The Meaning of Pay
What makes lawyers happy? Is it the money, prestige, status? It seems most think so, at least in the beginning. It may explain why we make so many of them in the U.S. Despite the stereotype of the unscrupulous and venal ambulance chaser (think Seinfeld’s Jackie Chiles or Breaking Bad’s Saul Goodman), and the many lawyer jokes, the law is still well-regarded as a profession.
And it doesn’t hurt that it pays so well. And while pay is an important factor (which includes straight salaries or a share of profits), it’s not the only consideration. Of course, the relative importance of compensation and other factors in job contentment vary with the individual and the circumstance. Some are in it for the money. Many aren’t.
What else is there? There’s to have a purpose in life, or to aid their clients, pride in their profession or the firm, for companionship, and for the approval of their peers, their spouses and relatives. But again, some are in it for the money but the importance of money on the list of what’s important isn’t a constant among lawyers. It’s importance can also change for the same lawyer at different times in their life.
For some, their share of profits or salary is the measure of their worth which is quite distinct from the purchasing power and wealth that money itself represents. Many lawyers view their compensation as the value their peers place on them personally.
How the profession views its pay:
- Pay needs to be sufficient to meet financial obligations at a reasonable level for the recipient’s age and standing.
- Pay is viewed by the recipient as a measure of success in comparison with peers, law school friends, and other lawyers of the same age in the community.
- Pay is perceived as a measure of the lawyer’s importance within the firm or legal department in comparison with all other lawyers. It is a status symbol, and a very clear one.
“Financial rewards are not major sources of positive motivation in the modem industrial society, even though discontent with them inhibits performance,” stated Peter F. Drucker (in The Practice of Management, Harper . . . Row, New York, 1954).
An employee (or partner) who feels trapped in a low paying job will generally not perform well. But a young lawyer coming out of school who has a choice between a job in an undesired location at higher pay, or one in a preferred location for a little less, may choose location over a few thousand dollars a year more.
Problems with compensation can break up friendships and firms, cause employee turnover, and result in massive waste of energy within an organization.
“Few instruments of management evoke more powerful and complex emotions in an organization’s membership than its compensation policy,” wrote Malcolm S. Salter, Assistant Professor of Business Administration at Harvard, in Harvard Business Review, May, 1972. He continued:
The source of these emotions is a concept we call equity ... Researchers have framed several different concepts of equity, but there is agreement on two important points:
Compensation should be equitable;
It should be perceived as equitable by employees and managers alike.
Three perspectives on equity have special relevance to the design of compensation systems. Respectively, each of these defines equity through the individual’s preconceived, unconscious idea of what constitutes equitable payments in specific cases.
Comparisons of the total strengths—social as well as professional—that the individual brings to his job and the total satisfaction he takes away from it. [Also significant is the] relationships between the individual’s performance and reward.
Equity Pay: Paine’s PainA person’s concept of equity may change with time and circumstances. For example, B. Paine was hired as an associate lawyer. He is not native to the city and has no clients. In the course of time, he becomes the firm’s expert on wills and trusts and handles these matters for the other lawyers of the office. By the time Paine becomes a new partner, he is recording 1,800 billable hours a year, which he calculates will gross the firm $360,000 at his $200 per hour rate. Paine figures that he is underpaid when in his first year as a partner he earns $160,000. The argument that Partners Gooch and Twitty and six other partners brought in most of the work he performed carries little weight with him.
A few years pass, and Paine is now established in the firm and in the community. He has a good reputation, and generates clients of his own. His annual billable hours are now 1,400, which at his $240 per hour rate bring in $336,000. His earnings from the firm now come to $200,000. But he generated $215,000 worth of business, by his own private calculations. The shoe is now on the other foot. Partner Paine wants to be compensated both for the work done and for the business he brings to the firm. He does not want to “subsidize” partners and associates who bring in no business. He is even willing to admit that in his early years with the firm he was overpaid, but there is no reason not to change the system now to one which is more equitable.
Such problems regarding the concept of equity are difficult for a group of partners to handle. When these situations arise, impartial and knowledgeable outside assistance can render a valuable service.
Compensation Plans, in General
Every organization of lawyers must develop a compensation plan. But any organization which is unable to develop a plan understood by all will eventually find itself in trouble.
A compensation plan must recognize the needs for equity of the lawyers, the economics of the enterprise, the competitive factors of the labor market, and the goals and objectives of the organization. A plan which is satisfactory now may be inadequate next year. The compensation plan should be implemented only after objectives are carefully considered and the essential features of the plan worked out.
The compensation plan should be developed after broad consultation with those affected, and then well cirulated and understood.
The whole purpose is to let the work in the office flow where it’ll serve best, most quickly, and at lowest cost. The associate having too much business must not be afraid to part with it, and should be encouraged to do so. And when he does so, the system should protect his natural and proper interest and the money it brings.
Compensation Considerations in a Partnership Plan
A study made by for The Virginia State Bar provides this analysis of the elements in a partner’s compensation:
- In a professional partnership, the partners function in three capacities normally identified in businesses: (1) they are professional workers and perform a production function. (Lawyers paid a salary perform the same function in partnerships, and also in corporate law departments and government agencies.) (2) Partners function as managers in supervising legal work, and as general business managers in running the firm. (These functions also are performed by salaried lawyers in corporate law departments and government agencies.) (3) Partners perform the entrepreneurial or ownership function, putting up capital, taking risks and losses, just as the shareholders in any business corporation. The return for this last function is called profit in business enterprises...
- The objective of the Virginia study was to determine the profitability of law practice in the area of real estate. To determine real profit, it was necessary to assign to law partners and sole proprietors a value (or cost) for functions (1) and (2), production and management. This was accomplished by a comparison to the compensation paid lawyers employed in industry. Among the twenty-three law firms studied in detail for this project, there was found a range from a 34 percent loss (as a proportion of gross receipts) to profit of 35 percent of the fee dollar.
- The entrepreneurial aspect of a partner’s compensation includes performance in sales or marketing, general client relations, and risks taken in a firm’s initial years. The lawyers who start a new practice quite often take considerable risks and subsidize such an enterprise with periods of reduced earnings. Such intangible contributions must be considered in compensation. There are, today, continuing risks in ownership of a law firm, including poor earnings years and the risk of litigation against the firm.
- There follows a more refined itemization of factors which should be considered in placing a value on a partner’s performance. These factors must be taken into account in devising a compensation plan, and should be assigned varying degrees of importance.
Production of WorkWork billed and paid for is one of the fundamental components of partner compensation. Yet, in this respect the partner (or shareholder in a professional corporation) differs not at all from the salaried employee.
In determining compensation, some firms consider only the raw hours produced (which may or may not be billed and collected) because they have no system for determining exactly which of the hours are actually turned into dollars. If a firm keeps proper records, the hours worked should be converted into production and profitability figures before they are considered in compensation decisions.
ProfitabilityThe profit derived from work supervised or managed by the partner is important. Even in those firms which do not systematically assess the profitability of legal work, partners who handle the obviously profitable, or that which is thought to be profitable, often can command additional economic consideration.
Effective delegation of work to less experienced assistants enables a lawyer to be more productive at a lower cost (and thus results in greater profitability for the firm), while the “lone wolf’ type who does everything alone is usually less effective.
Bringing In and Holding the ClientWeight is given to almost all of the formal plans developed by law firms for “client catching.” Quite often, the importance given this function is exaggerated in the well-established firm. Doing good work, on time, is an important aspect of retaining clients and of bringing in new ones. Some of the systems in use at law firms don’t fully recognize this factor.
General ManagementManagement enables the firm as a whole to operate. Profitability of each client or matter can be considered in the compensation of managing cases. General management enables the firm to function, to exist, to pay its bills, and to prosper. Any compensation plan which fails to recognize the importance of management provides a disincentive to managers and courts disaster.
Delegation and TrainingThe future of every law practice depends on training a cadre of younger professionals, paraprofessionals, and support personnel to continue the firm’s work. Partners who’re good teachers and developers of talent, who engage in recruiting and who plan systems of personnel utilization must be encouraged by the compensation plan to continue to provide good work and to thrive.
Risk and InvestmentThe entrepreneurial function is a compensable factor for partners and shareholders of professional firms. Capital accounts are only a small portion of the total risk factor since the partners (shareholders) absorb any “losses” through a reduction in their own pay. Firms in which the founding lawyers are still active may also consider the risk these lawyers took in starting the firm. Most new law firms offer few financial rewards during their early days. These years are a part of the firm’s “investment” even though they cannot be formally capitalized.
Technical ContributionThe contributions a lawyer make to their firm, by virtue of special technical skills, is another important compensation consideration. Ideally, a law firm is an aggregation of special, mutually reinforcing talents. These talents may relate to legal specialties as well as to such law related talents as writing expertise, ability to formulate legal theories, and special abilities in debate and argument. In a given firm, the fees charged for litigation may not be very important nor profitable. Yet the ability to litigate is important if a firm is to maintain the respect of the local bar and its clients. Hence, the firm should be willing to reward litigating capabilities.
Client Following“Who’ll follow the lawyer if they leave the firm?” This question may be the ultimate test of a lawyer’s market value. This isn’t precisely the same as bringing in new clients or retaining them, since recognition and credit for this value is determined as the firm—or the senior partners of the firm—perceives it, not necessarily as it really is.
Participation in Bar Association ActivitiesIn firms where there’s a strong feeling of obligation to the law as a profession, credit may be given for participation in local, state, or national bar association work. Also, some firms with specialty practices which rely heavily on referral work from lawyers attribute much of the referral work to friendships and networks which develop from bar association work. Such firms are likely to encourage their members to participate in bar work and include it as a consideration in their compensation determinations.
Noteworthy Activities Outside the Legal AreaSome firms have members who’re well known because of political activity or charitable work. These firms may include non-bar related activities, especially as they contribute to client-getting and the image of the firm. This is another factor given weight in income division deliberations.
CompatibilityThe ability of a lawyer to contribute to the smooth-running nature of a practice may receive great attention in some law firms and none in others. In some firms, compatibility is considered only when a certain lawyer’s behavior causes complications such as high turnover of clerical personnel or frequent disputes within the partnership. Then, it can become a negative compensation factor. Other firms believe that an office in which things run smoothly and pleasantly is a culture worth cultivating. Those who contribute to such an ecosystem may also be rewarded.
SenioritySeniority is not as important a factor in compensation determinations as it was several decades ago, though it can still be in some firms. Some firms treat seniority by assigning points or percentages for years of service to the firm. Some recognize seniority in terms of voting rights, perhaps allowing a partner 2 votes in partnership matters after 10 or 20 years as a partner. This latter approach can have a bearing on compensation when the entire partnership is required to vote to confirm compensation decisions.
Compensation Plans: The Need for Flexibility & Goal SettingRigidity in compensation plans in professional firms can be dangerous. The relative contributions of the partners—or shareholders—change over the years. Formulas agreed upon in an earlier time as time and circumstances change can be difficult to enforce. Any rigid plan will ultimately violate the concept of equity. This is just as true when partners initially agreed on an equal share as when an unequal plan is developed.
Many law firms have found that the overemphasis on objective contributions (such as hours worked, profitability and seniority) at the expense of other contributions (such as management, business development and planning) is in effect the same as emphasizing short-term profitability at the expense of long-term continuity. To avoid this may require a great deal of willpower among the partners. But utilizing subjective and long-range criteria is much more difficult than relying on hard statistics.
Any compensation system should recognize that all partners may not be paid for the same contributions. Each type of contribution to the overall goals of the enterprise has a value. A good system will encourage cooperation rather than competition among members of a firm.
There’s agreement among many experts that compensation systems based on statistically measuring an individual lawyer’s performance by allocating credits for work production and client origination are counterproductive. They’ll often encourage internal competition rather than encouraging cooperation. Even though such data may not be the only criteria used for allocation of profits, the very existence of such records creates an atmosphere in which specialization is more difficult. It also encourages competition among partners.
You’d think there’d be enough competition between law firms to please even the most competitive of lawyers. Within the law firm team, a good compensation system must encourage utilization of all the talents available at the firm on a cooperative basis.
One critically important yet often overlooked feature of partner compensation is this: Not every partner does the same job. Each must be paid for those tasks for which they’re responsible. Lawyers and they roles they play aren’t fungible.
Statistical systems, as well as many of the evaluation systems, make the assumption that all partners of a law firm have the same assignments. Depending on the weighting of a system, be it one dependent on evaluation or a system of statistical allocation, either the production or sales function may be more heavily emphasized. Leadership and management functions are often unrecognized or given short shrift.
In any enterprise, there are individuals who’re engaged in production, management, marketing and sales, and various support functions such as personnel, finance and market research. In larger enterprises, these positions are distinctly different. Sales managers don’t assemble machines, production engineers don’t make sales, and chief executives are not engaged in either function.
In law firms, particularly in smaller firms, partners wear multiple hats—as owners, workers, salespersons, and managers. However, not every partner needs to have all of these functions and some partners probably should refrain from a few. The only thing that partners have in common, by definition, is the ownership function. A condition that is probably least important in terms of compensation.
Goals and ObjectivesA partner who heads a department or a branch office with the responsibility of a number of lawyers, legal assistants, and staff persons, who must also manage case acceptance standards, work quality, timeliness, and other management functions, may be paid more as a manager than as a working lawyer. In a corporate law department, that’d certainly be the case. Compensation and evaluation systems must consider the agreed upon, assigned functions of a partner in establishing a compensation relationship. To assist law firms in judging each individual based on the tasks that are assigned and agreed upon, an emphasis on goal setting and review as a management and compensation technique is often best.
Goal setting requires that each partner (associates may also be included) write out proposed goals in advance of each year. The proposed goals should include hours and billings, marketing activities, management responsibilities and professional/ community service goals. The stated goals will differ for each individual. A firm may, however, suggest certain standards of production as appropriate, particularly for younger firm members.
The goals as drafted by individuals are usually reviewed by the firm’s departments, executive committee or another review body for two reasons: 1) the goals must be reasonable for each individual, and 2) the goals must be coordinated so that the sum of individual goals fits properly into a firm’s overall business plan and budget.
The Goals of GoalsThis means that the review authority may suggest alterations in an individual’s goals. Most commonly, such alterations will affect billing objectives or marketing/sales involvement. But adjustments may also involve the amount of effort given to professional and community service, attendance at continuing education functions and other professional activities.
Late in the year, the firm is then in a position to review achievements against predetermined goals. This review may be better for partners than any other form of evaluation. To the extent that goals are precisely measurable, such as in hours and billings, little counseling or evaluation is required. One hits or surpasses the target or falls below it. With respect to other goals, individuals should be encouraged to engage first in self-evaluation. Were specific marketing activities successful? Did a speech at the national XYZ conference produce inquiries regarding services? Was an article that was authored actually published? Were the new associates hired of acceptable or expected quality? Does the new computer system work?
This process of goal setting and review will provide a firm with a good deal of information about each of the partners. That information can be most useful in setting compensation.
Most firms make it a practice to have partners draw out funds on a scheduled periodic basis. Some firms, however, permit partners to obtain checks from the bookkeeper at will. This system—or rather, this lack of a system—is generally difficult for the bookkeeping department and may result in some partners taking out excessive amounts and therefore ending the year in debt to their fellow partners. Specific dollar amount drawings paid monthly, weekly or on some other schedule are consequently desirable since they are more orderly. They also permit better financial planning and cause less accounting work.
Such flat amounts may constitute an advance against a percentile interest of each partner in the profits of the firm. Alternatively, the drawings of partners may be akin to a salary and may be fixed in amount and relationship to the amounts paid the other partners. Some pay plans may allocate a fixed drawing, equivalent to the partner’s salary as a working attorney and may divide profits above this amount on a ratio different from the basic drawing amounts.
There are some firms which don’t pay interim drawings but rely on each partner’s ability to carry themselves for long periods until distributions are determined by the managers of the firm. In a few firms, substantial distributions are made only at the end of the year. This system is, of course, quite disadvantageous for the younger, lower earning partners who find themselves in debt by year’s end.
Overdrawing in Professional Corporations
Some law firms pay partners at a high level throughout the year, even when cash flow isn’t sufficient for these payments. These firms will, in effect, borrow from banks in order to pay their owners.
When a partnership maintains this practice and doesn’t generate enough revenue to cover all the partners’ draws, the net effect is for the partners go collectively into debt. The interest paid by the partnership may be deductible but the borrowed amounts aren’t considered taxable income.
However, when this scenario is created in a professional corporation, the results can be quite different: The corporation borrows money and pays it out which may result in a corporate deficit. Unless the corporation has had previous years in which it reported a profit and paid income taxes, the loss simply accrues. The individual owners may report earned incomes in the amounts of their compensation from the corporation. Incremental amounts are taxed as high as 39.6% at the federal level plus whatever state tax applies. The result may be that the corporation borrows $1.00 to pay its owner. The lawyer may keep a portion and pay the rest in taxes. Interest is paid on the full dollar borrowed. Obviously, it’d be more economical for the lawyer to borrow personally from a bank, rather than to take an inflated paycheck from the professional corporation.
Percentages and Points
The simplest form of income division among partners is to allocate to each partner a percentage of the earnings of the firm. In the firm of Pine Elm & Oak, percentages may, for example, be allocated as Pine 45%, Elm 30%, and Oak 25%. This is the simplest of all systems and it works very well in many small firms.
A problem may arise when another partner is added. In the above example, let’s assume that Associate John Apple has been made a partner. If the firm wants to remain on a percentage basis, this’ll require that each of the partners divest themselves of some percentage of their interest in the firm in order to allocate income to Apple. This can be emotionally difficult for some partners and generally results in the complication of fractional interests.
When a firm stays for too many years on a percentage division system the emotional impact can be disquieting and disturbing to the younger as well as older partners.
The point system is also advantageous in changing the relative interests of existing partners. As previously noted, any firm that won’t, from time to time, examine the contribution of each of its partners and make adjustments won’t remain a firm for long.
Statistical systems were made famous by Reginald Heber Smith, the former managing partner of the firm of Hale & Dorr, Boston. Writing in the American Bar Association Journal in 1940, Smith described, in part, a system used in his firm. Since that time, many other law firms have adopted systems for maintaining records of the production and profitability of work based on the Hale & Dorr approach.
Some firms have used the results of statistical systems directly in the compensation of partners. This means that if Pine were to have achieved 31% of the statistical credits of the system, he would be allocated 31% of profits. It might be fair to say that this wasn’t Smith’s intent.
Where this direct application of statistical records-to-compensation has been made, it has sometimes resulted in firms that function more like a series of individual practitioners than as larger law firms. Although it’s useful, and perhaps necessary, to maintain a careful record of the contribution of each partner and associate to the welfare of the firm, it’s simplistic to think that all of these contributions can be measured in terms of clients obtained, work done, and profitability of assignments. The other factors listed earlier in this chapter—general management, risk and investment, technical contribution, and client following—aren’t adequately measured by statistical systems.
Most firms should consider the yield of a statistical system as an important factor in making profit allocations between partners—but this should never be the only consideration.
If you were to review a list of factors often considered in income deliberations, you could see how limiting these types of statistical systems might be. For the firm bound to this kind of system, it can create an environment of myopia for making important determinations and decisions. Partnerships operating under this rigid system will frequently find partners very unhappy with the system. The result is valuable contributions made to the firm often go unrecognized in a partner’s income. For example, a partner who’s taken the time to develop a training program for associates may have his production statistics adversely affected under a strict formula system when, in actuality, by doing so he’s contributing to the future good of the firm. The result of this system is generally a neglect of management, training, planning and other functions which go unrecognized by such a system.
The simpler statistical systems used by smaller firms generally allocate credit for business obtained and work done so that each fee is entered twice in the firm’s book. When profitability is also measured, a third entry may be necessary.
A firm wanting to bring in more work might also want to place as much emphasis and credit on bringing in business as in doing the work. On the other hand, a well-established firm that has all of the work it can handle and doesn’t need rapid growth may place a credit by a factor of three or four for work performance as for bringing in business.
One of the most difficult problems in all credit systems is how to allocate of credit for business obtained under various circumstances. Allocating credit for obtaining clients is simple in some situations, but in others it can be quite complex. Firms using credit allocation systems generally develop policies with regard to allocating credit for business obtained over a period of years. Some also find it necessary to establish a review committee. Still others leave it up to the discretion of the partner initially contacted to determine the credit allocation.
Suppose Partner Elm first works for John Smith. In the course of this work, Elm involves Partner Oak because of Oak’s expertise in Smith’s problem. Six months later Smith comes up with a new legal matter and approaches Oak directly. Question: Who gets client credit?
Another common occurrence is that client Smith may send client Jones’ business to the firm. Jones asks for Oak. Question: Who gets credit?
Pine begins to develop business from First National Bank. After a period of years, all of the firm’s partners are involved in various areas of the bank’s activities. Question, who gets credit after five years? After ten? Eventually the bank relies heavily on Apple and places him on its board. Question: Does Pine still receive all the credit?
John Williams walks into the firm’s office and asks to see “a lawyer.” Question: Who gets credit?
There’s no one correct way to answer all these questions. That’s up to the culture and discretion of the firm. They may be debated and decided by a firm as the firm’s needs and the partners’ equity may dictate. In any event, they’ll need to be resolved if a credit system is to work without continuous confusion and debate.
Many firms have established a period of time after which a client is regarded as a “firm client” and thereafter no credit is given for obtaining the business. Other firms, after a period of years, reduce the amount of credit. Instead of continuing to give full credit for business obtained, over time they provide a smaller credit.
Purchase of Work
An alternative to the division of credit for securing business is to regard the lawyer obtaining a client as the manager of the matter. As manager he may then call on the services of those of the firm’s lawyers who are most capable of handling the client’s problem at the lowest price.
This approach has operated successfully for a number of law firms. A description of one such system that’s operated successfully over several years follows:
Basis of the Plan
Each attorney who brings a matter into the office acts as the “account executive” for that matter. They’re responsible for managing the matter to its satisfactory conclusion. If the obtaining attorney chooses not to manage a matter, he may turn it over to another attorney who can take it on. However, the obtaining attorney in that case will receive no credit for obtaining the work.
Each attorney and paralegal is assigned a billing rate for the year. The “account executive” purchases time from the other attorneys, at his own discretion, at 85% of the handling an attorney's or paralegal’s billing rate. The “account executive” is free to set the billing for the client at the assigned rate or at any other rate they feel is appropriate.
Time records are maintained by all attorneys and paralegal assistants.
Each of the partners with managerial responsibilities is assigned a budget of hours for management activities including the training of associates. He’s credited in the system for such activities at 85% of his billing rate.
Retainers paid in advance are credited to the account executive when received and debited as funds are reallocated to other attorneys who’ve performed services.
Figures are accumulated on all producing personnel including associate attorneys and paralegal employees. These figures are considered in their compensation among other factors considered.
An associate will not be an account executive on any matter, but will serve only as a “subcontractor” by selling their time to the partners of the firm at 85% of their billing rate.
In contingency matters, attorneys who perform services receive credit for work performed monthly.
When a matter is concluded or, in the case of continuing clients, at the end of each year the account of the responsible attorney (the account executive) is adjusted so as to deduct all credits paid to other attorneys in the firm. He is then credited with “profit” on the matter. If they’ve expended more professional effort than the fee justifies, they may end up with a “loss” resulting in a deduction from their available credits. On the other hand, if they bill the matter at substantially more than standard fees they may end up with substantial excess over the 15% called for by the discount rate.
After operating under this plan for a time period, one firm made the following observations:
- The plan encourages the associates to work long hours—generally considered a requirement for associates at this firm.
- The associates and other “subcontractors” don’t have to worry about whether or not the bill is paid—they receive automatic credit by functioning as subcontractors.
- The plan encourages business development by partners because time can be purchased at a discount. “Mr. Jones” could be the second highest scoring lawyer in terms of credits and yet while he worked the smallest number of hours.
- The plan causes better review of the value of a potential new matter by the partner before he obligates himself to buy the time of “subcontractors”.
- There’s no problem with business obtained credit—a problem in many other profit distribution systems.
- Bookkeeping is simple and generally easy to keep up to date.
- The plan provides an excellent overview of what the “subcontractors” are doing with their time.
- On the counter side, the evaluation indicates that there’s little incentive for associates to improve their efficiency since their credits in the system are based on time expended. However, with fixed fee matters the “account executive” will be reluctant to use inefficient subcontractors. Consequently, an associate who does not perform well will likely find it difficult to have access to more work in the future and their performance in the system will suffer.
Under a lockstep approach, a law firm’s compensation plan is predetermined. Firms with a lockstep compensation plan generally assign interests on an annual basis, based on the number of years a partner has been a partner, up to a maximum number of points after 15 or 20 years. For example, a firm may have a system whereby a new partner enters into the partnership with 10 points and receives an additional point every year until he has a maximum of twenty-five points. At this stage they and all other partners that have served as partners for 15 years will share equally.
Some firms operating under the lockstep approach have reported that it serves them well and avoids controversy. However, other firms find that the lockstep approach can cause partner turnover because it makes no provision for “superstar” performers and may instead reward mediocre partners in the same amount with superior talent or work habits. As was stated earlier, one of the requirements of an accepted compensation determination is that the amount resulting must be viewed by the recipient as a measure of their value as compared to all the other firm’s lawyers. The lockstep approach fails to meet this criterion.
Some firms note a lack of accountability under this system. A partner may simply stop working some years prior to retirement. Nevertheless, the unifying effect of the lockstep system makes it popular in quite a number of large firms.
Another approach to compensation planning is a “peer evaluation” system. Under this system, a firm sets its own criteria for the value of a partner and the partners are reviewed in an evaluation set by the other partners. In some cases, criteria are weighted by the value which the firm places on them. For example, dollar production ratings could be valued at twice that of management contribution, etc.
A firm can then allocate compensation based upon a collective evaluation of individual performances in various areas. These might include business development, billings generated, management of staff, recruiting, and administration. Weights can be assigned to categories which the firm believes are more important. For example, in a young, small firm seeking to establish itself in a community, business development might be worth 50 points and administration might be worth only 5 points. The weighted values can then be multiplied by the points assigned to each individual during the collective rating process. Then, point totals can be converted to a percentage share in the compensation pool.
In small firms where the partners work together on a daily basis, each partner may have sufficient knowledge of the diligence, talent, and contribution of each of the other partners to make a peer evaluation judgment without any additional information. In larger firms, however, it is sometimes necessary to have back-up materials on dollar performance of lawyers, special contributions to the firm, and other criteria included in the peer evaluation plan.
It is entirely possible to devise combination systems that include fixed amount payments, distributions based on statistical systems, and possibly also discretionary distributions, percentage interests, or any combination of these.
Let us assume that Pine, Elm, and Oak expect to have $200,000 available for distribution to the partners during the year. They might allocate base compensation to the partners as follows:
- The partners could allocate the next $40,000 of compensation on the basis of the results of a credit system such as one of the systems described above. Any remainder might then be distributed (1) at the discretion of the partners, (2) equally, or on the basis of some fixed percentage which may differ from the proportions of the base compensation.
- Another example of a combination system utilizing seniority and peer evaluation is illustrated by the approach used by a large law firm: First, minimum “guarantees” of compensation are made to all partners. Then, the partners are divided into four groups based on seniority. Group A consists of partners who have been partners for ten years or more. Group B consists of partners who have been partners for seven years or more, but not more than ten years. Group C contains partners with four to seven years of ownership standing and Group D consists of partners with fewer than four years as partners. Each group has units assigned to it as a group, i.e. Group A has 600 units, Group B has 500 units, Group C has 400 units, and Group D has 300 units. Each group votes through a peer evaluation plan as to how to allocate the units given to that group. The resulting allocation of units is applied to 85% of income. After this is done 15% of firm income is distributed by secret peer-evaluation ballot on a firm-wide basis. All data from the accounting department are made available to voting partners at both voting stages and each partner is allowed to prepare a lobbying statement for himself before voting takes place.
In these matters law firms are not alike. The incentives which work well in one law firm may not work the same way in another.
Determining Which System to Adopt
The basic outlines of a firm’s compensation plan can remain in place for long periods of time or they may change or by modified with frequently depending on the firm’s needs. However, the relative standing of the partners and the components of the pay plan should be reviewed every year or two.
There is, unfortunately, no magic formula. Nor is there a scientific method for setting up or revising compensation plans. Most firms do so by negotiation between the partners. When income is on the rise, such negotiation is generally amicable and easily resolved. It is more common to encounter difficulty when income is static or declining.
In some firms, a strong senior partner or a small committee of senior partners effectively controls compensation. When other partners have a high regard for such individuals, that system often works well for long periods of time. It works well, that is, when the senior partners do not become greedy.
In more egalitarian firms, a negotiation process involving all of the partners may occur. The culmination of that process is generally a vote of the partners.
The “Compensation Committee” in some firms asks each partner to submit information regarding his or her desired number of points (or draw, percentage, whatever), and also to suggest the appropriate amount for every other partner. A compilation of such suggestions, modified by the committee, may then be submitted to a partnership meeting for ratification or modification.
An example of one firm’s compensation philosophyThe following is the text from one large firm’s philosophy regarding compensation and its terms of partner participation:
Partner Participation Criteria
This paper is intended to describe criteria to be applied by the Management Committee in determining the participation percentages or compensation of partners. It's hoped that this statement will enable partners to channel their efforts in directions the Firm considers productive and also to accept and understand the judgments of the Management Committee as to partner participation in the net profits of the Firm.
The Committee has concluded that it will not follow a wholly objective, mathematical or "formula" approach to the task of determining partners' compensation. Rather, the approach will involve the exercise of its judgment with respect to a series of nine factors or qualities, some of which can be objectively measured or assessed but others of which require a more subjective evaluation.
These nine qualities the Management Committee will consider in its determination may be described as follows:
Judgment and integrity
Partners of the Firm are expected to maintain the highest standards of honesty, good sense, practicality, fairness, restraint, decisiveness and professional ethics.
These qualities are essential traits of any person who commands the respect of clients, professional peers, subordinates and the general community. Particular reputation for these qualities will enhance the individual partner's stature and will contribute significantly to the Firm's progress and vitality.
Quality of work/professional ability
This factor refers to the partner's ability to produce work products which are of the highest professional quality and which, in consequence, reflect favorably on the Firm's reputation for legal excellence. It also refers to the partner's ability to provide a model of legal competence and scholarship for the younger attorneys in the Firm. While this factor is difficult to judge on a comparative, partner-to-partner basis, it is nonetheless an essential element in any fair compensation system. Partners must know that the quality of their work is as important as its quantity and that the Firm will recognize the value contributed to it and to its clients by a partner whose work is consistent with the highest standards of professional expertise.
This factor represents the partner's capacity and record for attracting to the Firm and/or maintaining profitable legal business. A successful law practice requires constant attention to those activities which lead clients to select and retain the Firm as its counsel. A partner's alertness and effectiveness in the stimulation of new business is a quality which the Firm must recognize and reward to a substantial degree. Similarly, the Firm will recognize and reward the partner who devotes time to the task of new business development.
This quality is intended to embrace such traits as (a) the partner's capacity to organize and direct difficult legal matters beyond the one-lawyer stage of complexity, (b) the partner's capacity to win and maintain the confidence, respect and friendship of clients, (c) the partner's ability to maintain effective control of or contact with a wide range of simultaneously pending matters and (d) the partner's ability to manage matters under his care in a manner consistent with a reasonable profit to the Firm (which includes timely billing and collection of fees) and with appropriate regard for the workload of partners, associates and other personnel working with the partner. In addition, this factor specifically recognizes the value to the Firm of a partner's success in referring or permanently delegating to another partner or associate the full responsibility for a given client's affairs where that action is appropriate and tends to enhance the Firm's overall productivity. These traits and abilities are essential to an office of our size which handles a variety of major multi-lawyer matters and which depends to a substantial degree on its ability to service large corporate clients with a variety of lawyers making different contributions in satisfying the client's needs.
Constructive firm work/firm management
Office management activities, which consistently occupy a substantial share of the time of certain partners, are vital. Those who fill administrative functions essential to the Firm's operations are entitled to be compensated for the time devoted to these efforts. These functions include the roles assigned to members of the several Firm committees as well as those provided on an ad hoc basis by partners.
This quality refers to the partner's standing among his/her colleagues in the profession. Professional stature is enhanced by success on behalf of clients, by gaining positions of responsibility in bar association work, by publishing articles, giving lectures or speeches and otherwise undertaking assignments which tend to win the professional respect of other lawyers and of existing or prospective clients. Partners who undertake efforts which lead to these kinds of assignments are helping to build the overall image and reputation of the Firm; these activities should be recognized in measuring their contribution to its prosperity.
This factor refers both to the quantity of hours devoted to professional matters of Firm clients as well as to the value of those hours (when related to the partner's hourly rate). In addition, the compensation system will recognize the diversity of the assignments on which chargeable hours are recorded, and to the extent possible, the partner's efficiency or productivity in the hours spent on client matters as well as the value of the hours spent in terms of the Firm's ability to collect revenues which match the partner's hours and billing rate. This factor is probably the most objective of all the criteria to be considered in the compensation determination and lends itself better than any other to a comparative judgment among partners. Other things being equal, the partner devoting a relatively high number of hours to client matters should be compensated more than the partner with a substantially lower number of chargeable hours.
Compatibility and Cooperativeness
The work of a large law office requires partners to collaborate with each other and with other office personnel on professional assignments as well as on matters of an internal or administrative nature. Those partners who consistently exhibit a willingness to cooperate with or to observe procedures fairly designed to support the common effort make a valuable contribution to the Firm's well being. We value greatly the sense of a real partnership among us and those who contribute to this spirit should be recognized in the overall compensation.
Seniority, Tenure and Current Compensation
It is important to recognize in the partner compensation process the value of seniority and tenure among the partners. Those partners with the larger number of years with the Firm (or its predecessors) bring a measure of wisdom, maturity, stability and professional experience to the Firm which is essential to support its continued growth and development. Other things being equal, a partner with more seniority or tenure with the Firm will be entitled to greater compensation than a more junior partner. On the other hand, a partner's age or number of years of service with the Firm will not, standing alone, be considered a basis for determining compensation.
Another related consideration is the partner's present and historical level of compensation. This factor, at the very least, is intended to mean that each partner's contribution to the Firm will not be considered afresh each year; rather, considerations of fairness require that some weight be given to the partner's present compensation level and to the desirability of avoiding wide annual fluctuations in a partner's compensation level. This result is appropriate given the financial interdependence which characterizes a true partnership.
When other methods fail to produce amicable solutions, some firms obtain the assistance of consultants, who, in effect, may mediate among the partners.
The compensation plan must provide incentives toward the achievement of a firm’s goals. Consider the following case in point.
Hoppe and Scotch was one of those law firms which grew from a sleepy little firm in a sleepy little village to a large and robust firm in a major metropolitan suburb by the seventies. The twenty-five partners and seventeen associates shared in a very prosperous practice. They had established a degree of specialization, engaged an MBA Administrator, and built a lovely office building. But both management and departmentalization remained problematic.
The firm was managed by an executive committee which gave grudgingly of its time. Specialization was recognized only in one very minor area, and most of the firm’s lawyers gave the concept lip service only. Associates were assigned to individual partners. The firm had decided to adopt a managing partner concept but could not find a willing candidate, nor did some of the members of the existing executive committee want to continue to serve.
While an investigation indicated that a number of factors were involved, a key ingredient in the firm’s disorganization was that the partner income division plan provided negative incentives to both specialization and managerial activity. Partners were allocated percentage interests annually, based on recommendations of the executive committee and subject to change by the entire partnership. Although the origins of the procedure were obscured by time, the partners had, historically, given great consideration in their income deliberations to statistics of work billed by each partner. And therein lay a major part of the problem with both management and specialization.
Partners who became involved in a well-paying matter would retain it; since there was no provision for charging the firm for management time, partners were reluctant to reduce their billable efforts in order to manage the firm. Clearly, a revision in the compensation plan was necessary to have a specialized firm or a properly managed one.
The compensation of shareholders in professional corporations may in many respects be similar to the compensation of lawyers in partnerships. The major course not open to professional corporations is the simple allocation of percentages or units of participation in advance of a determination of available cash, as in a partnership. A similar result, however, can be achieved through a combination of salary and bonus. When such an arrangement is desired, it may be good tax strategy to insure that share ownership is not in the same relationship as income.
Shareholder-employees are, above all, employees of the professional corporation. Employees in business may be paid on many plans. In addition to salary, these plans may include commissions, deferred compensation, productivity payments, group incentives, piece-rate pay, and a host of other arrangements. Profit sharing is an accepted method of compensation for senior professional employees and managers in business corporations. These concepts, suitably altered, may be utilized in a professional corporation. But almost any employee is paid a salary and the employees of a professional corporation should also be paid a salary in order to insure the continued treatment of the enterprise as a corporation, for tax purposes.
It is entirely possible to utilize within a professional corporation some of the compensation arrangements shown in 1.09 “Combination Systems.” What has been termed a draw in a partnership will simply be called a salary, and should be stated as such in corporate records and employment agreements.
The compensation paid by a professional corporation to its shareholder employees includes both reportable income and non-salary benefits. Non-salary benefits may amount to a significant portion of total compensation, especially for firms with a defined benefit pension plan. For older highly paid lawyers, the benefit portion of compensation may be in the range of $100,000 to $150,000 per year, considering pension, life insurance, medical benefits, and social security. Therefore, the compensation plans of professional corporations must give recognition to benefit costs.
Salary Plans in Corporations and Government Agencies
Business corporations and government agencies large enough to employ their own legal staffs are generally highly managed. Most often, such enterprises utilize professionally developed salary administration plans or civil service plans for the white collar, managerial, and professional employee groups. Staff lawyers, as well as accountants, engineers, scientists, and other such employees, are generally included in the management level compensation program.
The amount of flexibility in such programs as well as the methods of establishing pay grades or classes vary in detail. In general, most corporate programs rate each position on the basis of a number of factors, and they may assign numeric scales or weights to each factor. Some programs use a ranking method in which a committee is required to review a position and rank it above, below, or on a par with other positions.
Factors considered in the various plans may include such items as the number of persons supervised, fiscal responsibility measured in dollars, prerequisite education and experience, reporting level, accountability for profit, physical requirements, mental requirements, hazards encountered. Whether lawyers fare well or not depends on the particular plan and its administrators.
In one business situation where such a plan was installed, lawyers responsible for approval of commercial contracts were ranked higher than lawyers with responsibility for antitrust problems. This plan placed a heavy weight on fiscal responsibility, measured in dollars.
The attitude of the appropriate management official of the corporation may be important in providing the necessary flexibility for correcting such imbalances. In some large corporations, the pay grades of key levels of attorneys are rather arbitrarily pegged into the management pay structure, since it is difficult to use the same job evaluation formula for lawyers as for line executives. Once a few lawyer pay grades are tied into the general structure, it is a much easier matter to determine the relative value of the levels of lawyers to each other by using a simple forced ranking system, in which all of the lawyers are placed in a sequence of most valuable to least valuable. Pay grade lines are then drawn according to staffing needs and budget.
Special problems occur in corporate salary programs when compensation for one occupational group rises at a rate faster than compensation generally. In the fifties, this problem was prevalent for engineers, whose salaries escalated more rapidly than those of other groups of employees. In the later sixties and early seventies, lawyer compensation rose at a greater rate than that of most other occupations employed by corporations, causing some dislocations in salary planning.
Use of Salary Survey Information To Establish Salary Plans
The use of salary survey information has long been one of the considerations in the establishment of individual salaries and also of whole compensation plans. However, it is only one of a number of factors which have a direct and indirect influence on compensation, and it is not always the most important factor.
The Labor Market
The labor market is a concept developed by the fraternity of economists; it has its uses—and abuses. There is no neat little market for lawyers. Instead, the labor market in which each individual finds himself is distinctly his own, although it overlaps the labor markets of many other people. The labor market in which an employer seeks to fill a position merges with many other labor markets and also has individual characteristics. If we can imagine a series of overlapping circles, somewhat like the symbol of the Olympic Games, we have a picture of labor markets.
An illustration, from the point of view of the employer, is that he is trying to fill a specific, described job, or he wants to find an employee who can accomplish identified, needed work. The employer, therefore, is not just looking for a lawyer.” He is seeking, for example, a patent lawyer with a certain technical background (let’s say chemistry), and possibly one admitted to practice in a certain jurisdiction, one with certain experience and skills to be employed in a specific location. Further, he may have strong ideas about the need to develop the new employee into more responsible work.
If the larger labor market for registered patent lawyers, at the time the employer is recruiting, consists of 500 persons who are willing under some circumstances to change jobs or who are out of work, chances are that only a few meet most of the specific needs of the employer. These few, for the purposes of this vacancy, are in the employer’s specific labor market.
A particular lawyer, who is one of the people in whom the employer is interested, may have had experience as a corporate lawyer as well as a patent lawyer, and therefore finds himself fishing in two labor market ponds. However, he may not want to move to the city where the employer is located. His labor market is not the same as the labor market of the employer.
Despite the complexity of the labor market concept, the availability of individuals with certain skills and the demand for these skills at any given time have an interacting effect on compensation. Salary surveys provide measures of this effect. During the past decade, the general shortage of certain legal skills has unquestionably exerted an upward pressure upon compensation in private firms, government and corporations, and upon the fees charged by lawyers.
A major consideration of management is to maintain a rational and defensible relationship between the compensation of each of an organization’s employees. There are in use many formal wage and salary plans, all of them dependent in some measure on subjective evaluations and none of them perfect.
To fit into a salary program the diverse technical skills, management functions, sales functions, and other specialized occupations which exist even in a small enterprise is a complex and difficult undertaking. A formal wage and salary administration program should relate the salary of a particular lawyer with not only the salaries of other lawyers employed by the organization but also with the compensation of the company doctor, the vice president for finance, and the offset machine operator.
Industry and Geographic Patterns
The compensation structure of each company or legal organization relates generally to an industry pattern; in some cases it may also relate to geographic compensation patterns. For example, historically the oil industry has been among the highest paying industries, although that situation has changed somewhat in recent years. Textile manufacturers, on the other hand, were and are among the less well paying industries, because of the competitiveness of the industry and the large use of manpower. Also, manufacturers generally have higher compensation patterns than utilities, etc.
The size and strength of an employer will affect pay scales. Larger, stronger employers may pay a premium in order to attract and hold the best employees. Figure 5-2 shows pay distribution of nonsupervisory attorneys employed by corporations according to years of experience.
In geographic terms, employers located in the Northwest would be expected to pay higher compensation than those in the Southern United States. Because of the national scope of many corporations and also because of the postwar union drive to eliminate formal regional wage differentials, geographic differences are no longer as pronounced as they once were. Increasing thought is being given, however, to paying living cost differentials for certain locations, particularly New York City.
Studies of factory workers, where output can be precisely measured, show conclusively that an individual who is outstanding at a task may produce more than twice as much as the average worker and several times as much as a marginal worker. Many lawyers have observed substantial differences in output among the typists who aid them.
Such differences apply just as well to professional workers, although their productivity and value is far more difficult to measure. Most corporations and some larger law firms attempt, at least subjectively, to measure the productivity of lawyers.
Corporate and governmental compensation programs usually provide a salary range for each position and for professional groups; they often allow movement among several position levels for employees with quite similar responsibilities. A typical salary range, if calculated from the minimum figure, may go up by at least 50 percent of the minimum (from $75,000 to $150,000). Adjacent position levels usually have overlapping salary ranges.
All of these devices are designed to permit management to retain competent employees. The individuality of salaries usually is apparent when employees with identical classifications and similar experience are paid different salaries, which happens in most organizations. This individuality of compensation must not be overlooked.
Surveys of earnings and compensation are useful in salary administration and fixing salaries insofar as they provide a range of information. The most useful range is generally that between the 25th percentile and the 75th percentile, called the interquartile range. One quarter of all positions fall below and one quarter of all positions fall above this range.
A salary survey to be useful must, of course, be statistically sound. It must draw information from a reliable cross section of the labor market studied. The jobs included must be defined. It is not useful, for example, to place into a common group the general counsel (heading a fifteen lawyer department) and a working attorney, though both may have the same number of years of legal experience. Nor is it useful to compare the compensation of the general counsel, who heads a two-man law department, with the general counsel of a major corporation, who supervises more than one hundred professional employees. Finally, it is not useful to compare twenty-five-year-old lawyers with lawyers twice their age. Some kind of maturity refinement is required to utilize fully compensation survey information.
There have for some years been annual studies of the compensation of lawyers employed by corporations. Positions are defined in these studies by level of responsibility as a lawyer and the data are analyzed by industry, position, years in practice, and geographical factors. The charts shown in this chapter are based on these studies.
A comparison between the salaries paid by one employer and those paid by other employers for similar positions is a valid consideration in the establishment of compensation policy as well as in setting the rates of individuals. In using such information, however, care must be taken that the data used are appropriate, and there’s the rub. All of the factors suggested in this section interact to determine just how much a particular lawyer will be paid this year: his labor market, the company’s labor market for his job, his and the management’s evaluation of his work and value, the pay of other employees of the company, and the pay pattern of his locality and industry.
Comparisons of Salaries to Private Practitioners
Lawyers employed in corporate law departments often try to compare their salaries with published information regarding the earnings of partners in private practice. It is true that some lawyers can move from a law department to employment by a law firm as an associate; in a few, rare cases such lawyers may even be offered partnership. In making any comparison, however, it is important to keep in mind that a lawyer at a corporation generally receives many benefits in addition to his or her salary that are not received by partners in private practice.
Such non-salary compensation as retirement contributions, the employer’s share of social security deductions, medical and other insurance benefits and corporate perquisites of other types generally add a value (and cost to the employer) of from 25 to 50 percent to the nominal salary of a lawyer employed in industry or government. Thus, a partner’s ‘K-1‘ from a law firm might need to show a nominal income of $150,000 to $225,000 in order for the partner to receive a salary comparable to a law department attorney who is earning $130,000. (A K-l is an Internal Revenue Service form for the reporting of a partner’s share of firm income, credits and deductions.)
In addition, a partner with a law firm has entrepreneurial risk and management duties not associated with a salaried position for which the partner must be compensated.
One can more readily compare salaries paid to associate lawyers in private practice with salaries paid by law departments, although the benefits package in industry is often better than in law firms. This comparison, however, can only be maintained for the first few years of practice, since qualified associates graduate to partnership after that time.
Formal Salary Plans
Business corporations generally have formal corporate salary administration plans. Lawyers and law departments often fall within the jurisdiction of such plans. Therefore, it is important that those individuals who manage law departments have a general understanding of the subject.
A compensation program has to achieve three basic management goals: first, it must retain those individuals who are doing an adequate job for the company. It is a lot cheaper to retain someone than to find, train and orient a new person.
Second, the program has to stimulate employees to provide their best effort on the company’s behalf. It is not enough just to keep a body, you have to keep a mind busily at work, producing legal work which is imaginative, fending off attacks upon your clients, and all of the other jobs involved in a legal operation.
Finally, the compensation level has to be sufficient to attract other lawyers when they are needed. The employer has to be competitive in the labor market. Those are some of the corporate goals of a compensation program. There is another obvious ingredient. Labor costs have to be such as to permit the corporation to make a profit
There are a number of current problems in compensation and employee relations. First, the nature of compensation is changing. In former years, base pay and bonuses, that is cash, were a far greater component of total compensation than they are today. Now, medical insurance, dental plans, educational assistance, company stores, retirement benefits, company savings plans, stock options, and a host of other noncash benefits are added to base pay. Some, but not all of these, relate as a percentage to the amount of compensation. Benefits may total 40% of wages. Nevertheless, insofar as employees are concerned, direct salary is the single, most important ingredient of their compensation. It is on the basis of salary that employees are satisfied or dissatisfied with their pay.
Compensation represents a complex transaction between the employee and the corporation. Scholars assert that the transaction may be variously considered as an economic, psychological, sociological, political and ethical exchange, and it may be all of these and more than the sum of them. Most basically, compensation is an exchange of labor for pay. That makes it an economic transaction. Secondly, it is a psychological transaction. One of the reasons people become unhappy with their compensation is the relationship of their pay to the pay of others. Compensation is an absolute measure of the value of an individual to an organization. Corporations can use other rewards than money, such as titles, offices and perquisites, but if an employee is paid less than someone else, this is a clear signal as to status irrespective of the size of his office or his title. A basic rule in compensation is, never assume that employee compensation is really confidential. Pay will be compared.
Compensation is a political transaction, particularly at higher management levels. Powerful men are paid more. Less powerful men may be paid less. Questions of ethics arise often in compensation. There are phrases used like “a fair day’s pay” or “a just wage.” Concepts of equity and inequity abound in salary administration. Each employee must decide for himself whether his compensation is “fair” or not.
Young lawyers today have great expectations. They want to lead a team of other lawyers at age 30 and head a department at age 40. They assume that they can rapidly achieve substantial responsibility. They are impatient with the slowness of their progress and what they give in return is often less than might have been expected in former years. Such expectations, including the higher dollar expectations that go with it, must be contained and explained by a salary administration program.
Factors in Salary Determination. The actual salary or salary range of an individual results from the interaction of four factors.
Kind of business and organizational philosophy. Some industries are known as high wage industries. An example would be a basic manufacturing company or a corporation in the computer field. Every organization has a basic philosophy. Some companies quite deliberately want to be the high wage operation in their industry segment. Other corporations, as a matter of philosophy, aim at a middle course in compensation, and some firms, particularly smaller ones with financial difficulties, may seek to minimize compensation. That is, they want to pay as little as they can to accomplish the basic objectives of compensation, which are to retain, to stimulate, and to attract.
Every job is in a labor market. Labor markets are a lot like the Olympic rings, they overlap. Some labor markets are entirely local. For example, if you wanted to hire a file clerk, you would not look more than a few miles from the location of the office in which the job is to be located. On the other hand, if you want to hire a general counsel or a specialist in a certain area of law, you might conduct a regional or national search.
Location also affects compensation. A lawyer employed in the metropolitan area of New York would, on the average, be paid more than one employed in Los Angeles or San Francisco. The lawyer employed in those California cities would, on the average, be paid more than colleagues in Chicago. The Chicago lawyer would probably earn more than a like individual employed in New Orleans or in Miami.
The performance of an individual in a job affects his or her salary. Organizations have various types of performance appraisal systems. Typically, they require superiors to rate employees at intervals, to counsel employees, and also to base salary advancement recommendations on the results of such appraisals. Performance appraisal fixes the actual location of a salary between a minimum and a maximum value assigned to a defined position. It is not part of the salary administration program, but it certainly is part of the salary administration game.
The salary range of a position is determined by the placement of the job in the job hierarchy of the employer. That is the essence of salary administration. The aim of the salary administration plan is to create a hierarchy, to define the compensation for each step of the hierarchy and to have the whole structure rationally related internally. That means that there has to be a rational relationship between the pay of the file clerk and of the department head, and this is quite a job.
The Objective of Job Evaluation.
The general purpose of job evaluation in compensation administration is to provide a measuring instrument that sets forth the relative position of jobs in the organization’s hierarchy, based on job- related contributions.
The basic methods of comparing jobs are: (1) the ranking method, (2) the classification method, (3) the factor comparison method, and (4) the point method. Several modifications and variations of these primary methods have been developed, as well as combination systems. Basically the objectives of all of these are to break a job down into components so that the components can be more easily compared than the whole job. You cannot compare a whole job with another whole job in an entirely different kind of work. But by isolating certain factors, for example, physical requirements or training requirements, one can begin to make comparisons.
The first step is always the study of the jobs that exist in an organization. That means writing job descriptions. In order to be useful, job content must be understood by the analyst, and must be delineated in such a way as to facilitate comparison of the various factors that are to be compared. A job analysis process collects information regarding duties, responsibilities, and relationships of the position, together with information regarding requirements for successful performance. In that process one determines what factor or factors place one job at a higher level than another. Such factors are yardsticks that can be used to determine the relative positions of jobs. Because these factors are the basis on which jobs are compared, choosing compensable factors is an important part of the whole process.
Most job evaluation plans use employee responsibility, skill, effort, and working conditions as compensable factors. There are about 100 items that can be subordinate to these major headings. Skill, for example, can be measured by education and experience. Mental effort may be differentiated from physical effort. Responsibility for people or dollars can be delineated.
The salary administration process tries to separate the incumbent from the job. It views a job as an abstract group of duties for which one can define require merits, evaluate the ongoing abilities needed, and the like. The personnel professionals use the term “job evaluation” to mean the comparison of jobs in a formal and systematic procedure in order to determine the relative position of one job to all other jobs in the earnings hierarchy. This separation of the incumbent from the job is where most people have difficulty in the implementation of programs. Job evaluation is only a first step. It is an aid in determining relative wages. Its results may be only one of the factors used in devising an internal salary structure.
Job evaluation views a job as a grouping of work tasks. This is an arbitrary concept, requiring careful definition by the organization. Lawyers don’t always fit into this process too well. Quite often, legal jobs change with each assignment. They are not always task-oriented. A job may be routine 95% of the time, but a sudden emergency or difficult case may make the other 5% worth more than the routine. In professional occupations, knowing what to do under certain stressful situations may defy the definitions required by task evaluation.
Factor Comparison Method.
Many companies operate under a factor comparison method of job evaluation, like the popular Hay Plan. The system was originated by the late Edward Hay of Philadelphia. This system does not always work well for company lawyers, however.
Every job contains a number of factors. For example, in one system, the factors are listed as skill, effort, responsibility and job conditions. Each of these is subdivided, so that skill is the composite of education, plus experience, plus initiative or ingenuity. Effort is composed of physical demand and mental or visual demand. Other programs or plans would break factors into five major groups. For example, (1) mental requirements, physical requirements, (3) skill requirements, (4) responsibility, and (5) working conditions. So far, so good. It all seems very scientific. But consider the following. Every one of the 11 sub-factors in one system is assigned a number of points or a relative value. These range from a low of 25 to a high of 110. These values are assigned quite arbitrarily. How values are assigned can substantially affect the placement of a group of jobs in a hierarchy.
In order to develop the scheme, the salary administrator uses words and phrases in a systematic, stylized way. The key phrases on, for example, “know-how” are from primary to elementary vocational through seasoned technical-specialized through professional mastery, which is the highest level. That is cross-related to managerial “know-how” and human relations skills required. Again, there are keywords like “minimal, diverse and broad.” These words must be consistently applied by the salary administration staff to achieve a homogeneous result.
We have already seen that the assignment of weights to factors is an arbitrary process. Hay uses a factor entitled “accountability.” That is dollars of impact. And that is where law-related jobs are often misunderstood. For example, in the first assignment the author had as a consultant with a corporate legal department, a Hay Plan had been installed in a major utility. When the salary plan results were announced, the law department found that its commercial lawyers, who dealt in very large contracts, were coming out better than its antitrust lawyers. The commercial lawyers had “accountability” for multi-million dollar deals. The antitrust folks were not held to be responsible for money, although they constantly practiced preventive law to keep the company out of expensive and damaging antitrust legal actions. Preventive law is difficult to quantify in dollars.
Steps in the Classification Method.
The steps salary administration planners go through are these:
Obtain job information. That includes writing descriptions and writing job specifications in terms of the compensable factors.
Separate jobs by title. That means such classes as clerical jobs, administrative management jobs, professional jobs, etc. Quite often a somewhat different set-up, criteria, and scales are used for each.
Select compensable factors, as previously discussed. They must be isolated and each must be given a weight.
Develop grade descriptions. Almost all salary plans consist of a series of grades. The grades usually overlap each other. Each grade ultimately is assigned a range of points, as well as a range of dollars.
Select key jobs and study them carefully, then place them on the scale. That enables a comparison of all other jobs to these key jobs. That helps in placement.
All of this is relatively constant as long as job content does not change or the business does not change its form of organization. The relative value of jobs to each other should remain more or less the same. Of course, sometimes an incumbent changes the job and that means that the job has to be redefined and re-evaluated. But it is then a different job.
What does change from time to time is the dollar values assigned to jobs. In most programs for professional positions, there is a 50% spread from the minimum value to the maximum value of a job. For example, $40,000 to $60,000. Many programs make it more difficult to obtain increases as one approaches the maximum value.
Salary administration people have a very difficult job. Any job that is supposed to keep everybody happy, and control costs in as critical an area as pay, is going to be a very political one. Salary administrators in corporations like to speak of their salary plans as though they were dealing in a science. Factors, points, values, job grades, and ranges made up of minimum and maximum amounts, and the like, are only a convenient art form. They are not a science at all, any more than the legal or the patent process is a science. Salary administration is an art form.