Law Partner Compensation

An Overview of Law Partner Compensation

This article addresses my personal experience recruiting law partners in the United States and subjects related to their compensation. It’s not exhaustive but is meant to provide a general overview.

 

4 Compensation Systems

Generally speaking, law firm compensation is of four systems:

1) Formula
2) Black box/ Subjective
3) A Hybrid of both
4) Lockstep

 

Formula is a very transparent compensation system of knowing fairly accurately how the collections will be divvied up. Generally smaller firms lean towards formulaic.

Black box/ subjective is just that; usually decided behind closed doors with a trusted compensation committee.

A hybrid mixes both subjective and formula giving partners some understanding usually for the upside of their practices depending year to year.

Lockstep compensates partners likes associates in that partners at specified levels whether tenure or merit are all paid the same.

Compensation systems are either open or closed. Meaning compensation is either a mystery to everyone except for the compensation committee in a closed system, or in an open system there are varying levels of transparency to complete transparency within the law firm. You can imagine how a compensation system affects the culture of a law firm.

 

Factors for Compensation

Compensation for a partner are driven by the profit margin of a law partner’s practice. The factors that determine the revenue and expense of a law partner’s practice are as follows:

-Firm size and overhead allocation
-Partner hours billed on own work originated
-Partner hours billed on work received from another attorney
-Business origination
-Additional partner or associate hours billed to assist client matters
-Bill rates

-Collections

Speaking of profit margins, the profitability of clients and partners vary greatly. Prudent law firm leaders know the difference and compensate partners accordingly.

 

Check out Lateral Moves: A Guide for Partners and Law Firms for more information on law firms and lateral moves.

 

Timing of Compensation

Every law firm has a different compensation system, different fiscal years and different methods for doling out the compensation. Law firms generally determine a draw or base for their partners which can be as little as a 33% of projected annual compensation to as much as 70-90%. Then typically partners are paid their final distribution in December or their last month of the fiscal year if different from the calendar year. Also, many firms wait till year-end is closed to determine what final collections were. And thus partners could get their final distribution as much as 2-4 months into their next fiscal year, which again could be as much as 30, 40 or 50% of their annual income. Most law firms compensate in this manner, but a smaller count of firms pay an annualized salary over a 26 payment period.

 

Income vs. Equity Partners

Generally speaking income partners receive a more stable consistent salary than an equity partner. It is usually less compensation than an equity partner and tends to be multiple times less. The equity partners though generally experience more fluctuations in their pay depending on the compensation system and how the individual lawyer or overall law firm performs year-to-year. If the equity partners are paid from the profits of the firm, then major capital outlays or losses will affect the bottom line which may adjust compensation down the following year.

 

What is Valued: Personal Production vs. Rain Making vs. Collaboration

Law firm culture and compensation systems go hand-in-hand and tend to reward specific behaviors and thus will attract or repel certain law partner practices and clients. Due to the Great Recession of 2008 and the destruction of Dewey & LeBoeuf, law firm management are taking a harder look at law partner compensation metrics. I find these three behaviors that drive law partner behavior and reward such.

Better be billings hours (a lot) – In personal production, certain law firms are focusing on individual partner billing and collections. They want all of their attorneys very productive and hitting personal billable hours of 1,800 or more. More hours billed, more cash in the door. Personal billings are rewarded over rainmaking. Business development hours are not honored as billable hours and thus must be additional time put in. Again these firms will not pay a less productive rainmaker as well as the poster child worker bee partner racking up personal billable hours. In this firm’s compensation model, you will see lots of siloed law partners with less interest to share their work.

Make it rain (a lot) – In a rainmaking firm compensation model, its the survival of the fittest. Law partners who hang the moon and stars are rewarded for throwing off work to other attorneys in the law firm. Their personal billings are de-emphasized and sometimes discouraged to the chief good of bringing clients and their matters to the firm. Getting credit for client origination is everything and in these firms prepare to encounter sharp elbows or client wrestling. If you do not originate client business, you are paid a multiple less than those who do.

Must play well with others. – Collaboration compensation systems are less common. What I mean by this is unless you are sharing work with other attorneys and working together on matters as a team, you will not last long at this firm. On this platform, the clients are the focus and tend to primarily be institutional. This firm values legal talent, client success and the best client experience. Do your job, work hard and you will be rewarded. If want to be an island or make more from your client originations, find a new home.

 

3 Main Levers

The 3 main levers of every law partner’s practice are the bill rate, the hours billed and the other attorneys billing. For any law firm big or small, the bill rate (& hours billed) determines the collections and thus the size of the pie to divide. The challenge of any partner is to incrementally increase their bill rate, keep their billable hours up and to leverage the lower bill rates in the firm by delegating work.

 

Partner Capital Contributions

 

Calculating a Partner’s Compensation & Deciphering a Partner’s Book of Business

When calculating a book of business for a partner, a law firm will want to understand the following facts:

– The collection history of client originations for the past 3-5 years
– Future expectations of client originations
– Bill rate history and anticipated
– Collection rate
– Hours personally billing from originated clients
– Hours personally billing from work referred internally but not originated
– Accounts receivable history of clients

– Type of support practice areas, attorneys or staff, and their contributed working attorney collections

When speaking with a prospect law firm, knowledge of these subjects will help determine how you fit in their compensation system. Here are a few examples of what some might consider for compensation:

 

Example #1

A partner who generates $1 million in originations annually with a bill rate of $400 and billed 1500 hours from his/her own work could assume the following:

– Personal collections of $570k (5% provision for uncollected on $600k)

– Generally speaking, partners could make between $350-450k in compensation.

Other assumptions are:

– Work shared $400k – 2,000 hrs @ $200 hr for an associate or two
– Overhead allocation of $150k conservatively to $300k per attorney depending on firm.

 

Example #2

Now a partner with $2 million in business origination should not expect a linear line of expected compensation. Rule of thumb: The more business you generate the more you have to staff and pay for the increased client demand. So let’s assume the same partner in Example #1 increase origination to $2m because of a large deal or case came through, then I would assume the following:

– Personal collections of $684k (5% provision for uncollected on $720k)
– Partner personal hours billed increase from 1,500-1,800 because of the demand of the large deal/case.
– Generally speaking, partners could make between $450-600-750k in compensation.
Other assumptions are:
– Work shared $1.28m – 6,400 hrs @ average rate of $200 hr to staff the excess
– Overhead allocation of $150k conservatively to $300k per attorney depending on firm.

 

Example #3

So let’s assume the same partner in Example #1 increase origination to $3 million. Personal collections of $684k (5% provision for uncollected on $720k) for 1,800 hours billed.

– Generally speaking, partners could make between $600-750-900k in compensation.

Check out Lateral Moves: A Guide for Partners and Law Firms for more information on law firms and lateral moves.

 


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Follows us on Twitter @FindtheLions and @ChrisBatz On LinkedIn Chris Batz and The Lion Group


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