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Aug 17, 2010
Law Firm Partner Compensation – Should We Change Our SystemQuestion:
We are a three attorney law partnership that does primarily business transactional work. My partner and I have been in practice together for four years. We are equal partners (50% each) as far as our partnership interests and we use these same interests for determining partner compensation. In other words we receive the same compensation. We recently have been discussing whether we should look into a different method for determining partner compensation. Currently we produce about the same level of fee revenue. What are your thoughts?
I could write a whole book on compensation systems – but here are a few thoughts:
- Over the past 30+ years I have seen just about every form of compensation system that there is – from "even steven" systems such as yours to "eat-what-you-kill", other formula systems, profit center systems, objective systems, etc. No particular system is better than another system. It depends upon the firm – the culture – strategic goals – and the environment.
- If the system is working – sometimes it is better to leave it alone. There is nothing wrong with an "even steven" system as long as the contributions (fee generation, fee origination, firm management, and otherwise) made by both of you to the firm are perceived as equal. Frequently, partners start out making even contributions and down the road contributions change (often due to life or family changes) and are no longer in alignment.
- When perceived contributions get out of alignment partners are reluctant to have the candid discussions that need to occur as well as changes in the arrangement or compensation system. It could be the system – percentage interest is fine – but as contributions have changed the percentages need to change.
- Resist the temptation to look at financial contributions in a single year. Look longer term – say the past three years.
- Consider not just the compensation as to whether people are happy with what they are getting – but consider whether the system in encouraging the behaviors that you need to achieve firm goals? For example – management of the firm, marketing activities, mentoring and training associates and others in the firm, etc. Often we discover that firms that are not realizing their strategic goals (those firms that have such goals) – for example growth – are victims of their compensation systems. The systems are motivating "lone range behaviors" rather than firm strategic goals. Often this is the primary reason that firms decide to change their system – to transition from "long ranger" to "firm-first" team-based firms.
- Consider bonus pools and other methods of supplementing the base system.
- Start slow.
John W. Olmstead, MBA, Ph.D, CMC
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