A common reason that many law firm partners decide to look for a new firm is because they think they are being underpaid, yet partners often lack a full understanding of how their law firm determines compensation. Here, we hope to provide some clarity if you have never been on a compensation committee and want to be able to make an informed analysis, rather than an emotional one, when it comes to evaluating your current compensation and whether or not your abilities and effort are valued in such a way that allows you to maximize your earnings at your current law firm. In order to fully evaluate your situation, it’s important to understand the type of compensation system your law firm has in place and what you can do as a partner to reach your highest potential compensation within its framework. Managing your practice to be its own strong profit center will position you to make more money within the most common compensation systems, and will give you negotiating power, whether it’s with your current firm or a firm that offers a compensation system that makes more sense for you and your practice. Keep in mind that all partner compensation systems boil down to business generation and profitability. The more you contribute to these metrics, the more likely you are to reach a mutually satisfactory compensation number. To better equip yourself for critical compensation conversations throughout your career, use the following information as a resource in evaluating your current system, your value within it, and the impact both your firm’s, and your individual profitability, have on your pay.
How Does Law Firm Partner Compensation Work Under Various Comp Systems?
Law firm compensation systems are either open or closed in terms of whether partners know how much other partners are earning and why. Interestingly, many attorneys claim that they prefer an open, transparent compensation system, but as Blane P. Prescott of MesaFive, LLC noted in an article in The American Lawyer in 2018, the data shows that transparency doesn’t guarantee happiness. There are advantages and disadvantages to each, and you may find that you prefer one to the other for a variety of reasons. Beyond the distinction of open and closed systems, Prescott described in a presentation given at the 2022 Annual NALSC Conference, there are four basic partner compensation systems in place at law firms today:
- Parity
- This is a simple system, where every partner is paid equally, regardless of performance, contribution, tenure, or merit.
- The issue and the reason this system is incredibly rare, is that the equal nature of it rarely translates into fairness.
- Lockstep
- This is another simple, and rare system, where the firm pays at preset compensation levels and partners advance automatically based on tenure, with no exceptions, and all partners eventually plateau at the same compensation level.
- Variations of this system, referred to as modified lockstep, are more common than a true lockstep model and can include variables such as merit-based advancement, stall points based on unmet performance metrics, bonus components, and super levels for top performers that can impact total compensation.
- Formulaic
- In this system, a math formula calculates each partner’s compensation, and while it is more common than parity or lockstep, it is still quite rare within the AmLaw 200, and more common in mid-sized and smaller firms.
- Formulaic systems are objective and harder to manipulate, however, when partners make contributions that fall outside the factors that are worked into the formula, it can leave them feeling undervalued as well.
- Subjective
- The most common compensation system found in more than 90% of AmLaw 200 firms is a subjective system that assesses performance and assigns compensation through a close look at data rather than a blind adherence to it.
- There is tremendous variation among subjective systems, but great ones commonly have clearly defined criteria, offer predictability, are administered by communicative leaders, reward widely held definitions of merit, and manage the partnership’s expectations.
Since the majority of you are working within subjective systems that’s where we’ll focus. In subjective systems, partners generally earn varying credit based on their rates, leverage (usually associate), realization rates, the nature/profitability of their work, the role they play in matters, and the firm’s financial metrics including revenue per lawyer, profits per lawyer, and overall profitability. Compensation committees will look at these criteria, among other factors that the firm values, such as collaboration, firm involvement and contributions, pro bono efforts, etc. to set each partner’s final compensation. Speaking with an experience legal search consultant can be incredibly valuable during this evaluation as they will go through the metrics of your practice in relation to the system in place at your current firm and provide an analysis of the compensation range you should expect at your existing firm in comparison to other platforms in the market. The reason is the subjective portion of these compensation systems is allocated differently from firm to firm, based on its culture and values, and your law firm may not compensate you to your full earning potential based on its objectives. And, a good headhunter will know the ins and outs of various firms in the market.
Note that one of the most considerable factors in this analysis is how credit is assigned based on the role a partner plays in the matters that generate the firm’s revenue. The most common approach is often referred to as the “Finder – Minder – Grinder Model” under which the Finder is the originating attorney (sometimes, referred to as a rainmaker), the Minder is the attorney who opens and helps manage the matter (and the team on the matter), and the Grinder is any attorney (or timekeeper) billing on the matter. Finders typically get significant credit for bringing in new clients and expanding work with non-institutional clients, and rarely institutional clients. Minders are often more junior partners who are subject matter experts on various aspects of the matter and there may be multiple Minders on a matter from various practice areas or industry groups. In the case of institutional client matters, a larger portion of credit may be directed to the Minder(s) because a true Finder may no longer be with the firm or play a significant role in the client relationship. Finally, Grinders are attorneys at all levels doing most of the work and billing on a matter, and in leveraged firms, grinders are often associates, counsels, and non-equity partners. In any matter, the same attorney may act in a combination of roles and will therefore get credit in more than one category.
How Does a Law Firm’s Profitability Factor into a Partner’s Compensation?
It’s not a novel concept that the overall profitability of a firm is a determining factor in partner compensation. There are factors that impact a firm’s profitability that may be outside each attorney’s control. For instance, firms with many offices in expensive real estate markets or those that pay associates very high salaries could be less profitable and in turn, partner compensation may not be as competitive. When assessing how your firm stacks up, a good indicator of a firm’s profitability and how it translates into compensation is the profit per equity partner figure (calculated by dividing the firm profits by its number of equity partners) reported on The American Lawyer’s annual AmLaw 100 and AmLaw 200 lists. However, individual attorneys can and do impact profitability and the following four factors can be leveraged when it comes time to negotiate pay: making the firm money, saving the firm money, improving efficiencies within the firm, and helping to keep the firm compliant.
In terms of making your firm money, business generation is always king. Whether it’s finding new clients or winning new work with existing firm clients, your ability to bring in revenue will be paramount. Make sure you’re taking time for business development and managing client relationships in a manner that leads to spinning off profitable work for yourself and other practice groups, when possible. I was once told that an equity partner generates for themself and others, and a non-equity partner generates for themself and less than one other attorney, to create profitable law firms, and I believe this holds true.
From a money-saving and efficiency standpoint, the way in which work is assigned, billed, and collected will impact the profitability of the firm. Profitability is also determined in part by the number of attorneys servicing a matter, the rate on that client/matter, the complexity and overall billing time necessary, specialist/expert costs, among many other factors. Well-managed, highly profitable firms generally have partners that understand how to assign work and minimize external costs in ways that produce high-quality results for clients, while also generating strong profit margins. To the best of your ability, strive for that standard. Of course, certain client matters tend to be more profitable than others and the nature of work a partner does certainly impacts the profitability of their practice, which is an aspect of compensation that you can continue to improve, giving you more power when compensation decisions are being made.
Are You Maximizing Your Compensation Potential at Your Current Firm?
Ultimately, before you leave your firm, make sure you understand how pay is calculated and how you may be able to improve your compensation based on the factors discussed above. While parity, lockstep, and formulaic systems are all fairly straightforward, subjective systems can be very complicated and difficult to calculate. Even with the information above and an understanding of the factors used at your firm to determine compensation, you may still find yourself unclear about what you consider fair. This can be especially true if you have generally been under the impression that your compensation should track at one third of your book of business; a figure historically used as a benchmark in the industry. A conversation with a trusted headhunter can offer valuable insights and advice concerning both your current scenario and possible alternatives in the market. If you conclude that you aren’t being paid fairly, or better stated, at your full potential, and a different firm’s model would be more suitable, they can help ensure that a move is a good fit in terms of compensation and other comprehensive factors in lateral movement, so a transition is as successful as possible. And perhaps most important, they can help you clarify expectations with the chosen firm before joining so you don’t encounter a similar problem in the future.