Question:
I am the founding and senior partner in our firm which is located in Tucson, Arizona. We have a total of ten lawyers in the firm, six of which are equity partners including myself, two are non-equity partners, and two are associates. We are a real estate and business boutique litigation firm. I determine compensation for all the attorneys and staff in the firm. For partners I use a combination of working attorney fee collections and client fee originations and make a subjective determination regarding the other contributions a partner has made to the firm. I would like a better way of evaluating these contributions. I would appreciate any ideas that you might have.
Response:
Your problem is a problem faced by all law firms with which I have worked. While it is not hard to measure working attorney, responsible attorney, and originating attorney fee collections, billable hours, realization rates, and other hard measures of short-term financial performance, it is hard to capture the subtler aspects of partners’ contributions such as mentoring new lawyers, firm management, idea development and its virtually impossible to measure the long-term present value of each partner’s work and contribution.
The key is to make the subjective considerations more measurable. Many firms are supplementing the easily measured economic contributions per partner with additional measurements to determine the actual value per partner and incorporating them into their compensation systems. Some firms:
- Measure client retention and solicit feedback from present and former clients.
- Measure client satisfaction scores obtained from end of matter surveys.
- Require annual business plans from each partner to be approved by the managing partner or compensation committee with specific measurable goals for the upcoming year.
- Conduct partner peer reviews via online questionnaires.
- Conduct annual partner performance reviews.
Many firms often avoid partner performance reviews. They are time consuming and it is hard to give candid feedback to colleagues. However, without partner performance reviews neither the partners nor the firm will reach full potential. When partner performance reviews are used not only to review performance but to set measurable goals this data can be incorporated into the compensation system and provide additional hard data for providing a true measure of partner contribution and value.
Regarding your non-equity partners, 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.
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