Deferred compensation plans offer many advantages when it comes to deferring contingent legal fees. Aside from more flexibility and privacy, attorneys can take advantage of many creative use cases.
One use case of a deferred compensation plan that most law firm owners are unaware of is that the deferred compensation plan can be used to keep and retain key associates in the firm. Many law firm owners struggle with incentivizing key associates to stay in the firm without giving up equity and partial ownership of their business.
Vesting Schedule for an Associate’s Deferred Compensation
A deferred compensation plan can create “golden handcuffs” for key associates. It works by deferring a portion of the legal fees into a deferred compensation plan designed for them. The law firm owner has the ability to set the vesting schedule for when the associate will receive partial funds from their deferred compensation plan, and when they take full ownership of the plan.
For example, you could have a vesting schedule where the terms are: The associate will get 50% of the funds in the deferred compensation plan after 5 years, and the rest will be available in their 10th year. It places golden handcuffs on the associate and gives them an incentive to stay with the firm for the long term because they know they have the funds from the deferred compensation plan to look forward to. Meanwhile, the law firm owner is in control of the vesting schedule of the plan and keeps full equity of the firm while retaining key employees. It’s a win-win for both of them.
What if The Associate Leaves the Firm Before the Plan Vests?
Another benefit of using the deferred compensation plan in this strategy is if the associate happens to leave before the vesting schedule vests, then the amount placed into that particular associate’s plan will instead be paid to your firm. It’s a way to incent and attract good associates to stay with you, and it’s a way to offer a good employee benefit to associates that you’d like to keep around. In addition, the firm gains control of the funds if the associate decides to leave the firm, whatever portion of the plan has not yet fully vested will be payable to the firm.
Using Deferred Compensation to Bring in New Associates
Deferred compensation plans can also be used as a way to bring in new associates. This is especially helpful for small practices with start-up capital.
When you are trying to attract a new associate to your firm, you might be competing against a larger firm that is able to provide a higher annual salary or bonus upfront. Deferred compensation plans offer higher long-term cash flow and benefits that will help smaller firms compete with larger firms when it comes to employee packages.
Do you have questions using deferred compensation plans to retain key associates and employees? Give us a call. We can help you explore if this use case of deferred compensation plan makes sense for you and your firm.