Law firm compensation models are ALWAYS a hot topic in the legal industry — especially at the partner level.
Firm leadership is always trying to thread the needle of incentives, rewards, and economic viability. It is essential to encourage the correct behavior for the firm.
For some firms, this means an emphasis on citizenship and mentoring; others only care about how much work each partner brings in.
The result of each firm solving that incentive challenge for themselves is infinite variability in how lawyers are compensated.
This is good news for candidates I work with because it allows you to find the perfect partner compensation fit for you. Doing so comes down to two things.
The first is understanding what you want.
The second is understanding each aspect of compensation in detail before negotiating a package that best aligns with your needs, practice, and personality.
In this blog post, I highlight some of the critical factors that make up law firm partner compensation models so that you can better negotiate your package and make more informed choices about tradeoffs.
- How is Law Firm Partner Compensation Calculated?
- Factors Impacting Law Firm Partner Compensation
- The Right System for You
- Negotiating Pay
- Guaranteed pay when changing firms.
- What’s next?
How is Law Firm Partner Compensation Calculated?
There are many law firm compensation structures. Some firms have formulaic compensation systems that give a certain amount of weight to specific factors, like client origination credit, hours billed, and realization rates, among other factors (we cover these below).
Other law firms use these factors in a more subjective approach to compensation. And while some firms are very transparent with their compensation systems, others are not so forthcoming.
One advantage working with so many firms over many years gives us is a good understanding of many firms’ compensation models.
No two law firm partner compensation models are the same, but there are some common approaches you should understand.
- Lockstep system: each partner of the same class year gets paid the same, and you get incremental raises that are not directly related to how much business you bring in or hours you bill – this is more unusual these days.
- Formula system: gives you the exact mathematical formula that allows you to calculate your compensation based on your actions. Because firms are trying to incentivize so many behaviors, including cross-selling/marketing, DEI, and other good firm citizenship, most firms that claim to use the formula have a subjective component now.
- Subjective: the firm gives a laundry list of all the things that will be considered for compensation and sometimes doesn’t tell you which ones are weighed more than others (though the amount of business you bring in is always important).
- Eat what you kill: a model that ties your earnings directly to the business you bring into the firm and how much you can convince your clients to spend.
- Open systems: transparently communicate all income, everything attributed to you and your actions, and there may be a clear formula or a more subjective formula that determines your earnings at the end of the year. You always know where you stand in comparison to everyone else… but even in a transparent system, you may not know what your end compensation will be.
- Closed or “Black box” systems: keep the cards more hidden, management tells you what they consider for compensation, but you may have no idea where you stand throughout the year.
- Reward for billable hours systems– especially prevalent in firms with large institutional clients.
- And, of course, the argue-at-the-holiday-party systems define very little until the partners get together to discuss (argue about) compensation at the end of the year. This sounds made up – but it does happen.
I am sure there are many other law firm partner compensation systems I haven’t thought of – where there are lawyers trying to figure out compensation structures, there is infinite variability.
However, several common factors impact partner compensation that are worth understanding.
Factors Impacting Law Firm Partner Compensation
The factors in this section are common ones that affect compensation.
Equity partner versus employee
The first factor impacting compensation is whether you are an equity partner. Equity partners are firm owners, and their compensation is tied to profitability. Partners have a say over management issues (including compensation) and generally earn more than non-equity employees.
If you are a partner, the most common way to earn more money is to bring in more business. Your compensation is often tied directly to the money you bring into the firm.
Originating Attorney Credit, or Origination Credit
Origination credit is credit that a lawyer gets for bringing business to the firm and is either determined by client or by matter.
Attribution of origination credit can be a tricky topic, and understanding the formula is essential.
One standard method is the attribution of origination based on the initial introduction. Such an attribution means that even if another lawyer (you, for example) makes the effort to bring in a new matter from a client, that lawyer (again, you) may not get origination credit.
This method may be great for the lawyer who introduced the client to the firm 20 years ago and now spends his days on the golf course. But it can be an issue for the newer lawyer who brings in the business but doesn’t get credit.
Origination is often an issue for younger lawyers with a significant book of business. And sometimes, the only way to get full origination credit is to take your clients to another firm.
The billing attorney is an experienced attorney with the time, experience, or skills needed to address a client’s needs. The billing attorney enters the client relationship when the originating attorney doesn’t have the time or expertise to handle the client’s needs.
While models differ, generally, billing attorneys share some of the origination credit.
Or another way to put it is often, billing attorneys do the work and pay some of the origination credit to the lawyer who made the original introduction.
A working attorney is any lawyer who works on a client file.
Generally, 30-40% of fees collected go to the lawyers who generate and work on the business.
If you are a rainmaker with a book of business, one challenge you may face is not having enough support from billing attorneys and working attorneys to serve your clients.
If you have a talent for bringing in work and then must do all the work yourself, this is almost certainly limiting your compensation.
The realization rate is how much of your bill the firm collects. If you billed 20 hours, but the client paid 15, your realization rate is 75%.
Firms must be able to pay you and generate a profit, so the more they have to discount or write off your fees, the harder it is for the firm to pay you.
Even if it isn’t explicitly in the calculation used to pay you, your realization will play a role.
Firm Citizenship Credit
Citizenship credit is compensation for doing good things for the firm.
These good things often involve internal training, supporting new hires, or being a good mentor. They can also include work like writing articles or blogs, speaking at conferences, serving on internal committees, or taking other actions to make the firm look better.
Basically, citizenship comprises the actions that make you an excellent contributor to the firm, not just your bottom line.
Cross-selling and cross-marketing
This is generally a pool of money to support lawyers who help each other bring in new business. I get some credit for inviting you to my meeting with a client so you can market your skills, for example.
Some firms wrap this into firm citizenship, but the firms that reward this directly may find it easier to incentivize.
The Right System for You
There is no perfect law firm partner compensation model.
However, there is a law firm compensation system for every type of lawyer, and there is likely one that will fit your work style.
As you evaluate and negotiate your compensation, there are many questions you should consider, such as:
- Are you the lone wolf who likes to eat what you kill?
- Do you prefer to hunt in a pack and share your success?
- Maybe you prefer to be on a team where you can bill a ton of hours and not worry about origination?
- Do you have a practice area that is high volume with lower rates?
- Does your firm require you to take on leadership roles? Do they compensate you for that?
- Does your firm’s current system reward origination too much and not leave enough money for the worker bees?
Thinking through these questions can help you clarify for yourself what you want as well as understand what you like and dislike about the structure you are evaluating.
The upshot is this: your firm’s compensation system should reward you based on your contributions and skills. If it doesn’t, there are firms out there that may be a better fit.
We are adamant that lawyers should be happy and well compensated.
However, there is a fundamental fact to keep in mind when negotiating: regardless of the compensation model, what you want, and what you are looking for, your contribution must support the firm’s economics.
Economic necessity would seem obvious, but lawyers often forget that their compensation must fit the firm’s needs.
If, for example, you bring in $1 million of revenue into the firm through your origination and billing, the firm can’t pay you $1.5 million.
That doesn’t support the economics of the firm.
Every action for which you receive compensation must, in some way, improve the firm. If you receive citizenship credit, the firm must believe that the effort you put into being a good corporate citizen will yield higher billable hours or more clients elsewhere.
When you negotiate pay packages, consider compensation as an economic negotiation, economics is at the heart of every law firm partner compensation package.
The firm is happy to pay you millions of dollars; you only have to be worth millions of dollars to the firm.
The general rule of thumb is that you get about a third of what you bring in. If you are a rainmaker, do very little work, and the firm relies on service partners, maybe you get less. If you do all your work yourself and bill ridiculously high rates, perhaps you get more.
The firm’s goal is to figure out how to keep people from leaving and incentivize the right activity while also making a profit.
There are as many ways of doing it as firms out there.
But it all comes back to economics.
Guaranteed pay when changing firms.
As a rainmaker changing firms, you will want to consider all aspects of your compensation, but the trickiest one will be the guarantee versus bonus.
When you switch, you will receive a guaranteed salary based on what you have done in the past. Then if you hit specific targets, you will earn a bonus.
Remember that you are a risk for the firm: they are betting that you will perform, but they don’t have enough history with you to know for sure.
So, one crucial tip I always share is that it is much easier to negotiate a higher percentage bonus than a higher guaranteed payment. The guaranteed payment is risky for them, whereas the percentage of income is all profit. So if you believe in yourself, go for the percentage, not the guarantee.
Does your firm’s compensation system meet your needs? We want successful lawyers to be happy, and compensation structure can hugely impact that happiness.
We help lawyers find their exact right perfect fit firm every day – fit includes compensation models. But compensation is only one part of the equation. Let’s talk if you are frustrated and wondering what your options are. It may be that you are already at the right firm and need to negotiate some of your compensation terms.
Whatever your situation, I am committed to your happiness. Give me a call today, and we can discuss your situation.