Best Practice: Types of partner compensation plans

Asked and Answered By John W. Olmstead, MBA, Ph.D, CMC Q. We are a four partner law firm on the west coast. Currently we each have a 25% partnership interest and we cut up the pie in accordance with these interests. Recently, our contributions have changed and we are considering other approaches to compensation. What are some of the systems in use by other law firms? A. Compensation plans in use in law firms run the gambit. But here are the typical approaches: Subjective Plans which review the performance of each partner and subjectively determine a relative value for each partner. These plans require evaluation of the individual, comparing the evaluation against those of all other partners and relating the determinations to available funds. Some firms use a democratic process in which each partner participates in the process and others use a committee to perform the evaluation. Increasingly, partners are required to submit personal business plans each year which must be approved by the partnership, executive, or compensation committee. Formula – Objective Plans which use a formula to assign value to various criteria to determine compensation. Approaches can range from eat-what-you-kill plans that focus only on a partner’s individual production to plans that assign values to the full range of compensation criteria. Some eat-what-you-kill plans employ a profit center approach in which each partner is set up as a department in the accounting system and fee revenue is assigned based upon generation, and indirect and direct overhead is allocated based upon a predetermined usage formula. Other eat-what-you-kill systems focus only on revenue by allocating fee credits for generation (production of work) and for origination of business, weighting the two factors, and determining compensation based upon the results. Combination Plans are hybrid plans that combine elements from subjective and formula plans. Bonus Pools are being used to supplement the above plans and reward individual or groups of lawyers for extraordinary performance. Subjective or combination plans are most appropriate for firms desiring to build and   reinforce a team-based practice. They focus on the long as well as the short term and all contributions   (compensation criteria) to the firm. They also require more work from firm management. While total formula plans are increasingly falling in disfavor they can be appropriate in lone ranger firms that only want to eat-what-they-kill – nothing more. John W. Olmstead, MBA, Ph.D, CMC, is a past chair and member of the ISBA Standing Committee on Law Office Management and Economics. For more information on law office management please direct questions to the ISBA General ListServ, which John and other committee members review, or view archived copies of The Bottom Line Newsletters. Contact  John at jolmstead@olmsteadassoc.com.