Compensation: How to Divide the “Pie”

Published April 29, 2014

Dividing the pie is always a touchy subject amongst those who want to eat their fair share. Similarly, compensation, or how to divide what is left over in a law firm, is a subject sure to arouse emotions.

There are three levels to consider: (1) the staff, (2) the associates and nonequity partners, and (3) the equity partners.

Staff
The actual cash compensation must be competitive with the marketplace. The availability of benefits also play a major role in employees’ thought processes. In addition, noncash factors, such as reputation of the firm and opportunities for education and professional association activities, are important.

Retaining employees is important. Turnover is one of the highest-cost items in any business operation. Law firms could increase their profit by paying more attention to personnel issues.

Associates and Nonequity Partners
Law firms, even large ones, must provide value to their clients. And they must be profitable in order to open their doors the following day.

While the new, high-priced associates may not earn more than they cost the firm in the very beginning, at some point within the first three to five years, on average, these lawyers must be profitable. In other words, their total billable hours minus the expenses attributed to them should equal a net profit to the firm.

Equity Partners
Equity partners in the Am Law top 50 law firms recorded average profits per partner of $1.6 million in 2012. The contrast to the typical solo lawyer’s experience could not be more dramatic.

There are, of course, various formulas for determining compensation among partners. It’s not important what formula is used as long as all involved perceive the process as fair.

Conclusion
People will generally accept a great deal less than the top compensation to which they might be entitled as long as they like their colleagues, they think the work that they do is interesting, and they enjoy their clients.

Categorized in: Coaching, Financial and Cash Flow Management

Audience type: Administrators, Associates, Large Law Firms, Small Law Firms, Sole Practitioners