Our firm is at a crossroads concerning partner compensation. We are a twelve lawyer firm in Richmond, Virginia with nine partners and three associates. We are in our second generation of partners as the original founders have retired over the years. We do not have a managing partner or management committee – management decisions are made by all the partners. Our compensation is based upon compensation participating percentages set at the beginning of each year based upon the recommendation of a rotating member compensation committee recommendation which must be approved by the full partnership. These percentages are then used to allocate each partner’s share of firm profit. Monthly draws are taken against projected allocations and the calculations are trued up each quarter and at the end of the year. There is nothing in writing and it is unclear what is taken into consideration by the compensation committee. However, in general the primary metric is individual working attorney production collections. Supposedly, other metrics and subjective factors are taken into consideration but no one knows what they are. The majority of the partners have been relatively happy with the system but a few are not due to the vagueness of the system. I am wondering whether we should move more to a formulaic approach. What are your thoughts?
The trend in compensation, particularly in larger firms, is toward subjective or hybrid approaches and a movement away from strictly formulaic – eat-what-you-kill – objective systems. These systems are fine in “lone ranger” firms but often are unsuccessful in firms that are or want to be “firm first” or “team based” firms. The unhappiest partners that I see are in some of the firms with eat-what-you-kill objective systems. It sounds like your system has worked fairly well and a majority of the partners have been satisfied with the system. However, it may not be reinforcing the behaviors that you would like to instill in your partners if the only metric used, or is perceived as the only metric being used, is working attorney collections. Your firm is very partner top heavy and I would not be surprised if your utilization of paralegals as effective billable revenue producers is minimal. You are encouraging personal production period. What about delegation, new business origination, leadership, contribution to firm management, mentoring and training of associates, etc? Subjective or hybrid approaches often do a better job of dealing with overall contribution to the firm if they are setup properly.
I would suggest you fine tune your existing system. Consider the following:
John W. Olmstead, MBA, Ph.D, CMC