Compensating The Unique Practice Partner

How do you compensate the partner who has a unique practice within a law firm? Truly unique practice partners should be fairly uncommon, so first it makes sense to ask if a unique practice actually exists?

Mere specialization does not equal uniqueness. A practice group (eg, litigation vs. corporate, or insurance defense vs. contingent fee ' to name just two of the more common and noticeable pairs of specialized practices) should consider itself unique and deserving of a separate economic arrangement only if that is the nature of relationships among all partners. That would typically occur in a law firm organized and operated as a confederation.

In a more closely knit firm, a unique practice partner is one who has developed a practice that is outside the firm's core services and/or clients. Such a practice is likely to be:

• Self supporting: of sufficient scale to be a stand-alone operation;
• Independent: in that it is not dependent on the rest of the firm for the clients and work (although resources of the firm may support it to some extent);
• Interesting: at least for the partner who developed it; and
• Sustainable: economically viable over many years and in varying economic conditions.

Compensation Variables and Firm Types

The answer to the question “How?” ' as any lawyer is fond of saying ' is “It depends.” There are two significant variables that affect how to compensate the unique practice partner: a) the method of remunerating partners at the firm and b) the nature of the relationships among all the partners.

If the firm is a confederation of space sharers, the compensation issue may be relatively simple. In this type of firm, partners are likely to make independent economic decisions regarding many issues, and joint decisions on only a few issues such as space and common services. It is likely that this type of law firm (actually a firm of many “mini-firms”) will allocate receipts and expenses directly to each of its various “profit centers.” These profit centers may be individual partners, or small groups of partners who have banded together for a common specialty; so in this scenario partners with a unique practice may not be so unique. The compensation systems in such firms tend toward the “eat what you kill” variety.

Deciding on compensation is more difficult in a team-oriented firm. This firm type is characterized by client sharing, pooled resources, common philosophies and the like. Within this type of firm the partner with a unique practice will quite likely operate within the firm's environment for all but the clients sought and/or services offered. (A separate, and possibly more important, topic for discussion within such a firm is the rationale for including a unique practice in the first place.)

A team-oriented firm that pays its partners using objective metrics such as business generated, business managed, personal productivity and the like will find compensating the partner with the unique practice area a bit easier, as such metrics apply equally to the unique practitioner and to the general partner population.

Once a firm adds subjective elements such as management, training, leadership, or firm marketing; however, the compensation question begins to get more difficult. Some of these traits may not be applicable to the unique practitioner. The extent to which the compensation decision-makers have latitude in applying criteria will affect the difficulty they have in fairly addressing the unique practitioner.

Some firms desire a team-oriented organization where the economic rewards are shared among the owners; tiered, lock-step and equal share systems clearly fall into this category. In these situations the unique practitioner's compensation is most problematic.

The best course to pursue regarding the unique practitioner is to first identify what the firm wants out of its relationship with this individual. If the intent is that this is a unique practice but still part of the firm, then it would seem logical that the group assumes the risks and rewards. If the intent is to segregate the practice, then a separately negotiated compensation arrangement makes the most sense. This is often the case with lawyers designated “special counsel” and “of counsel” in a law firm.

Variety of Compensation Methods

When the relationship calls for a special compensation arrangement, it's important to clarify how risks and rewards will be shared. There are many variations, from the elegantly simple to the technically complex.

At the simple end of the spectrum are arrangements that split the fees paid. Three scenarios apply:

1. The unique practice partner originates some work that the firm services. Here the unique practice partner is generally entitled to a range from 10% to one-third of the fee.

2. The unique practice partner originates and services the work. Here the unique practice partner is generally entitled to a range from 40% to two-thirds of the fee.

In each of the above situations the remainder of the fee goes to the firm to cover overhead and the value of its time if it services the work.

3. The unique practice partner may also have an agreed upon rate for servicing firm clients. This is a more typical compensation approach for a unique practitioner servicing firm clients.

Alternatively, the arrangement for the unique practice partner to service firm clients can be a percentage of the fees paid by those clients (like the two scenarios described above). Such an arrangement is much more typical of a firm's relationship with an of counsel lawyer, however, and its use suggests that the practice area involved may not meet the definition of unique.

Some firms adopt the profit center approach, allocating the direct expenses of malpractice insurance, rent, and secretarial and other staff who, while employees of the firm, are dedicated to the unique practice partner. The rent charged is often a bit higher than the firm's rent, to provide some contribution towards general overhead and firm-wide office services such as reception. Directly allocated employee expenses include fringe benefits and mandatory employer contributions and taxes. Fees belong to the unique practice partner, who is then charged back for direct overhead and the agreed upon rates for firm timekeepers who work on his or her matters.

In yet another scenario, some firms split the unique practice partner's fee income so that the unique partner takes the first “x” of fees, the firm takes the next “y” of fees, and then they split anything above “x plus y.” Such fee sharing, which provides cash flow to each party, may be agreed upon as a simplified means to recognize the elements of origination, servicing, and overhead without the bother of tracking and accounting specifically for each.

This brief sample of what has been done shows that the methods for compensating the partner with a unique practice area can be quite diverse. One is limited only by one's creativity.

How do you compensate the partner who has a unique practice within a law firm? Truly unique practice partners should be fairly uncommon, so first it makes sense to ask if a unique practice actually exists?

Mere specialization does not equal uniqueness. A practice group (eg, litigation vs. corporate, or insurance defense vs. contingent fee ' to name just two of the more common and noticeable pairs of specialized practices) should consider itself unique and deserving of a separate economic arrangement only if that is the nature of relationships among all partners. That would typically occur in a law firm organized and operated as a confederation.

In a more closely knit firm, a unique practice partner is one who has developed a practice that is outside the firm's core services and/or clients. Such a practice is likely to be:

• Self supporting: of sufficient scale to be a stand-alone operation;
• Independent: in that it is not dependent on the rest of the firm for the clients and work (although resources of the firm may support it to some extent);
• Interesting: at least for the partner who developed it; and
• Sustainable: economically viable over many years and in varying economic conditions.

Compensation Variables and Firm Types

The answer to the question “How?” ' as any lawyer is fond of saying ' is “It depends.” There are two significant variables that affect how to compensate the unique practice partner: a) the method of remunerating partners at the firm and b) the nature of the relationships among all the partners.

If the firm is a confederation of space sharers, the compensation issue may be relatively simple. In this type of firm, partners are likely to make independent economic decisions regarding many issues, and joint decisions on only a few issues such as space and common services. It is likely that this type of law firm (actually a firm of many “mini-firms”) will allocate receipts and expenses directly to each of its various “profit centers.” These profit centers may be individual partners, or small groups of partners who have banded together for a common specialty; so in this scenario partners with a unique practice may not be so unique. The compensation systems in such firms tend toward the “eat what you kill” variety.

Deciding on compensation is more difficult in a team-oriented firm. This firm type is characterized by client sharing, pooled resources, common philosophies and the like. Within this type of firm the partner with a unique practice will quite likely operate within the firm's environment for all but the clients sought and/or services offered. (A separate, and possibly more important, topic for discussion within such a firm is the rationale for including a unique practice in the first place.)

A team-oriented firm that pays its partners using objective metrics such as business generated, business managed, personal productivity and the like will find compensating the partner with the unique practice area a bit easier, as such metrics apply equally to the unique practitioner and to the general partner population.

Once a firm adds subjective elements such as management, training, leadership, or firm marketing; however, the compensation question begins to get more difficult. Some of these traits may not be applicable to the unique practitioner. The extent to which the compensation decision-makers have latitude in applying criteria will affect the difficulty they have in fairly addressing the unique practitioner.

Some firms desire a team-oriented organization where the economic rewards are shared among the owners; tiered, lock-step and equal share systems clearly fall into this category. In these situations the unique practitioner's compensation is most problematic.

The best course to pursue regarding the unique practitioner is to first identify what the firm wants out of its relationship with this individual. If the intent is that this is a unique practice but still part of the firm, then it would seem logical that the group assumes the risks and rewards. If the intent is to segregate the practice, then a separately negotiated compensation arrangement makes the most sense. This is often the case with lawyers designated “special counsel” and “of counsel” in a law firm.

Variety of Compensation Methods

When the relationship calls for a special compensation arrangement, it's important to clarify how risks and rewards will be shared. There are many variations, from the elegantly simple to the technically complex.

At the simple end of the spectrum are arrangements that split the fees paid. Three scenarios apply:

1. The unique practice partner originates some work that the firm services. Here the unique practice partner is generally entitled to a range from 10% to one-third of the fee.

2. The unique practice partner originates and services the work. Here the unique practice partner is generally entitled to a range from 40% to two-thirds of the fee.

In each of the above situations the remainder of the fee goes to the firm to cover overhead and the value of its time if it services the work.

3. The unique practice partner may also have an agreed upon rate for servicing firm clients. This is a more typical compensation approach for a unique practitioner servicing firm clients.

Alternatively, the arrangement for the unique practice partner to service firm clients can be a percentage of the fees paid by those clients (like the two scenarios described above). Such an arrangement is much more typical of a firm's relationship with an of counsel lawyer, however, and its use suggests that the practice area involved may not meet the definition of unique.

Some firms adopt the profit center approach, allocating the direct expenses of malpractice insurance, rent, and secretarial and other staff who, while employees of the firm, are dedicated to the unique practice partner. The rent charged is often a bit higher than the firm's rent, to provide some contribution towards general overhead and firm-wide office services such as reception. Directly allocated employee expenses include fringe benefits and mandatory employer contributions and taxes. Fees belong to the unique practice partner, who is then charged back for direct overhead and the agreed upon rates for firm timekeepers who work on his or her matters.

In yet another scenario, some firms split the unique practice partner's fee income so that the unique partner takes the first “x” of fees, the firm takes the next “y” of fees, and then they split anything above “x plus y.” Such fee sharing, which provides cash flow to each party, may be agreed upon as a simplified means to recognize the elements of origination, servicing, and overhead without the bother of tracking and accounting specifically for each.

This brief sample of what has been done shows that the methods for compensating the partner with a unique practice area can be quite diverse. One is limited only by one's creativity.