Our firm is a sixteen attorney full-service law firm in Denver, Colorado that works exclusively with small businesses. We have six equity partners five non-equity partners, and five associates. Three of our equity partners serve on the firm’s compensation committee of which I am one of the members. Our committee makes compensation recommendations to the partnership for equity partners, non-equity partners, and associates. Since forming the non-equity partner tier a few years ago we have not changed our method of compensating non-equity partners which has been salary and discretionary bonus. We are wondering what factors we should be considering and what some of the best practices are concerning non-equity partners. You thoughts would sure be helpful.
Non-equity partners’ salaries are generally based on a baseline of a predetermined billable hours multiplied by their general billing rates, plus an estimated overhead factor and incentives. The bonus threshold is generally based upon their billings and collections.
Below is a list of the factors that are considered in most firms when allocating salary increases and bonuses to the non-equity partners:
- Contributions to firm profitability (their own billing, leverage, rates, collections, origination, synergies);
- Billable hours;
- Billing and Collection Realization;
- Origination of new business;
- Generation of business from existing clients;
- Enhancing the image of the firm and themselves;
- Contributions toward a positive and collegial firm culture;
- Leadership and attorney mentoring;
- Community activities; and
- Professional development and accomplishments.
A goal should be for equity partners to earn 25 to 30 percent or more profit margin on work provided to the non-equity partners.
The firm should ensure that a profit-margin opportunity is not totally given away by virtue of the salary and bonus calculations that overemphasize billable hours and billings rather than collections. Consideration must be given to firm overhead and profit margins.
If the work performed by the non-equity partner was originated by that attorney, it is reasonable that some portion of the fee generated be paid as a commission for originating that work. Originating the work and doing the work yourself is a common scenario. It is not unusual to see firms pay a 10 to 15 percent commission for that work.
If the work is originated by the non-equity partner but billed and handled by someone else, the commission should be lower (approximately half the normal commission or less).
All of these origination commissions should be built upon the expectation that the work is billed and collected at reasonable rates. There is little justification for paying for origination for work that is not profitable.
John W. Olmstead, MBA, Ph.D, CMC