Whatever your position on this matter, not compensating associates who bring in clients is likely a bad strategy, since business development is the lifeblood of any firm and someone who has a natural talent for cultivating client relationships is always going to be valuable—to you or your competitors. And while I’m more than happy to continue lateraling out the superstar casualties of Big Law shortsightedness, a far more wise approach would be for big firms—all of them—to implement origination, billing and compensation policies that are consistent, transparent and honor associates for efforts that are above and beyond their pay grade.
Evan Anderson is the founder and CEO of Placed Legal Search. Contact him at firstname.lastname@example.org.