How much do law firm partners make? question is very interesting, It’s not been invent by anyone,” says Robert J. Henderson the creator of RJH Consultin G and an Jackson Hole, WY, attorney consultant.
It is as numerous different compensation systems as legal firms and none are exactly the same.
How does a company decide on the appropriate kind of attorney firm partner compensation?
How much do law firm partners make
“All pay plans are designed to encourage a specific sort of behaviour,” Henderson says. A company that handles every business it can handle requires a plan that encourages efficiency and quality.
A law firm seeking to establish new business requires one that stimulates creation. A business that wishes to boost revenue must encourage collection and billable hours.
Personality is also a factor. If partners place high values on their lifestyles and lifestyle, a system that rewards hours worked and a rise in revenue isn’t likely to succeed.
The following are the four major partner compensation schemes for law firms together with their benefits and drawbacks. Choose one , and then subtract and add to it in order to promote the particular behaviour the firm would like to be able to observe.
THE LOCKSTEP SYSTEM
The most straightforward of partner compensations can be the locking step system. However, it’s not the most efficient.
The partners are compensated solely based on the length of their service. For instance, partners who have at most between one and five years in the company receive an amount equal to $X, partners with between six and 10 years receive an additional percentage and so on but there is a limit.
What are the benefits of this?
None, Henderson says. Whatever way anyone does or how much money any individual is able to bring in, the profit isn’t higher than what people on the other side of the spectrum get. Therefore, “there’s no motivation for either performance, origination of clients or the collection of.”
More importantly, “there’s a disincentive to succeed,” because industry brings no rewards. There’s no incentive for being anything other than normal.
The bad news is that it’s unattractive to any new hiring that the firm hopes to recruit because they realize the moment they start that any effort will be used to support those who do nothing. In the same way, it snuffs out the top lawyers “because they aren’t interested in staying as the deadbeats are paid.”
THE BENEVOLENT DICTATOR
There’s also the benevolent dictator model in which all compensation decisions are made by one person , usually the managing partner or by a committee of management.
It’s an unscientific system. Everyone is influenced by whatever the person who makes decisions believes is right, but within certain parameters.
One benefit, Henderson says, is that it ends the year without debate over how to divide up the earnings.
The most significant benefit is the fact that “it’s an intersection of an equation and something that’s entirely personal.” It is a system that rewards origination and revenue, however it also recognizes the contributions that aren’t quantifiable mathematically.
The company can assign weight to things like the contributions made to management or mentoring as well as maintaining relationships with clients.
In some companies, partners can submit resumes highlighting the accomplishments they’ve made in the fields of marketing, practice development and mentoring, originating of billed hours, etc and the good-hearted director takes them into consideration.
Additionally, there is the benefit of being flexible.
It allows, for instance, the company to pay more when it feels appropriate or to a potential new partner that has an income-producing practice group, or whose name provides the company credibility and credibility that it did not have prior to.
The issue, however, is that humans are people. There always will be one who isn’t happy with whatever large-scale criteria the company chooses to adhere to.
THE EQUAL DIVULGUTION SYSTEM
A simpler approach that is that is far more efficient than lock-step is to use an equally disbursing of profits.
It’s ideal for small companies, and it’s typically the best option for two lawyers who start the firm and decide to share the profits. “If both partners are equally skilled and are equally dedicated,” the system works well, Henderson says. Furthermore, “it’s simple and avoids the most common issues between partners that is the contest to be compensated.”
It also encourages cooperation. Two attorneys do not have any hesitation in passing on business to each other.
When a company expands, the equally distributed distributions become less appealing. New partners don’t necessarily contribute as much like the founders however they are the same amount of money.
Furthermore, when you only have two lawyers there is a clear indication that one of them is not working hard while the more committed of them both could request changes to the structure of compensation. As more attorneys are brought into the mix, it’s not as obvious when one isn’t up to standards. It’s easy to get lost in the crowd.
Then there’s the eat-what you-kill lawyer firm compensation, where the partners receive compensation according to the amount they charge, the amount they earn, and the amount of work they generate. Period.
The firm determines beforehand the best way to weight each aspect and assigns more weight to the areas that it would like to highlight. If its aim is to attract new clients, for instance it might charge the lawyer who initiated the transaction with 25 percent of the fee.
It would leave the remainder of 75% over to the lawyer who is actually working on the issue. If it’s got every task it could manage, it could decide to set the origination credit at just 10 percent of the amount.
The benefit of eating whatever you kill is that there is no subjectivity, and therefore no suspicion of favoritism.
It also promotes any behavior the company wants to be able to observe. If it’s looking to see more hours billed and that’s where the emphasis is placed.
A SHARE FOR ASSOCIATES TOO!
Alongside law firm partner compensation , there’s the issue of compensation for associates and associate compensation. Henderson supports a system of pay that which only a few companies adhere to.
Instead of awarding associates rewards based on the number of hours that they are billed and collected as a bonus, consider including them in profits sharing towards the close each year he suggests.
An incentive that rewards hours is a recipe for “a number of issues with excessive hours.” If the members simply divide the amount, there’s no incentive to perform at a personal level.
Through a sharing arrangement employees are paid an amount of money in addition to a portion of net profits. The company allocates a specific percentage of the profits to partners, and the excess is split among associates.
They may share the profits equally, or depending on a qualifier like the number of years in the firm.
In the majority of instances, there is the possibility of a limit that ranges from 30 to 35 percent of the associate’s earnings.
A participation program “gets everyone in the same boat and working together to increase the profits of the company,” he says. The associates “start thinking as associates.” They realize the benefits their work brings to the firm as well as for their own personal lives.
Problems with the Model of EAT-WHAT YOU-KILL
The problem is that the eating/kill mentality hinders teamwork and causes team members to “hog the files.” Imagine that origination by itself is worth 25% of the cost and the lawyer who performs the work earns 75 percent. Any partner who introduces the client will retain the file and earn 100 percent.
The partners do not turn the work over to partners with the right qualifications to manage it The result could be dissatisfaction with the client and a higher chance of mistakes.
Additionally, if multiple partners participate in bringing a client into the fold There can be a serious debate over who is entitled to what percentage of the credit for origination. “Firms have been splintered over this.”
Firms that work best with this kind in law firm partnership compensation Henderson states, include firms whose attorneys typically perform the same kind of work, and pay the same fees such as hourly, contingency or whatever. In this situation it’s possible to do apples-to-apples comparisons between who is involved the most value to what.
In contrast, in companies that have attorneys who bill hourly, while others are working with contingencies, it is fuzzy.
To make matters even more complicated there is a common belief that hourly lawyers must spend more time than contingency attorneys in order in order to get an equal amount profit.
Additionally, he states, there’s often a dispute over how long a partner is entitled to credit for business-related origination. The past has seen it’s not been unusual for there to be a limit, meaning that partners could take the credit to the origination for a long time.
There should be a ceiling. In the case of a contingency fee it could be a proportion of the fee. For a client who is an ongoing customer, he suggests, the credit may end after 18 months, or perhaps continue for as long as 3 years.