Law Firm Compensation – Compensating New Equity Partners

Question:

Our firm is a seventeen lawyer insurance defense firm in Austin, Texas. The firm was founded by the two existing partners twenty-five years ago. In addition to the three founding equity partners we have five non-equity partners and ten associates. Non-equity partners and associates are paid a salary and a discretionary bonus. The two equity partners are paid their profit share based upon their partnership percentage which is fifty percent each in the form of distributions dependent upon cash flow. The two of us are considering offering partnership to two non-equity partners with a buy-in based on selling both a five percent interest based on a designed price per share. We would to maintain our same method of equity partner compensation based on percentage interest. We would appreciate any ideas that you have.

Response:

This approach would be fine if the compensation numbers work. I often find that at the lower end of partnership equity shares the compensation model that you have been using no longer works. The new partner simply does not have enough of an equity share interest to compensate him or her fairly and or be competitive with other law firms. He or she may ending up making less than they were making as non-equity partners. It may be time to at least shift to a compensation model for all of you where each of you are paid a base salary based upon your years of experience, billings, and overall performance and contribution to the firm, a bonus pool for exceptional performance or contribution to the firm, and the remainder distributed based on partnership ownership shares. Take a look at the non-equity partner candidates, their present compensation, what other law firms are paying that you are competing with for talent, and go from there. Also consider the buy-in that you are asking for and whether it is affordable and reasonable and how many years it will take your candidates to breakeven on the investment. Today we are finding that more and more non-equity partners and associates are saying “no thanks” to equity offers.

Of course there are many other approaches that you could take concerning compensation but this recommendation seems the easiest and closest to your present approach.

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John W. Olmstead, MBA, Ph.D, CMC

Posted at 07:37 AM in Compensation, Partnership

Feb 02, 2023

Law Firm Compensation – Compensating New Equity Partners

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