By Brenda A. Barnes and Camille Stell
Partner compensation is probably one of the most sensitive aspects of a law firm’s practice management. Whether you are adopting a new system or modifying the current one, there must be an extraordinary amount of thought, care, and study.
Systems are either non-performance-based systems or performance-based systems. Here are the typical systems:
Non-Performance-Based Systems:
- Ownership percentage: Income is allocated on relative ownership percentage.
- Pay equal: All partners are paid equally, or nearly so.
- Seniority or lock-step: Partners are paid based on years as a partner. This method is all but obsolete, however, some firms still have a baseline built into their systems for more senior partners.
Performance-Based Systems:
- One person decides: Typically the managing partner or other designated key partner (often referred to as the designated pie slicer).
- Compensation committee: Instead of one person allocating income alone, a highly credible, small number of partners is elected and/or appointed to allocate income.
- Paper and Pencil: The partners complete a ballot in which they allocate income to all partners. Each partner’s ballot is averaged and the result is the income allocation.
- Pure formula: An algebraic formula devised, based on business origination, book of business, billable hours, realization, and other factors.
- Shared overhead: Also referred to as profit center accounting. Each partner is allocated a share of the firm expenses, individual expenses are allocated to the partner directly.
Whatever method the firm decides to use, the most popular systems have a base compensation and a year-end bonus. The base compensation can be set at the beginning of the year based on prior year performance or the base can be determined by current year productivity. When a firm utilizes the latter, a partner will take draws against the projected compensation with a semi-annual or year-end true-up.
Brenda A. Barnes and Camille Stell are co-authors of RESPECT — An Insight to Attorney Compensation Plans (lawofficemanagementbooks.com). They will present a webinar on compensation and bonuses this Thursday, Feb. 23. It’s free for members of Law Office Manager, and there is still time to register here.