MOTIVATION OF NEW ZEALAND LAWYERSA CLOSE EXAMINATION OF THE ‘THIRD-THIRD-THIRD’ PRINCIPLE.                                ...
C ONTENTSIntroduction: Third-Third-Third Principle ..........................................................................
I NTRODUCTION : T HIRD -T HIRD -T HIRD P RINCIPLEOne of the most significant changes in reward management in the last 20 y...
P ROBLEMS WITH THE TTT P RINCIPLEThe TTT principle often fails to take into account variables that effect an employee’sabi...
such a scheme. Budgets need to be both achievable and motivational. For exampleif a lawyer is required to record 8 billabl...
The first reflects a lawyer’s actual recorded hours and time spent on a file, thesecond is what was actually billed for th...
Recommendation:This is essentially an exercise that needs to be taken by the firm. Clear boundariesshould be put in place ...
are able to receive guaranteed rewards for their hard work across busy periods.There is an element of risk here to the emp...
offered, the opportunity to save money, lifestyle, including social and community                                   11netw...
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Mirkin. J (2011). Motivation of New Zealand Lawyers, Jonny Mirkin

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An examination of remuneration in the New Zealand legal system

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Mirkin. J (2011). Motivation of New Zealand Lawyers, Jonny Mirkin

  1. 1. MOTIVATION OF NEW ZEALAND LAWYERSA CLOSE EXAMINATION OF THE ‘THIRD-THIRD-THIRD’ PRINCIPLE. Jonny Mirkin, 2011
  2. 2. C ONTENTSIntroduction: Third-Third-Third Principle ............................................................................................................... 3Problems with the TTT Principle ............................................................................................................................. 4 Performance Systems ..................................................................................................................................... 4 Charge-out Rates ............................................................................................................................................ 4 Impact of Legal Aid ......................................................................................................................................... 5 Non recoverable fees ...................................................................................................................................... 5 Unattainable budgets ..................................................................................................................................... 6 Stolen fees – the problems with file sharing .................................................................................................. 6 The junior lawyer ............................................................................................................................................ 7 The firm’s ability to provide quality work ....................................................................................................... 7 Billing practices of the firm ............................................................................................................................. 8 Geography and Nature of the Firm................................................................................................................. 8Conclusion & Recommendations ............................................................................................................................ 9
  3. 3. I NTRODUCTION : T HIRD -T HIRD -T HIRD P RINCIPLEOne of the most significant changes in reward management in the last 20 years hasbeen the extension of performance-related pay beyond the shop floor to white- 1collar and professional staff, who traditionally were paid straightforward salaries.It has become common in New Zealand law firms to introduce a performancerelated pay scheme known as the “third-third-third principle” (TTT Principle). In thisreport I strip off the accepted front of such a scheme and identify who it reallyfavours and whether it provides adequate motivation to staff solicitors.Many firms today are tying their solicitors’ performance directly to their salaries. Bysharing the risk with the employees, the firms are in turn offering a chance to earnmore bottom line pay. Legal firms have adopted a payment by results (PBR) systemcalled ‘piecework’. Typically pure piecework schemes are rare, yet they are commonin Zealand firms.Under the TTT principle, the firm takes the output of the solicitor, in billable hours,retains one third as profit for the firm (partners or principle), applies one thirdtowards overheads and direct costs for the work and then pays the final third to thelawyer as remuneration. This is illustrated in figure 1 below. It follows logically thatthe lawyer now has incentive to bill as much as possible in the year to maximise hisincome. If a lawyer puts through $120,000 in fees they might expect a $40,000salary whereas if they are able to bill $150,000 then their salary could increase to$50,000. 1/3 Profit to firm $ 1/3 1/3 Payment to Contribution empoyee as to Overheads salary/bonus Figure 1: Break-down under TTT Principle1 I. Henderson (2008). “Human Resource Management for MBA Students.”
  4. 4. P ROBLEMS WITH THE TTT P RINCIPLEThe TTT principle often fails to take into account variables that effect an employee’sability to benefit from such a system. Often these variables are outside of thelawyer’s control and if they are not anticipated and dealt with, the motivation thatthe scheme is supposed to provide will fail.Rewards have to be effectively managed to secure the maximum utilisation of 2human assets, and to attract, motivate and retain core employees.I suggest that these variables fall into 10 the general headings below. My theory isthat to ensure motivation is at its highest, a firm should first identify what variablesare in play for their staff and then secondly find appropriate ways to ensure thatmotivation is not reduced as a result of those variables.Below I will briefly outline each of the variables along with my recommendations forhow firms should address the problems associated with each variable.P E R FO R MA N CE S YST E M SBecause the purpose of the incentive bonus scheme is to encourage and rewardeffort, it is necessary to have some way of linking the rate of work to the level of 3output.Unless a firm can accurately monitor and record the performance of a lawyer, theycannot hope to implement this scheme. With performance-related pay, 4remuneration becomes more complex and expensive to administer. If a firm wishesto adopt this scheme, they need to ensure the appropriate IT systems are in place toallow a lawyer to record their time and review their work in progress (WIP). Ideally,the lawyer should be provided with constant updates from the firm showing themhow they are performing for a given month. Modern systems allow for computer 5generated WIP reports and alike which are useful tools for the lawyer.Recommendation:The firms need to ensure systems are up-to-(Aitken 2007)date and accuratelyrecording the hours worked by the staff, the hours billed, and the recoverable fees.This will result in a transparent measure to assess performance. If firms are not ableto invest in such systems, they should not attempt this scheme unless they are ableto ensure accuracy of records.C H AR G E - O U T R A T ESThe success of this scheme is going to be highly dependent on what charge-out ratea particular lawyer is attributed. A lawyer billing at $200 an hour will need to bill 600hours in a year to make a budget of $120,000 and a salary of $40,000 whereas alawyer only billing $150 an hour will need to work an extra 200 hours over the yearto achieve the same salary. Hence this is a vital factor to the success or failure of2 I. Henderson (2008). “Human Resource Management for MBA Students.”3 I. Henderson (2008). “Human Resource Management for MBA Students.”4 I. Henderson (2008). “Human Resource Management for MBA Students.”5 See examples of such systems at: http://open-tube.com/law-firm-and-case-management-software-best-legal-software-to-manage-your-cases-easily
  5. 5. such a scheme. Budgets need to be both achievable and motivational. For exampleif a lawyer is required to record 8 billable hours a day to meet a salary of $40,000,the lawyer’s motivation may be diminished.Typically, charge-out rates are determined on a ‘pay for skills or competence’ basis 6whereby pay is based on defined, recognised blocks or modules of skills , which iseffectively legal experience of the lawyers.Recommendation:Firms will need to carry out evaluations of their local markets to identify what ratesare appropriate for their solicitors. Next a conversation should take place betweenthe firm and the staff to discuss the rate. Once a rate is decided, they need todecided what budget reflects a fair work-load at that rate – both in terms of realisticmilestones and realistic market pressures.I MP AC T OF L E GA L A I D 7Lawyers working on legal aid files at $105 an hour are faced with a problem. If afirm is relying on a solicitor to work on a large number of legal aid files, thenbudgets should account for this. If other lawyers in similar positions are working onmostly private files, there will be an inequality in pay unless adjustments are made.Lawyers’ lack of motivation towards legal aid files has been confirmed in a recentstudy in the United Kingdom. It was found that when presented with remunerationthat did not reward the application of extra inputs, solicitors reduced their supply ofsuch inputs in comparison with previous practice. In contrast, where fee-for-service 8continued to be in place, solicitors raised the levels of inputs supplied.Recommendation:If a staff member is working on legal aid files, the firm should have systems tomeasure what amount of work is at the lower rate. Once this information is onhand, an exercise similar to that with the rates should be done to determine whatbudget accurately reflects a fair workload at the lower rate. One method could be toset a budget based on an average charge-out rate – for example if 50% is privateand 50% is legal aid, an average charge-out rate could be used for setting a budget.If there is a possibility to spread legal aid work amongst staff equally, that wouldpromote a sense of equality and fairness, further enhancing the motivation of staff.NON R E CO V ER A BL E F E E SOften fess may be unrecoverable. Whatever the reason, it is an on-going problemfor New Zealand law firms. In the situation where a bill is written-off, the questionarises to who should take the hit?There are three different figures a firm can chose to peg the salary on: recordedhours, billed hours, and fees recovered.6 I. Henderson (2008). “Human Resource Management for MBA Students.”7 http://www.lsa.govt.nz/documents/LegalAidRatesandFees.pdf8 Fenn, P., A. Gray, et al. (2007). "Standard fees for legal aid: an empirical analysis ofincentives and contracts.(Report)." Oxford Economic Papers 59(4): 662-681.
  6. 6. The first reflects a lawyer’s actual recorded hours and time spent on a file, thesecond is what was actually billed for that work (after any reduction or uplift offees), and the third of these is what the firm actually receives in cash.Depending on the nature of the firm and the clients they service, this will vary. If thereason for the non-payment was obvious to the lawyer before working on the filethen perhaps, it would be fair to withhold the fee from his budget. However if theclient unexpectedly entered bankruptcy for example, then it may be moreappropriate for the fee to be carried onto the lawyer’s budget.Recommendation:The Partners or Principle of a firm enter into ownership because, in most instances,they wish to pursue a higher return based on a higher level of risk and responsibility.Part of that risk included bad debts and unpaid fees. Employers should sit downearly with their employees and negotiate what level of risk the employees want totake on. The higher the level of risk , the higher the salary one would expect.U N AT T AI N A B L E B UD G E T SCurrent legislation prevents commissions being paid if it results in an employee 9being paid less than minimum wage. In law firms the tradition is to agree on abudget for a set salary which does not change even if performance drops below thatfigure. The firm want this figure as low as possible (to avoid over-payment for lowperformance) and the employee as high as possible (for higher guaranteed income).The problem here overlaps with charge-out rates. If an employee is forced into alower charge-out rate with a high budget, then it is highly unlikely they will everachieve a bonus. Therefore motivation to exceed the budget will be diminished andineffective. A firm should be cautious when setting a budget to ensure it is fair andachievable.Recommendation:Budgets needs to be set at a level where they can be reached by the staff. This iswhy the earlier steps of setting clear budgets is so important. The motivation of thebudget is so that anything above the budget target – the employee shares the extraprofit, thus adding to their base salary. If the bonus is within a realistic reach,employees should feel more motivated to exceed their targets. If the targets are toohigh and unrealistic they will not serve their task of motivation and in fact maydampen the lawyer’s morale.S T O L EN F E ES – T H E P R O B LE M S W I T H FI L E SH A RI N GWhen there is more than one fee-author working on a particular file, the problemoften arises over how the fee should be split. Both authors have something to gainfrom a higher portion and debate can ensue over how it should be divided. This ismore common where there is a supervisor relationship in which the supervisor orpartner takes the fees and applies only a small portion back to the lawyer doing thework.9 See: Minimum Wages Act 1983 and Employment Relations Act 2000
  7. 7. Recommendation:This is essentially an exercise that needs to be taken by the firm. Clear boundariesshould be put in place so that lawyers working on files together have clear systemsin place for how files are to be shared. By having fee-author meetings on a regularbasis, the lawyers should have good opportunities to raise any concerns about howbills are to be split. Another possibility would be to have a default system where,unless there is prior agreement to the contrary, bills are automatically splitaccording to the time spent by each author on the file. This is common place insome firms already.THE JUN I O R LA W Y ERThe junior lawyer is particularly vulnerable for all the reasons above. They have noexisting client relationships, legal experience or ability to produce high fees.Traditionally a firm will make a loss or break-even on a junior lawyer in the firstyear. It is particularly important for a new lawyer to be aware of how the TTTprinciple works and how it should benefit them more as time progresses.Recommendation:The nature of the industry means that junior lawyers are always going to have lessbargaining position and lower remuneration packages. However, it is important thatthese junior lawyers feel valued in their work. There is currently a large problemwith retention rates of young layers and one possible solution is to treat them fairlyfrom day one. In my experience, there is a lack of career discussion within a firmand this needs to be addressed. By opening communication early with the younglawyer – particularly before beginning work, the lawyer is able to feel involved withthe plan and valuable even if the pay does not reflect it.THE FI R M ’ S ABI LI T Y T O P RO V I D E Q UA LI T Y W O R KA lawyer is placed under added pressure when there is not enough work for them.This is usually outside of the lawyer’s control. As a result of the dropped work, oftena lawyer’s budget will be negatively impacted.This can be particularly de-motivational when a lawyer exceeds budget for a periodof time, only to have the bonus eaten away over another period where work driesup. This is where negotiation is important and monthly or quarterly bonuses can beexplored to give short term goals for the lawyers which are less susceptible to thisproblem.Recommendation:This will also be a constant threat to any lawyer working inside a firm. Like theunrecoverable fees, this would be another area where discussions could take placebetween the firm and the staff to see what level of risk they are willing to assume.The detriment of having reduced work could be compensated by the bonuses thatcome with brining new work into the firm off the lawyer’s own back.However the firm organises this, there needs to be a compromise between thelawyer’s bonus for hard work and the need of the firm to make a profit. Byintroducing a quarterly bonus – employees are less exposed to the market risks and
  8. 8. are able to receive guaranteed rewards for their hard work across busy periods.There is an element of risk here to the employer so again early communication andnegotiation is going to be key.B I L LI N G P R A CT I C E S O F T H E FI R MIf a firm has chosen to compete solely on price in a local market then there will behigh fee-reductions for work. A lawyer may work 5 hours on a house purchase onlyto find they can only bill the client $200. A common example is the firm who offersclients a free will. The lawyer doing this work often suffers at the hands of thesepolicies. In comparison, some firms allow and in fact encourage uplifts of fees towhich employees benefit from the policies.Firms need to be clear how they will compensate staff for reduced work. Firmsshould limit this kind of work and spread it evenly across all staff to maintainfairness and a good level of motivation for the employees.Recommendation:A firm should always be looking at ways to increase revenue for its services. If billsare constantly being discounted, it perhaps offers an opportunity for the firm toself-evaluate why that is the case. Employees need to know that their hard work willbe rewarded in some manner, so a reduction is a serious blow to their esteem.If the firm wants to reduce a bill, it is supposedly for some strategic benefit to thefirm – not a result of lack of quality of the lawyer’s work. For that reason, like therecoverability of fees it should be a cost that goes with owning the firm. If the firminsists on reducing some fees without remuneration, then they must at least allowthe lawyer to increase their fees when appropriate to balance out the exercise.G EO G R A P H Y AN D N AT U RE OF THE FIRMFinally the remuneration will need to be dependent on the firm itself. A study ofIndiana Law graduates showed that job satisfaction was not necessarily linked tosalary as the author’s hypothesised. Noting that both income and job satisfactionwere desirable, they hypothesized that those lawyers in the types of practice withhigher average income were trading job satisfaction for higher income, while thosein the types of practice with lower average income were trading income for higher 10job satisfaction. The results were inconclusive and it was found that both salaryand job satisfaction were important and generally employees would not be happy tosacrifice one for the other. There is an important lesson here for firms – that to trulymotivate an employee there needs to be a balance of both job satisfaction and pay.Firms particularly in cities are also more vulnerable to lose junior lawyers to ruralfirms. An Australian study looked at motivating factors for lawyers who moved torural firms (the majority of which were junior lawyers). The chief among thesereasons were the nature of the work and professional development opportunities10 Stake, J. E., K. G. Dau-Schmidt, et al. (2007). "Income and Career Satisfaction inthe Legal Profession: Survey Data from Indiana Law School Graduates." Journal ofEmpirical Legal Studies 4(4): 939-981.
  9. 9. offered, the opportunity to save money, lifestyle, including social and community 11networks and distance from ‘home’.Given the various benefits for moving to a rural firm, city based firms particularlyneed to ensure they strike the right motivation for their junior lawyers to ensureretention.Recommendation:Whatever the size of the firm, there needs to be transparency and opencommunication between the staff and the firm. The TTT principle is used tomotivate staff, so firms need to keep in mind the principles already discussed above.Realistic budgets and fair workloads need to be set, no matter the location or size ofthe business. If an employee is constantly underperforming compared to theirbudget, the firm needs to evaluate whether that is due to performance or thenature of the budget and the work being asked of the lawyer. If it is not a matter ofperformance, then the budget and workload should be adapted so that it accuratelyreflects a fair load.C ONCLUSION & R ECOMMENDATIONSGiven the above, it seems that the risks for the employee significantly outweighthose for the firm. The presence of any of the variables above will impact on themotivation levels of an employee. The default benefit is with the firm and it is only ifsome negotiation is made to deal with these variables that the employee begins tobenefit from the scheme.A firm should undertake an evaluation of staff to see what variables are in play. Thefirm then needs to look at how it can accommodate those to ensure that theemployee remains motivated.If the firm balance things right, they should hopefully end up with happy, motivatedstaff that will stay with the firm for years to come.11 S. Forell, M. Cain and A. Gray (2010). “Recruitment and retention of lawyersin regional, rural and remote New South Wales.”

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