Partner Compensation: Striking a Balance

Partner compensation is invariably the topic of most interest in every law firm. It is also a topic that involves the most fervent debate and encompasses the most varied points of view.

Biases Require Balance

Not surprisingly, partners normally advocate a compensation system that favors their personal strong points. Partners who do not generate much of their own business, but who have high billable hours, obviously favor a system based upon billable hours. Partners who bring in a great amount of “rain,” but allow it to be serviced by others, normally promote a system based heavily upon origination.

But a firm cannot be composed solely of attorneys who develop business, without any attorneys to service it. Conversely, a compensation plan based solely upon billable hours fails to recognize both the value and absolute need for business development: if the work is not brought it, billable hours will obviously become non-existent.

Similarly, a firm must have some attorneys with administrative and managerial skills, but the firm cannot benefit from those skills without actual business to administer and oversee.

A firm seeking long-term success, therefore, must recognize that all types of partners bring strengths and weaknesses to the process of creating revenue. To create a fair and balanced compensation system, the firm must resolve the tensions between these necessary contributions of its partners. Here are some guidelines for striking that balance.

Reward all originators ' but don't undervalue the overall contribution of the firm itself. There are different kinds of origination. One attorney may be successful in developing new business from sources not previously associated with the firm. On the other hand, the firm may also have long-standing clients whose business has been greatly expanded by a particular partner or group of partners. Obviously, both types of origination have value for the firm.

The dangers of a formula based purely upon origination are obvious. Initially, it discourages partners from giving support to the marketing efforts of others. More importantly, such a formula fails to reward partners who maintain a client originated by another, even when they are more suited for handling that particular case. It also discourages the administration of that client.

Origination credit also becomes problematic over time. At some point, the line becomes blurred between the partner who originated the work and the partner or partners who are maintaining the work and providing quality representation that keeps the client coming back. Realistically, after enough contacts by other attorneys, there comes a point at which a client moves from being “a client originated by [a partner]” to being simply a client of the firm.

Formulas based solely on origination can therefore be disastrous, leading to partners who are disgruntled from servicing clients generated decades before by a partner with little recent contact.

Even initially, moreover, the overall firm should be rewarded for its contribution to an originator's accomplishment. While some clients and many attorneys, particularly heavy rainmakers, like to stress that clients hire attorneys and not law firms, the fact remains that work of a certain level and scale cannot be performed or serviced by a solo practitioner. As an example, a solo practitioner would not be in a position to obtain and handle business consisting of a large volume of liability claims for a self-insured corporation. Substantial corporate transactions similarly could not be handled by a solo practitioner. Invariably the size, resources and reputation of the law firm play a role in an individual partner's success in obtaining or expanding business. A fair compensation plan must therefore reflect the value of the overall firm's resources.

In this connection, formulas that attempt to balance origination and production must also consider the nature of a firm's practice and financial structure. For example, a law firm specializing primarily in insurance defense litigation and operating at a low hourly rate cannot readily afford highly compensated partners who merely originate business without having significant billable time. Such a firm must, of course, set and maintain billable hours requirements.

By contrast, a firm in which hourly rates are much higher, as for labor or corporate transactional work, may have the luxury of highly compensating partners who are primarily rainmakers.

In any case, marketing efforts over and above billable production must be recognized and rewarded.

Reward personal production. Rainmakers are ultimately successful only if they are supported by highly competent attorneys who can do the work, produce the results and keep the client happy. A great trial lawyer who does not bring in business directly, but handles the most difficult cases, produces the results, and achieves a national reputation, has great value and plays a major role in bringing in business, albeit through an indirect process. Many other attorneys may also be skilled producers, though lacking strengths in marketing and business development.

Ultimately, a firm must recognize the need for both types of attorneys, by developing a formula that recognizes and compensates them not only for business origination but also for client service, skill level and results in actual case handling.

The ideal partner who ultimately should receive the highest compensation is the attorney who is able to bring in significant work and also do that work at a highly competent level with great results. These are the individuals who will emerge as stars of the firm.

Putting the stars aside, all partners must realistically develop some level of business, or their earnings will be capped. All partners must also recognize the need to service business as well as develop new client sources.

Don't discourage work referral. While a firm's compensation formula must reward production, formulas that overemphasize production are shortsighted. Such a formula leads partners to hoard all the work they originate, rather than referring some to other attorneys in the firm. Particularly in terms of lower paying hourly rate work, eg, insurance defense, profit will be capped unless the work is leveraged by using other attorneys, particularly lower-paid associates.

Restricting a client's contact with other attorneys in the firm also leads to a divisive legal practice. That is the antithesis of the proper operation and attitude of a law firm, and ultimately reduces partners to working like solo practitioners who merely share office space and some expenses.

Encourage participation in firm management. Managing partners and other attorneys with administrative responsibilities may often have a difficult time producing the same billable hours as attorneys without such responsibilities.

Again, the nature of the law firm practice must be considered. Firms dealing with high volume civil litigation practices may find it difficult to support a managing partner with full-time administrative responsibilities and no billable requirements. On the other hand, firms doing work at higher hourly rates may feel that a managing partner freed from personal production requirements is a necessity.

(Attorneys performing administrative duties should be wary of giving up all ties to their personal practice, however, since they are obviously giving up a certain amount of leverage and power within the firm by doing so.)

In any case, attorneys producing significant billable work and also performing administrative duties should justly receive additional compensation for those duties.

Is a Perfectly Balanced Compensation Formula Possible?

Plainly the answer to this question is no. There are no absolutely fair partner compensation formulas; indeed, compensation cannot ultimately be formulaic in nature. Moreover, there are few firms in which data can even be input to a formula in a neutral manner; all the factors discussed above must be considered individually and given a fair weight.

Setting fair compensation is a difficult balancing act, often subject to adjustment and compromise, and one that must be tailored to the nature of the practice. All the contributions discussed above are important to the operation of a healthy law firm, and all must be recognized and compensated in an appropriate manner.

Partner compensation is invariably the topic of most interest in every law firm. It is also a topic that involves the most fervent debate and encompasses the most varied points of view.

Biases Require Balance

Not surprisingly, partners normally advocate a compensation system that favors their personal strong points. Partners who do not generate much of their own business, but who have high billable hours, obviously favor a system based upon billable hours. Partners who bring in a great amount of “rain,” but allow it to be serviced by others, normally promote a system based heavily upon origination.

But a firm cannot be composed solely of attorneys who develop business, without any attorneys to service it. Conversely, a compensation plan based solely upon billable hours fails to recognize both the value and absolute need for business development: if the work is not brought it, billable hours will obviously become non-existent.

Similarly, a firm must have some attorneys with administrative and managerial skills, but the firm cannot benefit from those skills without actual business to administer and oversee.

A firm seeking long-term success, therefore, must recognize that all types of partners bring strengths and weaknesses to the process of creating revenue. To create a fair and balanced compensation system, the firm must resolve the tensions between these necessary contributions of its partners. Here are some guidelines for striking that balance.

Reward all originators ' but don't undervalue the overall contribution of the firm itself. There are different kinds of origination. One attorney may be successful in developing new business from sources not previously associated with the firm. On the other hand, the firm may also have long-standing clients whose business has been greatly expanded by a particular partner or group of partners. Obviously, both types of origination have value for the firm.

The dangers of a formula based purely upon origination are obvious. Initially, it discourages partners from giving support to the marketing efforts of others. More importantly, such a formula fails to reward partners who maintain a client originated by another, even when they are more suited for handling that particular case. It also discourages the administration of that client.

Origination credit also becomes problematic over time. At some point, the line becomes blurred between the partner who originated the work and the partner or partners who are maintaining the work and providing quality representation that keeps the client coming back. Realistically, after enough contacts by other attorneys, there comes a point at which a client moves from being “a client originated by [a partner]” to being simply a client of the firm.

Formulas based solely on origination can therefore be disastrous, leading to partners who are disgruntled from servicing clients generated decades before by a partner with little recent contact.

Even initially, moreover, the overall firm should be rewarded for its contribution to an originator's accomplishment. While some clients and many attorneys, particularly heavy rainmakers, like to stress that clients hire attorneys and not law firms, the fact remains that work of a certain level and scale cannot be performed or serviced by a solo practitioner. As an example, a solo practitioner would not be in a position to obtain and handle business consisting of a large volume of liability claims for a self-insured corporation. Substantial corporate transactions similarly could not be handled by a solo practitioner. Invariably the size, resources and reputation of the law firm play a role in an individual partner's success in obtaining or expanding business. A fair compensation plan must therefore reflect the value of the overall firm's resources.

In this connection, formulas that attempt to balance origination and production must also consider the nature of a firm's practice and financial structure. For example, a law firm specializing primarily in insurance defense litigation and operating at a low hourly rate cannot readily afford highly compensated partners who merely originate business without having significant billable time. Such a firm must, of course, set and maintain billable hours requirements.

By contrast, a firm in which hourly rates are much higher, as for labor or corporate transactional work, may have the luxury of highly compensating partners who are primarily rainmakers.

In any case, marketing efforts over and above billable production must be recognized and rewarded.

Reward personal production. Rainmakers are ultimately successful only if they are supported by highly competent attorneys who can do the work, produce the results and keep the client happy. A great trial lawyer who does not bring in business directly, but handles the most difficult cases, produces the results, and achieves a national reputation, has great value and plays a major role in bringing in business, albeit through an indirect process. Many other attorneys may also be skilled producers, though lacking strengths in marketing and business development.

Ultimately, a firm must recognize the need for both types of attorneys, by developing a formula that recognizes and compensates them not only for business origination but also for client service, skill level and results in actual case handling.

The ideal partner who ultimately should receive the highest compensation is the attorney who is able to bring in significant work and also do that work at a highly competent level with great results. These are the individuals who will emerge as stars of the firm.

Putting the stars aside, all partners must realistically develop some level of business, or their earnings will be capped. All partners must also recognize the need to service business as well as develop new client sources.

Don't discourage work referral. While a firm's compensation formula must reward production, formulas that overemphasize production are shortsighted. Such a formula leads partners to hoard all the work they originate, rather than referring some to other attorneys in the firm. Particularly in terms of lower paying hourly rate work, eg, insurance defense, profit will be capped unless the work is leveraged by using other attorneys, particularly lower-paid associates.

Restricting a client's contact with other attorneys in the firm also leads to a divisive legal practice. That is the antithesis of the proper operation and attitude of a law firm, and ultimately reduces partners to working like solo practitioners who merely share office space and some expenses.

Encourage participation in firm management. Managing partners and other attorneys with administrative responsibilities may often have a difficult time producing the same billable hours as attorneys without such responsibilities.

Again, the nature of the law firm practice must be considered. Firms dealing with high volume civil litigation practices may find it difficult to support a managing partner with full-time administrative responsibilities and no billable requirements. On the other hand, firms doing work at higher hourly rates may feel that a managing partner freed from personal production requirements is a necessity.

(Attorneys performing administrative duties should be wary of giving up all ties to their personal practice, however, since they are obviously giving up a certain amount of leverage and power within the firm by doing so.)

In any case, attorneys producing significant billable work and also performing administrative duties should justly receive additional compensation for those duties.

Is a Perfectly Balanced Compensation Formula Possible?

Plainly the answer to this question is no. There are no absolutely fair partner compensation formulas; indeed, compensation cannot ultimately be formulaic in nature. Moreover, there are few firms in which data can even be input to a formula in a neutral manner; all the factors discussed above must be considered individually and given a fair weight.

Setting fair compensation is a difficult balancing act, often subject to adjustment and compromise, and one that must be tailored to the nature of the practice. All the contributions discussed above are important to the operation of a healthy law firm, and all must be recognized and compensated in an appropriate manner.