This white paper is only intended to be a guide. Each law firm is unique when it comes to compensation and organizational chart. This subject is very complex with many moving parts. No law firm’s compensation models are the same. Each law firm compensates their partners and staff based on their strategic goals and organizational structure.
Not All Partners Are Created Equal
All attorneys start their careers as associates, and many will go on to become of counsel, non-equity partners, or equity partners.
EQUITY VS NON-EQUITY PARTNERS
There are two main types of partnerships within a law firm, Equity and Non-Equity. The main difference between Equity and Non-Equity is that Equity Partners take the most risk and for doing so, get the most rewards. This typically creates a two-tier compensation system for partners.
Equity Partners, lead the firm into the future. They have full voting right which include but not limited to evaluating attorneys, firing, recruiting, and strategic direction of the firm.
Many law firms offer their attorneys Equity partnership and Non-Equity partnerships. An Equity Partner is an owner of a law firm. Looking from the outside, you may not be able to know who an Equity Partner or, who is not. Sometimes, law firms will differentiate by title (see below on firm titles and what they mean).
Non-Equity Partners do not have the same job security as Equity Partners.
Non-Equity Partners have more flexibility to where and how they want to work.
Most Non-Equity Partners receive a salary instead of partnership distributions.
Non-Equity maybe paid by W2 vs. Equity Partners are paid by a Scheduled K-1.
Both Equity and Non-Equity attorneys can receive a base salary or draw with bonus. Again, this depends on the firm.
There are two ways an attorney can be invited to be an Equity Partner.
Buy in— Each firm has a different buy-value. It depends upon, the overall value of the firm, over-head etc. Some firms will offer an attractive loan for an Equity Partner to finance the buy in. Each law firm determines how the buy-in and buy-outs are structured. The terms are included in the shareholders agreement.
Sweat Equity— It’s just that. How much effort and business the attorney brings to the table. The value is determined by the attorney’s practice, originations, and leadership within and outside of the law firm.
Typically shares or percentage points are awarded based on the lawyers contributions to the firm’s bottom line. This compensation is clearly defined in the firm’s bylaws.
Both Equity and Non-Equity Partners demonstrate many similar traits. Partners typically demonstrate ambition & drive, interpersonal skills, strong work ethic and leadership skills.
What’s in the Title? What is it worth and what does it mean?
Equity Partners / Member / Shareholder / Executive Partner —-
Essentially these titles indicate that you own a percentage of the firm’s earnings. Many firms may not identify an Equity Partner by title. In large firms, an Equity Partner maybe forced to retire early or take a step down in title and position. Since the new 70 years young is now considered the old 50 years young, the older attorneys are leaving the large firms to continue to practice in smaller firms.
Non-Equity / Income / Contract Partners —
Non-Equity attorneys usually do not bring enough business to the table necessary to be an Equity Partner. It is easier and less complicated for Non-Equity Partners to move to another firm. Equity Partners and Named Partner (Partners name on the firms door) have been known to move to other firms. Many attorneys may laterally move to another firm taking their book of business to become an income partner.
Law firms are very careful who they ask to marry, it’s all about your ability to make it rain.
Managing Partner (CEO) —
A managing partner can be an equity partner, income partner, staff partner and sometimes a senior associate.
This title is given to those lawyers who have the expertise but don’t have a book of business. A Staff Partner can charge Partner billing rates.
Clients prefer working with any partner of the firm as they take comfort knowing they have an experienced attorney advising them, not an associate.
Of Counsel vs Counsel (Also, includes Special Counsel and Sr Counsel) —
Yes, this is very confusing. Again, each firm view and defines titles and compensation differently. One firm’s title and compensation may be very different from another firms.
The Bar Association provides guidelines regarding titles. The information is directional at best, as each firm interprets the guidelines differently to suit their needs.
Generally, Of Counsel is an attorney who is employed by a firm but not as an associate or partner. Some use this term for those who are associated with the firm but are not employed with the firm.
Often the designee is a former judge or government official transitioning to private practice, or an attorney that is not an associate or at partner level, or an attorney is getting ready for retirement.
There are two types of compensation approaches. Closed and Open.
A Closed compensation model means it is a mystery to everyone except the compensation committee as to how much each attorney makes.
An open compensation model is transparent, all are able to review how the partners are compensated.
Compensation models can be a hybrid system as there are benefits to both models. When creating a compensation model take into account the firm’s:
Type (regional, boutique, middle market, virtual law firms to top AM200).
And approach: how they bill their clients (contingency vs retained or hybrid).
Each category can have numerous subsets of how they are going to compensation the partners.
Every firm designs how they want to compensate their attorneys. One approach is using the Formulaic Approach which accounts for:
- Client originations— how much work one did on the case, billable hours, non-billable hours.
- Administrative and managerial duties.
- Leadership, marketing, mentoring etc.
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 equates to pay increases automatically. This is seen in many of the top AM Law firms.
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. This is seen in some of the AM law, although mainly seen in smaller firms.
The ‘Eat What You Kill’ model bases compensation on the revenue that each attorney performance. ‘Eat what you kill’ doesn’t’t account for referrals and developing the firm’s standing in the community and from within. Many smaller firms use this model, some AM laws and virtual law firms also use this model.
Here too, maybe a hybrid of all the above.
Rule of Thirds or the One-Thirds Rule
This is a quick down and dirty way to calculate what a Partners book is worth and the base draw/salary they will receive. Bonus and origination credit percentages can be formulaic or negotiated.
This is how the Rule of Thirds works:
- 1/3 of the attorney’s book goes to salary.
- 1/3 of the attorney’s book goes to overhead.
- 1/3 of the attorney’s book goes to profit.
Again, this is just a guideline. Virtual law firms may pay the attorney up to 80% of their book of business. Some smaller firms may pay the attorney 40% or higher for new business. The Rule of Thirds only looks at origination credit not the intangibles that the attorney brings to the table.
Partner compensation is very complex and is different, varying from firm to firm. Billable hours are your friend. This is a wonderful way to measure your success in hard numbers. But there are several other factors that line your pockets.
Each firm has a list of criteria that they use to measure your contributions for compensation. The criteria may account for the size of the firm as well as the book of business you bring to the table and your leadership.
An attorney that wants to be promoted in their firm needs to know what targets they should be aiming for. Talk to the executive compensation committee and find out what is important to your firm.
If you are seeking to make a lateral move. Know the law firm practice inside and out. Who are your clients, what has been your originations for the last three years. Have a marketing plan ready. Get all information you need for the lateral partner questionnaire (LPQ).
Watch out for the next white paper in making a transition.