Law Firm Compensation: How are Partners Paid, Compensated

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Equity Partners take the most risk and for doing so, get the most rewards.

All attorneys start their careers as associates, and many will go on to become of counsel, non-equity partners, or equity partners.

The main difference between an equity partner and non-equity or income partner is that the equity partners assumes a leadership role that goes beyond law. Let’s look at titles:

Managing Partner (CEO) this can be an equity partner, income partner or staff partner and sometimes senior associate.

  1. Equity Partners/Member/ Shareholder/Executive Partner (Own a Percentage of the firm) many firms may not even identify by title the equity partners. The website may just say partner.
  2. Income Partners/Contract Partners/Non-Equity Partners
  3. Staff Partner- This title is given to those who have the expertise but don’t have a book of business. The staff partner can charge partner billing rates. Most of the time one can not determine if the partner is a staff partner or not. This title does not show up on website.

Of Council VS Council

‘Of Counsel’ is an attorney who is employed by a firm but not as an associate or partner. Often the designee is a former judge or government official transitioning to private practice. Also, an attorney can be ‘Of Counsel’ can actually work for the firm (close, personal, continuous, and have a regular relationship between the firm and counsel lawyer).

‘Counsel’, ‘Special Counsel’, and ‘Senior Counsel’ may perform many of the same duties as ‘Of Council’. Most of the large AM firms consider attorneys who are ‘Of Counsel’, as a partner who is getting ready to retire.

Confused? Many law firms define the duties of ‘Of Council’ and ‘Council’ differently, further confusing the roles of these titles.

EQUITY VS NON-EQUITY PARTNERS

Many law firms offer their lawyers equity partnership and non-equity partnership. An equity partner is an owner of a law firm.

Non-equity partners do not have the same job security as equity partners. Most non-equity partners receive a salary instead of partnership distributions. Depending on how the firm is set up you maybe paid by W2 or K1 schedule.

Many partners may take a non-equity position for a while to give them time to build up business for the firm, prior to becoming an equity partner. If equity partners do not bill enough hours, they may be moved over to non-equity positions.

Non-equity partners typically demonstrate ambition and drive to eventually become an equity partner. Their interpersonal skills are strong, they have a great work ethic, and have valuable legal skills—they just aren’t quite at the partner level yet. Non-equity partners do not face financial liability if the firm goes under and do not have full voting rights.

Equity partners are high level performers, they generate business, bill tons of hours, and are more invested in the firm than their non-equity counterparts. Equity partners also have skin in the game. Most firms require equity partners to invest a significant amount of money into the firm.

Equity partners support evaluating attorney, firing, recruiting, and are involved in the strategic direction of the firm.

When the firm offers you a partnership invitation, you must ‘buy in’ as an equity partner. Some firms offer loans to partners who otherwise would not be able to become partner. Typically the factors that impact the ‘buy in’ are:

  • The buy in price for partner is based on the fair market value of the business and the equity of the business case loads, billable hours and future client projections.
  • The shareholders or operating agreement is vital to protecting the employee after becoming a partner in the business. The provisions within the agreement will protect the employee concerning compensation arrangements and distributions to meet the buy in. The agreement also has provisions for exiting the firm either voluntary or involuntary.

COMPENSATION MODELS

Base compensation or salaries are paid out several ways:

  • Salaries are determined by prior year revenue and other contributions.
  • Owners receive no salaries, income is entirely in form of incentive compensation or percentage of profits;

Incentive pay is tied to meeting or exceeding key performance indicators (KPIs) that are aligned with the firm’s strategic goals. KPIs include but not limited to new clients, new revenue generated, total revenue managed, client retention and satisfaction, and developing staff.

The lockstep model is based on tenure at the firm. All equity partners are paid the same scale based on the number years at the firm. Each year pay increases automatically.

This model creates transparency, stability as well as loyalty, by placing emphasis on group achievement and teamwork. A lockstep model provides certainty and benefits from diversifying opportunities and spreading risk. Lockstep does not address system underperforming partners or those who make it rain.

A merit-based system, or modified lockstep enables partners looking to retire to continue to fit within the structure rather as well as reward those who bill more hours.

‘Eat what you kill' model bases compensation on the revenue that each attorney performance. ‘Eat what you kill’ doesn’t account for referrals and developing the firm’s staging in the community and from within.

LATERAL PARTNER MOVES

Making the lateral partner move gets down to what you bring to the table. Your book of business opens the door and gives you the leverage needed to broker a strong deal.

Negotiating has a lot to do with the who, what, when, where, why and how of the situation.

Follow these practical tips when negotiating from legal mediator Diane Rosen —

  • Distinguish between interests and positions. Positions are wants, interests are needs. The position may be framed as a dollar amount. The need may be respect or acknowledgment.
  • Lead with curiosity. Ask, don’t assume, defer problem solving, ask more questions to reveal the other party’s stated positions.
  • The best negotiations are flexible, with alternative counteroffers and the ability to reorder priorities based on the response from the information. Set goals, but be ready to be open to alternatives not considered.
  • Prepare, and be ready with responses to counter arguments.
  • Respond, never react. When caught off guard, respond with something vague to give you a moment to organize your thoughts. Say something like, ‘that’s interesting, I didn’t consider that’.
  • Silence is golden. Silence can be used to reset the conversation, and change the direction of the negotiation.

Winning is not the end game. Consider maintaining the relationship to keep the door open for negotiations down the road.

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