Law Firm Partner Compensation – Separate Silos – Profit Sharing

Question:

Our firm is a 9 attorney firm in Orlando, Florida. We have three equity partners and six associates. Currently partners are compensated in accordance with their ownership interest percentages which are 35%, 35%, and 30% respectively for the newest partner. There is growing discontent with this arrangement. We have already evaluated several alternative approaches to compensation and do not believe that they would work for us. Two of the partners share common goals for the firm, have compatible practices and clients, and use almost all of the associate attorney's time and other firm resources. The other partner has a transactional practice (the other two of us are litigators) and operates more as a lone ranger and a separate silo. We are considering creating two profit pies for each of these two silos. I would appreciate your thoughts concerning such an approach.

Response:

I don't run into this approach as much as I did 30+ years ago. In essence this is the profit (or silo) approach to partner compensation. This approach is typically found in firms that believe that the cost of production and consumption of firm resources are disproportionate. Usually there is strong competition in these firms. Small personal injury plaintiff firms are sometimes structured in this fashion.

Using the separate silo (profit center) approach fees and costs (overhead) are allocated to each partner (or partner group or silo) profit center and profit determined for each profit center resulting in separate compensation pies for each profit center. Then each partner draws his or her profit center pie or participates in a sharing arrangement with other partners that are members of the profit center in accordance with an agreement of other partners in the profit center or silo.

The devil lies in the details and the trick is to develop a fair and balanced allocation formula that can be used to allocate fee revenues and costs to the silo or profit center.

Silo, lone ranger, or pure profit center approaches usually results in separate firms operating with a firm (a confederation), each sharing overhead in various proportions. Such firms are usually divisive and the form of organization does not encourage specialization or sharing of work. More often than not there are frequent disagreements over fee and overhead allocations.

Often this approach is the next stop to separate firms – separate books – space sharing arrangement.

Thirty years ago I worked in such a firm – the firm is no longer in business.

So proceed with caution – develop written allocation guidelines and test run the numbers before jumping off the cliff.

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

Posted at 09:33 PM in Compensation, Financial Management
Tags: Law firm compensation, profit center accounting, separate silos

Jan 28, 2014

Law Firm Partner Compensation – Separate Silos – Profit Sharing

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