Transcript
"""What are some formulas for calculating non-equity partner compensation in a small law firm of around 10 lawyers?""
Typically, law firms have a way of operating. Most law firms work on the rule of thirds. The rule of thirds basically says that if $1,000,000 comes in from a partner with business, for example; then $333,000 will go to overhead, $333,000 to partner profits, and $333,000 to the partner that's doing the work. Now, that number can go up or down, but there's also functions for that. So many times they will get 50% of the money for the work they're doing. And that can be 30 to 50%, and then many times 15 to 20% of what other people are doing.
This is really the most popular or the most common way that partners are compensated, that have business. And when you take partners without business in a smaller law firm, typically what will happen is your cap is always going to be, if the person's billing out at five or maybe $600 an hour, your cap is going to be one-third of the revenue they generate. If you expect them to bill 1500 hours, that would be $900,000 a year. This is actually good information for people to learn. So that would be $900,000 a year, and the person would get, the most they would make would be $333,000. But in most cases, the law firms, if it's a partner without business, then what they will do is they will work on other people's stuff.
Most firms will take that number and they will reduce it to something like 20-, 15 to 25%. That's really how partners are compensated in law firms. It's important to think in terms of the percentage of the number of hours that the person's working based on your cost because you typically need one third for your overhead, because you don't know what that's going to be. That could be legal secretaries and paralegals, office space and parking. And then the other one third you need to have profits to distribute to the partners that do have business and then you need to have money to distribute to other people that work there, and this would also be for associates and all sorts of things. That's a way to think about it.
Typically, most law firms will try to reduce this as much as possible. If someone's billing out at $600 an hour and work 1500 hours, a salary of $180,000 a year would not be unheard of, which would be 20%, and then 25% of that would be $270k. So that's how you do that. But that's the main rule for how people are compensated, and it's also that way to some extent as an associate."