Law Firm Partner Compensation Models & You
Gillman Strategic Group
Candidate-facing partner placement. Let us be your "law firm matchmaker" and help find the exact right perfect fit.
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.?
This guide will help you understand partner compensation packages.?
In this article, I go through;?
A recurring theme is the value of your book of business. I don't go into valuing your book of business in this post, but you can read more about that topic here:??
Trends in law compensation
Compensation continues its upward march
Last year, we were surprised to see Millbank lead the charge to record-breaking bonuses and pay increases. But they did it again this summer, rolling out summer bonuses for associates and special counsel. (They were the only firm to offer summer bonuses).?
Partners are also seeing increases, with partner compensation doubling over the last decade and up 26% over the previous two years.
However, firms are also more rigorously adjusting compensation based on performance. The top dollars go to those who bring in revenue. Throughout the market, 10% to 30% of partners see pay cuts , generally because they are bringing in less business than they used to.?
Associates have options
Milbank was the only AmLaw 100 firm we know of to offer these outsized summer bonuses, which makes it stand out as a place where lawyers want to work.?
Some boutique firms followed suit as a way to stand out and attract associates.?
This matters because if you need good associates to help you do your work, you want to understand what your firm is doing to attract and retain the right people.?
Some firms may be overpaying, but some aren’t paying enough. Where does your firm fit, and does its strategy fit yours??
Lateral partner pay guarantees
We’ve found that first-year guarantees are common in the Lateral Partner market. After that, the expectation is that you will bring in the business to support your income.?
There is some suggestion that longer-term guarantees may occasionally be possible . We are seeing some firms offer two-year guarantees. Longer guarantees are often given in specific situations, such as building a new practice area from scratch, where you may need a longer runway. The business cycle also plays a role: lateral partners have more leverage when the market is strong.??
Overall, underperforming lateral partners have burned many firms, so firms will try limiting their exposure and not offer long-term cash guarantees.??
Guarantees aren’t always cash, though. Firms may guarantee a percentage of business or equity shares.?
I’ve even found that very confident partners can do better by focusing on earning more of what they bring in over time rather than upfront guarantees. You’re changing firms so you can work better, and if you can bring in the business, take the percentage, not the cash.?
The evolution of non-equity partners
Over the past few years, non-equity partnerships have become more prevalent. Firms see this as a way to raise rates to partner rates without changing the firm ownership structure, to support non-equity partners with business development, and to create an alternative career path for those who don’t want to do the business development work of full partners.?
In some cases, this strategy helps promising associates strengthen their book of business and become equity partners. But not always, and there are some concerns about exactly how this structure will work.?
Paying non-equity partners more money without requiring them to bring in business can create financial issues. Also, non-equity patterns often do not clearly show how they will be compensated. This is leading some firms to work on incentive structures , and some are concerned that non-equity partners create “lesser-class citizens ” within the firm, which can have negative effects.?
There’s also been some legal action. This case against Duane Morris claims they used the non-equity partnership model to shift income, systematically underpaying some and overpaying others.?
How this will turn out is unclear, but it does seem logical that creating a second class of partners might lead to friction.?
Nevertheless, non-equity partnerships are likely here to stay, even as firms debate how this structure will work in the long run.?
If you are considering a non-equity partnership, be sure you understand the compensation system and your rights as a non-equity partner. These details will be essential as the market shifts.?
Challenges to the billable hour system
Billable hours are the norm, but this topic occasionally surfaces as firms consider how to take a more value-added approach to billing. Some firms use value-based billing, which offers certain results for a fixed price.?
Your compensation, in this case, will be less about billable hours and more about creating repeatable deliverables quickly.?
Only a few firms use value-based billing, though some suggest that as AI systems take over more of the timely work , we will see more value-based and less hourly billing.?
That could happen, though I expect the billable hour to be around for a while. I also expect that your compensation will be some function of the hours billed, whether yours or your team’s hours.?
How is Law Firm Partner Compensation Calculated??
There are many law firm partner 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. While some firms are very transparent about their compensation systems, others are less 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.?
For example:?
I am sure there are many other systems I haven't thought of—where lawyers are trying to figure out compensation structures, there is infinite variability.??
However, several common factors impact partner compensation that are worth understanding.?
Factors Impacting 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 is to bring in more business. Your compensation is often tied directly to the money you bring into the firm.
Non-equity Partnership model?
Most top law firms have implemented a non-equity partnership tier, where you may have the partner title and many of the same rights as partners, but without an ownership stake.?
Firms see this as a way to increase rates (partners charge a higher rate) with the complexity of expanding ownership, and it creates a career path for lawyers who don’t want to become equity partners or who need support developing business before they become equity partners.?
There is debate about the value of a two-tier partnership model. Some firms and partners complain about non-equity partners being “second tier” or “fake” partners. Others say there is value in the title, and both lawyers and firms get something as a result.?
You should make more money as a non-equity partner than as an associate, and a partner position can help lawyers brand themselves as partners for their next move.
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 the 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 an effort to bring in a new matter from a client, that lawyer (again, you) may not get origination credit.??
This method may be excellent 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.?
Billing Attorney/Relationship Attorney?
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.?
Working Attorney?
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, you may need more 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.?
Realization Rates?
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 action 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 should be 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.
Sometimes the firm relies on the lawyers to divide up origination credit themselves, which doesn’t always work well for the less squeaky wheel.??
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:?
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.
Remember that while it is about you, it isn’t only about you. If your firm does not reward associates and staff, you may not be able to count on them for long. If that’s the case, then your compensation may never be enough because you’ll never escape the grunt work.?
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.?
Negotiating Pay
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.?
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, you may 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.
To put yourself in the strongest position to negotiate your pay, know what you are worth to the firm. Take the time to estimate the value of your book of business and use law firm economics to your advantage.?
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.??
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.??
Whats next?
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.?