Why Market Compensation Isn't Always the Right Compensation
When law firm leaders discuss compensation, one phrase comes up repeatedly:
"That's what the market is paying."
And while market compensation is certainly an important consideration, it's not the only consideration.
In fact, some of the most significant profitability challenges I see in law firms stem from compensation structures that were designed to win talent—but weren't designed to sustain a healthy business.
The goal isn't simply to pay market.
The goal is to create compensation structures that attract great people while still allowing the firm to grow, reinvest, and remain profitable.
The Pressure to Stay Competitive
Today's legal market is highly competitive.
Law firms are competing for:
experienced attorneys
lateral partners
specialized talent
future leaders
And when competition increases, compensation naturally becomes part of the conversation.
Many firms feel pressure to:
increase salaries
increase bonus opportunities
create richer compensation packages
match or exceed competing offers
Sometimes that's appropriate.
Sometimes it isn't.
The Risk of Paying Too Little
Let's start with one side of the equation.
I've seen firms that attempt to keep compensation as low as possible in an effort to maximize profitability.
The result is often predictable.
They struggle with:
recruiting
retention
morale
accountability
And frequently end up attracting talent that doesn't align with the firm's long-term goals.
Eventually, turnover becomes expensive.
Training becomes repetitive.
And growth becomes difficult.
There is absolutely a point where compensation is too low.
But Paying More Doesn't Automatically Solve the Problem
The opposite extreme can be just as dangerous.
Some firms become so focused on recruiting and retention that they create compensation structures that are unsustainable.
At first, those structures feel successful.
The firm recruits strong talent.
Revenue increases.
People appear happy.
But over time, cracks begin to appear.
When Compensation Starts Consuming the Business
One of the more common examples I see involves service-based compensation formulas.
A firm creates a structure that heavily rewards servicing work.
The intent is good.
Reward production.
Reward contribution.
Reward effort.
But eventually leadership starts noticing something strange.
Revenue is increasing.
Production is increasing.
Yet profitability isn't improving.
A Real-World Example
I worked with a firm where later partner compensation formulas had become increasingly generous over time—particularly around servicing work.
On paper, everyone appeared successful.
The attorneys were producing.
The firm was growing.
The compensation plans were attractive.
But when leadership examined the financials more closely, a problem emerged.
The compensation structures were consuming so much revenue that equity partners were no longer seeing the distributions they should have been receiving.
In effect, some non-equity shareholders were taking home nearly the same amount as equity partners.
The business risk and ownership responsibilities remained very different.
The financial rewards were becoming increasingly similar.
Growth Requires Reinvestment
One of the most overlooked aspects of compensation design is its impact on future growth.
A law firm needs capital to:
recruit talent
invest in technology
improve systems
build infrastructure
support marketing initiatives
As we discussed in Why Your Law Firm Compensation Plan Might Be Hurting Your Profitability. When compensation structures consume too much of the firm's revenue, growth becomes constrained.
The business loses the ability to invest in itself.
Compensation Should Support Profitability
This doesn't mean firms should underpay people.
Far from it.
Great talent deserves great compensation.
But compensation should be designed within the context of:
profitability
cash flow
growth goals
reinvestment needs
long-term sustainability
Not just recruiting objectives.
The Best Firms Find the Sweet Spot
The healthiest firms typically avoid both extremes.
They aren't:
dramatically below market
dramatically above market
Instead, they find a balance.
One that allows them to:
attract strong talent
retain high performers
reward contribution
maintain profitability
Those firms often have more flexibility, more stability, and greater long-term growth potential.
Compensation Is a Business Decision
One of the biggest mistakes I see is treating compensation purely as an HR decision.
It's not.
Compensation is:
an operational decision
a financial decision
a profitability decision
a growth decision
Every compensation plan influences how the business functions.
And every compensation plan creates incentives that drive behavior.
Sustainable Compensation Scales Better
The most effective compensation systems aren't necessarily the most generous.
They're the most sustainable.
They create alignment between:
attorney success
firm success
profitability
growth
And they continue working not only today, but years into the future.
The Real Question
Instead of asking:
"What is the market paying?"
Ask:
"What compensation structure allows us to attract great talent while maintaining a healthy, profitable business?"
Because those aren't always the same answer.
If your law firm's compensation structure is creating profitability challenges, limiting growth, or making it difficult to balance recruiting with financial performance, it may be time for a deeper evaluation.
I help law firms design compensation systems that attract strong talent, align incentives, and support long-term profitability and growth.