The term “lateral partner bonus” is somewhat of a misnomer in the legal world, yet it comes up quite a bit in discussions and research into the process. So, in this post, I’ll explain the concept of lateral partner bonuses and delve into lateral partner compensation in general.
While there isn’t a standardized lateral partner bonus, partners making a lateral move can earn bonuses and payouts. There are three categories of bonuses:
- A signing bonus.
- A bonus to make you whole.
- A bonus at the end of the year.
I explain these below and then describe the first-year compensation structure for lateral partners who make the move.
The signing bonus
The first type of lateral partner bonus is a signing bonus. This is a one-time payment to the partner upon joining the new firm. This bonus aims to incentivize the partner to make the move.
Signing bonuses are more common at the associate level or earlier in your career and are unusual in lateral partner hiring.
A firm typically only pays a signing bonus if you fill a crucial gap for the firm. This may be the case if:
- You have expertise that the firm desperately needs; this could be industry expertise or a highly specialized practice area that is in high demand at the firm.
- You have a fantastic track record and reputation that is so valuable that you significantly enhance the firm’s ability to attract clients.
Remember that the lateral partner hiring process is a growth strategy for the firm. So, they will only pay a signing bonus if your skills help the firm grow beyond your book of business.
A firm will hire and pay you based on your book of business. The book of business and the fact that you have a book of business makes the signing bonus unusual. Since you bring revenue, they pay you out of that revenue, which is generally more than what you would get through a signing bonus anyway.
The “make whole” bonus
The second type of lateral partner bonus is a ‘make whole’ bonus. This is much more common and is designed to compensate the partner for lost income from their previous firm. This lost income may come from unpaid bonuses or profit sharing. The aim is to ensure the partner is not financially disadvantaged by making the lateral move.
Firms know you are leaving money on the table when you move from one firm to another. This “lateral partner bonus” makes the move possible without you waiting until you receive all the compensation due to you at the end of the year.
The exact right, perfect-fit firm will likely be willing to make you whole. This is why I encourage unhappy lawyers who want to make a move to take action now. The best time to start your search is now; starting early gives you more flexibility, and this bonus will help ensure you don’t lose money in the process.
The end-of-year bonus
The third type of lateral partner bonus is an end-of-year bonus. This is an additional payment made at the end of the fiscal year based on the partner’s performance and contribution to the firm during that year.
This isn’t a bonus in the true sense of the word; it is a part of the negotiated agreement for first-year compensation. So, I’ll describe it within that context.
First-year compensation for lateral partners
When lateral partners join a firm, their first-year compensation is usually negotiated upfront.
Firms pay out of the book of business you bring to them. Fundamental to law firm economics is that you bring in the business, take a part of what you bring in, and the rest supports the firm (including the staff and associates who support you).
The problem in the first year is the significant uncertainty around how much business will come with you to the new firm and the business you may generate with their platform. You think you know the number but only find out once you move.
First-year compensation for lateral partners typically includes a guaranteed base salary or draw plus a percentage of the business the partner brings into the firm. You receive the percentage payout at the end of the year, so it looks like a bonus, but there isn’t any uncertainty around it: the amount is agreed up front as a part of your lateral partner move.
Something to keep in mind: it is much easier to negotiate a higher percentage payout than a higher base salary. The percentage payout aligns well with firm economics and shows your confidence in your business book.
Lateral partners are, for the most part, beyond bonuses.
A firm may pay you a bonus because they need your expertise desperately, but in most cases, once you have a book of business, you earn money based on that book of business. Pay based on your book of business is good news: you’ll make much more money bringing in clients than you ever could through incentive bonuses.
The truth is that incentive bonuses exist to encourage people to do better work. As a rainmaker, that incentive comes from clients wanting to do business with you.
We’re here to help
If you have questions about your compensation, are considering a later partner move, or want to learn about your options, we are here to help.
Let’s schedule a call to discuss your situation, assess where you are, and see if there is a better situation waiting for you if you already are in at the exact right perfect fit firm.
I look forward to our conversation.