Attorney compensation systems tend to evolve over the life of the practice. Unfortunately, with each new iteration, complexity increases. Every new scenario, side-deal or exception, creates additional burdens on the accounting department which results in difficulty in explaining the comp system to new hires. In many firms, the administration of these complex systems is so difficult that actual compensation numbers are generated only quarterly, or worse annually.
So, what’s the solution? Re-invent the compensation system from scratch? Not likely as this would be problematic. Perhaps an alternative would be to look for a way to improve operational efficiency. If the business rules associated with the process can be consolidated it may be possible to automate much, if not all, of this process.
The reality is that some of the data needed by the comp system may not even be included in the native accounting system. As an example, if attorney pay is not in the GL at the attorney level (Which it almost never is) then it, like other direct costs must be incorporated from outside systems. Entering this data is time-consuming and prone to error.
The next big challenge is how to allocate in-direct expenses to add to the attorneys’ costs basis. This can frequently be a nightmarish process taking countless hours of manual work.
Finally, applying the firm-specific business rules to how gross revenue and profits are allocated is always messy. The hope is that the firm can boil this down to a reasonable-sized set of variables with as few exceptions as possible. The reality is, however, that there will always be a need to accommodate one-off or subjective adjustments.
A well-designed BI tool provides a solution to all of the above challenges. When properly implemented, it will reduce costs and eliminate mistakes. Taking all of the labor out of the process means analysis can be done more regularly.
This gets us to the meat of the matter. What do we mean when we say “Proactive Compensation”? Simply stated, when the rules are well defined, and the process is automated, attorneys can see how their comp numbers are building up during the month. No longer left to wonder until accounting has finalized the process, attorneys can assess where they are in terms of goals and their own expectations at any point in time and will self-incentivize to achieve bonus criteria. Whether it’s billable hours, collected fees, or average billable rates, attorneys will now able to take matters into their own hands and will see the results of these efforts in near real-time.
Done well, a good proactive compensation system not only provides inertia towards goals for the current members but can be used as a recruiting tool as well. While nothing is guaranteed, reducing cost, eliminating mistakes, and providing real-time incentives are close to a win-win-win scenario as we are likely to see.