Want Low Turnover and High Profitability? Focus on Merit-Based Compensation.
My company, Adam Leitman Bailey, P.C., turns 20 years old on January 3rd.
During the past 20 years, we have maintained an average retention rate of over 95% per year. We’ve been able to attract the best candidates, clients enjoy having the stability of working with the same attorneys, and the firm enjoys a healthy level of profitability as a result.
Why do we enjoy such a high retention rate? Is it the benefits package we offer, the company culture, the high morale in the office?
In part, it is all of these things. But in my opinion, money is the number one reason we are able to retain our attorneys at the rate that we do. We employ a unique merit-based compensation system that differs from most other revenue sharing programs.
In the usual revenue sharing system, Harry has the ability to make as much money as Sally, despite Sally working much harder and doing superior work. Our method focuses on the individual and essentially makes every individual their own company; how much they profit depends on how hard and smart they work as well as how effective they are at making sure the clients are happy.
The Merit-Based Compensation Program—Revenue Sharing
The program, at its essence, is individualized revenue sharing. Adam Leitman Bailey, P.C., is the only law firm in New York that provides this kind of payment structure.
Every attorney at the firm receives one-third of the billed time for a given client. The other two thirds go to expenses (one-third) and profits (one-third). Attorneys receive additional compensation for bringing in business, receiving up to fifty-three percent of their billable time if they brought in the client and worked on the case. That means that the attorney would receive 33 percent of the monies for working on the case and an additional 10 or 20 percent of any monies earned for bringing in a client.
When an attorney at any level brings in business, he or she receives a percentage of what he or she brings in on top of the compensation program. This can be up to twenty percent for top performers. However, our revenue sharing program is not based on bringing in business. Attorneys are not required to bring in business, and we do not have a minimum billable hourly requirement. Attorneys have the luxury of striving to make as much money as they can or have a more relaxed career by billing fewer hours.
The process is simple. A case is brought into the firm. A partner and associate are assigned to the case and may choose other members from the firm to assist the client. The attorneys record the time spent working on the case, which then gets computed into our database.
Here are a few examples:
- A senior attorney with a $625 billing rate x 2,500 billed hours per year equals $1,562,500. With a collection rate of 92% (the rate for 2015-2018), the firm would collect $1,437,500 for the year. The attorney would earn one-third of this amount, total compensation of $479,167.
- Assuming the same $625 billing rate x 2,000 billed hours per year equals a total gross compensation of $1,250,000. With a collection rate of 92%, the firm would collect $1,150,000 for the year. The attorney would earn one-third of this amount, total compensation of $383,333.
- At a $450 billing rate for some junior attorneys x 2,000 billed hours per year equals $900,000. With a collection rate of 92%, the firm would collect $828,000 for the year. The attorney would earn one-third of this amount, total compensation of $276,000.
For any company that can measure its employees based on a mathematical formula or another metric, our model keeps employees self-motivated and self-managed with lots of support. I can see some variation of this system working in about three-quarters of the companies I come into contact with.
Let’s take a restaurant, for example. Each server is assigned a number of tables. With the amount of information we have today, we can measure how long parties sit for a meal, as well as the biggest moneymaker — how much alcohol they order. Each server should know at the end of every shift how many tables they served, the amount of profit — net and gross — made, and the average time a party sat during a meal. If the server were to receive an additional piece of the profits when they hit specific goals or numbers, the food would come out faster, the tables cleaned more quickly, and the wines sold more often.
Of course, this can backfire rapidly with an overeager server — as it can in any business — but as long as the restaurant (or business) has checks in place to ensure the service is good, there wouldn’t be an issue.
Individualized Revenue Sharing Is Not for Everyone
Some unique variables must be considered when using this formula. First, the company must have enough work to quench its employees’ appetites.
At Adam Leitman Bailey P.C., no attorney has ever gone more than a week or two without having assignments as long as the other attorneys thought their work product was at the firm’s high standards. When an attorney has not been producing quality work, they have trouble finding assignments to work on as attorneys do not seek them out as collaborators. In this way, poor performers are naturally weeded out.
There is also a hierarchy of attorneys. Some attorneys are more sought out for work than others. Eventually, these stars stop accepting assignments from other attorneys and control their own caseloads — because if our firm’s attorneys notice their talents, so do the clients.
This merit-based system also only works at companies with employees that are ambitious and willing to work hard knowing that they must put in the time and effort at the highest level of excellence to earn a certain salary.
Lastly, the employees must have trust in the system. We have an outside accountant do quarterly reports on the numbers four times a year after each calendar quarter ends. Our attorneys are able to review their reports and numbers and have full access to the accountant for any questions.
The number one issue that arises — mostly for younger attorneys — is when it’s determined that the time spent on the matter exceeds the normal amount of time for the typical assignment. I always bring the attorney in to discuss the issue before cutting time, but I have the final say because not only do we need to provide a quality service, but we need to do it cost-effectively.
Raises, Bonuses, and Collections
The good news for employers considering this model is that no one ever asks me for a raise.
An employee’s raise is the amount of money they made above their salary in their yearly report. However, a constant discussion is whether to increase an employee’s hourly rate. Sometimes we need to tell the attorney to raise their rates, while other attorneys want to raise their hourly rates faster than the market can handle. When an attorney bills more than one-third of their salary and the money has been collected, the excess monies become the attorney’s bonus — payable either quarterly, or more typically, at the end of the year.
This revenue sharing system makes every attorney technically a partner. As such, they have an incentive to make sure the hours they billed are paid for by the clients. They are given monthly reports to see which clients have not paid their bills, and we expect the attorneys to work on the collections process. This participation could include making calls themselves or working with the accounting department to remain apprised on their progress. As a rule, we do not keep clients who do not pay their bills and are quick to withdraw from a matter or case if a bill is unpaid.
Because we set up a system where an attorney’s salary and income center on billing and collections, we have a duty to work with them to make sure the bills are paid and stop working on cases where the bills are not being satisfied. In addition, we sue clients who have not paid their bills for several months. This allows us to show the attorneys their hard work will not go to waste. All of the above has allowed us to have an enviable collection rate.
We Work for Our Employees
This is my personal creed. My employees work crazy hours, as if today were the most important day of their life—every day. I have never seen any social media site on an employee’s computer. We have been through hell and back together, and I’ve learned how loyal they are. I’ve hired some of the greatest people alive.
Flaws exist, and some of them drive me crazy. But when morale is high in an office, usually employees maintain their positivity. I do everything I can to give back to my employees and try to make them happy without getting in the way of productivity.
To that end, our benefits are extremely competitive. Everyone has their own office, and paralegal stations are as large as many other company’s employee’s offices. We provide food any time, all of the time, and it is always healthy. We pay for 80 percent of gym memberships to any gym preferred. We have Spa Fridays with manicures and massages every other Friday. Employees who arrive by nine and leave after eight receive dinner and a car home. We call our health insurance plan the Rolls Royce of plans; we self-insure dental insurance and eye-care insurance. We have holiday parties and happy hours, and employees control when they want to go out as a group on the company’s dime. Our office views are inspiring as well, and the office decor is immaculate and professional.
In confession, being cost-conscious when it comes to helping employees has never been our forte. We probably need to do a better job of monitoring our expenses for some of these activities. But I believe it is impossible to weigh the benefits of a happy employee against what you pay as an employer. These benefits really end up benefiting the company.
The biggest benefit of all, though, is compensating an employee through the individualized revenue sharing model. Do I expect most businesses to copy the above? No. But I do believe that by providing my firm’s operational plan, it can assist your business in making your own version. It may give you a few good ideas — and hopefully, lower turnover and maximum profitability in the future.
Adam Leitman Bailey is the sole equity partner at the eponymous law firm he built from the ground up into one of the foremost legal practices in New York. The firm, Adam Leitman Bailey P.C., focuses solely on real estate law and litigation and has become all but synonymous with the most important, bet-the-company disputes and deals of the new millennium.