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.
All attorneys start their careers as associates, and many will go on to become of counsel, non-equity partners, or 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 rights which include, but are 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 is and who is not. Sometimes, law firms will differentiate by title (see below on firm titles and what they mean).
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:
Typically shares or percentage points are awarded based on the lawyer’s 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 and drive, interpersonal skills, strong work ethic and leadership skills.
Law firms are very careful who they ask to marry, it’s all about your ability to make it rain.
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 who is getting ready for retirement.
There are two types of compensation approaches: Closed and Open.
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:
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:
The Lockstep Model is based on tenure at the firm. All equity partners are paid the same scale based on the number of 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 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 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 generates. Eat What You Kill doesn’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.
The Rule of Thirds or the One-Thirds Rule is a quick down and dirty way to calculate what a Partner’s 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:
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 on making a transition.