Monday, October 12th, 2015
By Gideon Grunfeld
Some law firm partnership agreements call for the equal division of profits among partners. This is especially true for newly created firms and firms with two, three, or four partners. In my experience this most commonly occurs when two lawyers come together to start a new firm and decide to split revenues and/or profits evenly.
Invariably, the contributions made by the respective partners to the financial well-being of the firm are not identical. One contributes more. And at some point, partners who feel that they are contributing more begin to resent that they are dividing money equally.
In the past two years or so, I’ve been approached a half a dozen times by the partner who feels that they should get more about how to make that happen. They feel like they have been patient, but can no longer tolerate a compensation system that they feel grossly undercompensates them for their efforts and results. By the time they call me, they have already considered splitting off and going out on their own. This can therefore pose an existential threat to a law firm.
So what should law firm leaders do to address the desire of a partner to earn more than other partners?
First, recognize that compensation terms in law firm partnership agreements are not intended to be permanent. A well-run firm will periodically revisit the appropriateness of its compensation system and the extent to which it serves the needs of the partners. We rarely see a firm with ten or more partners that has a totally even split among partners. And large firms have long compensated some partners better than others. Thus, a smallish firm that divides profits evenly should expect that this arrangement will need to be modified in two or three years.
Second, discussions relating to modifying the compensation system should be part of a broader strategic planning process. One of the most common mistakes that law firm leaders make is that they try to change the compensation system without recognizing that compensation drives firm culture and is tied to other critical aspects of the firm and how it functions. Thus, a discussion about compensation should begin with a discussion of what the partners want to accomplish over the next several years, what behavior they want to encourage and reward, and more broadly what kind of firm they want to build.
Thus, for example, if firm leaders decide that they want to bring in more clients, increasing compensation for partners who bring in clients is one way to do that. This is what firms do when they to adopt a compensation system is that is more “eat what you kill.” Different firms have reached very different conclusions, however, about how much credit should be given to what is commonly referred to as the “originating partner.” In other words, what percentage of the revenues generated by a law firm client should go to the partner who brought in that client, even if that lawyer didn’t do any legal work for that client?
Likewise, law firm compensation systems vary dramatically in terms of how discretionary and transparent they are to the partnership. For example, in some firms compensation is calculated in accordance with a formula. In other firms, compensation is highly discretionary. Some firms keep partnership compensation hidden from all but a few decision makers; in other firms every partner knows exactly how much every other partner earns. And firms have thrived and failed using all of these compensation systems. This is not a situation where one size fits all. It’s more that the partners of a particular firm need to reach a consensus about what will work best work for them.
Third, the process of addressing and changing a firm’s compensation system works best when the partner(s) who want to increase their compensation can offer specific proposals as to what they want. Too often, partners who approach me about this issue focus on the shortcomings of their fellow partners. They emphasize how much more ty have billed or collected than their colleagues have, or how many more hours they have devoted to rainmaking activities.
But many law partners who don’t like the current compensation system fall silent when I ask them, “How would you like to change the compensation system?” or “What compensation system do you want?” Not surprisingly, lawyers are better at spotting issues with the current compensation system than they are coming up with proposed solutions.
If you want to change a compensation system, the key is to be able to communicate about specific options and the reasons behind them. When lawyers feel that the numbers in the compensation system are aligned with certain kinds of values or a desire to encourage certain kinds of behavior, it increases the chances that they will find the compensation system to be fair and be willing to accept different levels of compensation for different partners.
Compensation is a complicated and emotional issue for many businesses, but discussing changes to it shouldn’t be traumatic or life threatening. If approached correctly, it is possible to negotiate a change in the compensation system in weeks rather than years.