Best Practice: Law firm partner compensation - Individual vs. firm-based
Asked and Answered
By John W. Olmstead, MBA, Ph.D, CMC
Q. I am the managing partner of a nine-attorney firm in Cincinnati. We have four equity partners and five associates. Partners are compensated on the basis of their ownership shares which are currently 25% each. In the past the system worked well - but now we are having problems. The two senior partners are working and contributing less and are taking out half of the compensation which is causing dissatisfaction and division within the firm. We have been discussing alternative approaches. Should we consider a system total focused on individual partner performance and production - an eat-what-you kill if you will?
A. I agree that personal production and performance should have a relationship and a tie to compensation. However, a move to a total eat-what-you-kill system might be a drastic first-step move. Eat-what-you-kill approaches can often destroy teamwork in firms that desire to be team-based firms. For firms that want to be lone ranger firms eat-what-you-kill is fine.
Since I don't know what you have done so far it is hard to identify the first step. Sometimes all that is needed is a frank and open discussion and a realignment of percentages tied to recent performance. In other cases is might be appropriate to have different percentages for compensation (participating compensation percentages) based upon say a three years rolling performance average/ratio. One approach would be to use this instead of ownership percentages for allocating profit to the partners. Another approach might be to create two profit pools - say 70% of firm profit and allocate this profit to the partners based upon participating percentages and 30% of firm profit and allocate this profit to the partners based upon ownership percentages.
Obviously there are many of approaches that you can take. This approach moves closer to individual performance but retains firm participation as well.
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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.