Best Practice Tips: Law Firm Partner Compensation
Asked and Answered
By John W. Olmstead, MBA, Ph.D, CMC
Q. I am a founding partner of a two-partner firm. We have been in business for three years. We have six associates and our practice focuses on health care law. My partner and I each have a 50 percent interest in the firm and our compensation is based on our ownership percentages. We split firm profits 50/50. Since starting the firm, I have been bringing in substantially more fees that my partner. This year I will bring in 65 percent of firm fees. I am getting frustrated and feel that our compensation system is unfair and needs to be changed. I would appreciate your thoughts.
A. It sounds like you are referring to origination of client business and referencing fees resulting from business that you brought into the firm. Most firms do not consider fee origination as the only partner compensation variable. Working attorney fee collections as well as other contributions such as firm management, mentoring and developing associates, developing firm systems, etc. are also considered when determining partner compensation. Many firms actually give more weight (credit) to working attorney production than to origination while others may give no credit at all.
I think you need to keep in mind overall contributions of each partner – not just client origination. Pull working attorney statistics and include these in your analysis as well as firm overhead consumed. Consider other contributions that each of you have and are making and see where the data takes you. Don’t look at just one year – look at the data over the long term – say three-year trends. If you still feel that the compensation arrangement is no longer fair, you and your partner need to sit down and have a heart to heart discussion.
The best approach may be to simply realign your compensation percentages after you have come to terms with the compensation factors that you consider important to the firm and the metrics you are going to use going forward.
If you and your partner can’t sit down and have such a discussion consider getting outside help.
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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 and author of The Lawyers Guide to Succession Planning published by the ABA. 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.