by Gideon Grunfeld
It’s more important than ever to change your compensation structure for equity and non-equity partners. The end of the year is typically when firms address compensation issues, including adjusting base pay and bonuses. More firms need to go beyond changing the terms of a lawyer’s compensation to adjusting the structure of partner compensation itself.
Why Change Your Partner Comp Structure?
In our work advising clients, we have seen three recurring patterns that are causing firms to update their partnership compensation.
First, small and boutique firms who haven’t promoted anyone to partner in more than five years, need to revamp their comp structure. Full stop. There is almost no chance that the comp structure that was put in years ago among founding partners will be adequate today. In the last few years, we have worked with several firms that haven’t updated their comp structure for as long as 30 years and are now elevating new equity partners. Moreover, it is likely that the partnership comp you need to establish to retain a new partner is different and, in most cases, more lucrative to the new partner than what the firm historically paid prior partners.
Second, more firms need to change their partnership structure when faced with a junior lawyer who is bringing in an unusually large book of business. This is especially true for firms that have historically required lawyers to be a certain vintage before being considered for partnership. We have seen firsthand that such an approach is increasingly at odds with what is happening in the market. If your firm is, for example, fortunate to have a sixth-year associate who is bringing in a million-dollar book or soon will, it is foolish to argue, as some existing partners do, that their firm has historically waited 7 or 8 years to make someone a partner. The increasing reality is that if you don’t pay young performers, someone else will.
And it’s not just about compensation. It’s also about providing your top financial performers with the resources and people they need to serve their growing practice. If you don’t, some other firm will. When deciding how much money to invest in a promising junior lawyer, it’s not relevant whether a more senior partner received a bonus or was elevated to a partnership years ago. We have seen law firms lose their best and brightest non-equity partners because they are looking to the past rather than what competitors are doing today.
Third, the opposite dynamic is also at play—when one or more partners are contributing significantly less than they used to. This is particularly a problem with partnerships that were founded with two to five lawyers. When the firm was founded, it was common and sensible to divide profits equally and to keep compensation differences among equity partners small. But fast forward ten or more years, and that presumption of equality may no longer be valid. For example, if one partner is both billing many more ours and bringing in the bulk of the business, the firm would be wise to recalibrate the compensation system before the busier, more economically productive partner gets angry, frustrated, and contemplates jumping ship.
What do these examples share? They highlight the mistake of assuming that you will be able or should want to keep the same comp structure the firm’s founding partners used.
This doesn’t mean, however, that every aspect of compensation becomes more favorable for the more junior partners. For example, it is increasingly common for firms that didn’t require a substantial buy-in to start the firm, or for folks who were offered a partnership ten years ago, to require new equity partners to make a payment to join the partnership. Likewise, more firms are asking new partners to pay for an increasing percentage of healthcare insurance costs, compared to partners five years ago.
The fact that more firms need to change their partnership comp structure doesn’t mean that every firm must follow the same playbook. There is still a wide latitude for firms to express their own preferences and to manifest different business cultures. Thus, for example, while more firms are making non-equity partners and keeping them as W-2 employees, some firms take the position that you are not truly a partner without some kind of profit split and that solely being paid as a W-2 doesn’t make you a “true” partner. Likewise, firms take quite different positions as to whether they permit their firm to loan money to an individual partner, or the extent to which they use a formula or a discretionary process to divide profits among existing partners.
As with many areas of managing a law firm, law firm leaders have more options than they realize when it comes to revamping their partner comp structure. The first step is to recognize that partner comp goes to the heart of what is expected of business owners and that their existing partnership comp system would likely benefit from an upgrade and an update.
How about you? What partner compensation issues is your firm facing?
For decades, Gideon Grunfeld has worked at the intersection of law, consulting, and human resources. His history of service to the legal community is sparked by a desire to elevate its standing and maintain lawyers’ quality of life and economic well-being. As President of Rainmaking For Lawyers, Gideon has devoted his career to helping lawyers and law firms grow their practices and build careers in rapidly changing times. Gideon founded Rainmaking For Lawyers in 2004 to collaborate with attorneys and law firms ranging from boutiques to the Am Law 200, in addressing issues related to business development, marketing, strategic planning, talent acquisition and retention, fee setting, and succession planning.
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