Description
The Many Formulas of Partner Compensation
[00:00:00] How much do partners at a firm make, on average?
It really depends on the firm and the location. there's really no answer to that question.
The salary survey is online. I know about an American lawyer does one each year. And you can find that information online, but it's really all over the board.
What I would typically say, the way to think about partnership compensation. There's a lot of ways to think about partner compensation. Like, how much am I going to make? When you look at the, partners with business.
If you were to make an average of everything that happens, partners make one-third of of the revenue, they contribute to the firm. That's the typical role.
The firm, and hopefully clients, bring it, but not always.
If a partner has generated 3 million per year, across all things considered, they're gonna probably make around a million dollars. Especially, if it's your own clients and less, if not. Firms will have formulas in terms of how they will distribute revenue to partners and how they'll pay them. But the most common is about one third of the revenue [00:01:00] that you bring in. Another common thing might be, 50% of the stuff you built yourself, on your own clients.
This one client, 20% of things.
Other people, your clients , 25% or 20%. This is just hypothetical work, something like that.
Maybe a base of 200,000.
So there are all sorts of different formulas that are used. This is just one of them. Different law firms have different formulas.
So if you're doing work, mainly, for other people's clients. Maybe you get, I don't know, 15% or 20%. If you're giving work, but you make more typically when you do work on your own clients. This is one reason when you see this statistic. I hope everyone's following, cause I know this is a little complex, but if a partner gives work to other people, they make less. When you become a senior associate, your billing rate starts rising to the level of partners.
And so what that means, essentially, when your billing rate gets high to the level of partners, a partner wants to do their own work themselves and a client would prefer to give [00:02:00] work to the partner as opposed to a senior associate. So it becomes much harder for people that are more senior, many times to get work.
So that's just a way to think about it, if that makes sense. Okay.
Do all partners have equal stakes in their firms profits and losses?
No, they don't. People will get larger stakes in the firm profits depending on their perceived level of contribution.
Contribution can be based on a lot of things. Sometimes their financial contribution is one thing and another type of contribution might be, leadership activities and firm, which could be, public record.
Recognition. There's just all sorts of formulas that are done. So every firm has their own formulas and the formula that the firm uses, is really what their strength is. So firms that have the most highly developed formulas, try all these different things.
They try to make work and the more they and those formulas, depending on how they're applied, will make certain attorneys are happy and we'll, make other people unhappy.
So as a firm matures, they get [00:03:00] better formulas in place. And so when you start talking about very established firms that have very kind of rigid formulas in place that change, but not much. And in younger firms that kind of have loosey-goosey formulas.
And so as time goes by, formulas change. So a lot of times you're going to have a different experience as an attorney, if you're working at a major firm that's very established versus going to a smaller, younger firm, Because, a smaller, younger firm is going to make all sorts of mistakes.
It's going to overpay people. It's going to underpay people. Whereas a formula that develops over time is going to make the firm much better.
Another thing to remember too, as firms get older, a lot of them will get a lot of bureaucrats and power. And then those bureaucrats will put formulas in place to benefit them, but not necessarily give people business and those people will leave and then the firm will adjust the formula again.
Some of the older firms are more difficult in terms of data. I'm just trying to think of there's one other way.
The way that the firm distributes its profits are, very important to a lot of people and it's really the reason that people [00:04:00] leave firms, it's what how things work , at different firms and if a firm losing money or getting money, things will typically change. The way things used to work. I just, I don't know how important this is, but I might as well bring it up. In the 1970s to the early 1980s, what happened in law firms are the profits of the firm were distributed on what's called a lockstep.
So meaning, first-year partners make this much second year this much or different tiers more third year more and so forth. That's kinda what happened. And then these consultants came. The consulting industry kind of arose at the same time. And the consulting industry came in and they started hiring consultants from companies like Arthur Anderson and all these other consulting, compensation experts, and all these sort of people came in.
And when all these people came in, they said things like, why are you giving all this money to people that are old and not working?
Why give them giving the most money to people that are not old, not working, with no clients. Then they [00:05:00] basically said, you need to incentivize business generation hours, all that sort of stuff. And that was like a shock to the system to firms all over the country.
Everything started changing and then consultants were paid hundreds of thousands of dollars in some cases to come in develop all these different types of systems and so forth. And that's the history of how all this stuff worked.
And that's pretty much what happened with law firms over time. And so it's important to understand that, today, everything is based on these formulas, consultants and things use.
And so different firms have different formulas.
But the basic incentive of the formulas is to incentivize business hours cooperation, maybe longevity, to some extent bureaucratic contributions and other things. Those formulas are applied at different ways at different firms. That's just something to understand. So it's important just from a business standpoint, understand what's going on in the background. Sometimes you have firms that are old that may be run by a couple individuals that are applying [00:06:00] different formulas in a random way, based on who they like and all sorts of things, and that kind of prevents from some growing.
The best firms typically will have kind of democratic processes in place to help all that stuff.
