Best Practice: Partner compensation at a 2 attorney start-up
Asked and Answered
By John W. Olmstead, MBA, Ph.D, CMC
Q. I am a solo practitioner in Chicago. I've been offered by another solo to join him as a partner, and was wondering if you could suggest any articles or books I could look at to think about how to structure the partnership. We bill about the same number of hours, but his rate is 50% higher than mine ($300 vs. $200) and he has 20 years on me in age and experience.
A. I am a believer in true partnerships as they seem to work best and the compensation system that seems to work the best is where the partners share and share alike the profits based upon their ownership percentage. Initially a percentage is agreed upon based upon the revenue/profit history and experience that each brings to the firm. If the level of contribution changes over time you talk about it and the percentages are adjusted.
You may want to start by looking at your fees and profits over the last five years and compare them to his and use this as a starting point. Consideration should also be given to his experience. Hours don't matter as much as dollars. Then determine that ratio. Often in an arrangement such as this, depending on the ratio, it might be a 60%/40% split. If this is what you agree to then establish your capital accounts in accordance with that ratio (initial firm investment in the form of cash or other assets) and then split profits according to this split. Over the years adjust as needed. If you have a healthy partnership you will be comfortable discussing this subject.
Other approach if you want to be lone rangers would be a formula eat-what-you kill approach.
Here are my blogs on this topics generally:
Here are a couple specific blogs:
- http://blog.olmsteadassoc.com/olmstead_associates_law_p/2009/05/index.html
- http://blog.olmsteadassoc.com/olmstead_associates_law_p/2010/07/law-firm-eat-what-you-kill-partner-compensation-systems.html
- Click here for articles on other topics
John W. Olmstead, MBA, Ph.D, CMC,(www.olmsteadassoc.com) 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 listserver, which John and other committee members review, or view archived copies of The Bottom Line Newsletters. Contact John at jolmstead@olmsteadassoc.com.