Partners Compensation in Law Firms: the several solutions for the equation

There are dozens of books about this subject, but anyway I am going to dare to write down some very simple and objective topics (remember that I am an engineer) so that everyone can think about  them  in a fast and pragmatic way.

Structurally, there are two basic forms to remunerate the partners of an office: the most traditional one is the appropriation of the net income and its distribution to the partners depending on the effective participation of each one in the company and, the second one, a more aggressive one, is the remuneration based on the performance criteria. That is when the problems show up!

In the first form, the difficulty is found in defining what exactly the participation of each partner is, as the law offices are not equity companies. What I have been usually stating is that the equity or asset (using accounting terms) of an office goes down the elevator every day and goes home, that is, if no lawyer returns in the following day, the value of that office is zero (what is worth only is the value obtained from the sale of existing physical assets which is very low). The real value of an office is in its accumulated experience and in the people who hold it!
The exact definition of the share interest of each partner is really complicated as there is one relativization aspect between each one due to the experience, partnership time, clientele, etc. (we will elaborate this topic later on) and highly volatile, being frequently changed due to personal and market factors.

The second form also presents difficulties to be implemented due to three factors: i.-Consensus among the partners for the definition of which will be the performance indicators and their weights;
ii.-The lack, and almost always, of numbers and reports with a certain degree of reliability and finally and;
iii.-Which internal department or person will make the evaluation (objective as well as subjective) of the engaged partners !

Now, having posed the difficulties, let us now go to the attempt for the equation solving! For the solution of any equation, we need to contextualize and define their assumptions, variables and factors (no variable elements).

The assumptions in this equation (that are applicable for the two forms referred above) are the following:

1 – Maturing and institutionalization of the company, i.e., all the operational and strategic decisions  must be  organized and assumed with professionalism, aiming  the best alternative for the good  and the perpetuity of the institution and shall be fully exempt from egos and personal interests. As I see it, this assumption is more difficult and a few offices are managed this way.

2 –Affinity in terms of the philosophical thinking of the company (what type of offices we want to be) and alignments of objectives in the short, mid and long term.

3 – Firmness in the relations among partners, moral, ethical and personality affinities and mainly professional and personal respect (the “amalgamation” that unites the partners).

The “factors” of this equation of several variables (which are exactly the shareholding interests) are the elements that are inserted in the equation that define how the partners will be “relativized” among themselves at every period (usually 1 to 2 years). For illustration purposes, I refer to some of them below and that shall not be regarded as the only ones, as each office may choose and define others depending on the focus that it wants to imprint to the company. Two types of factors are shown, the objectives obtained from managerial and accounting reports and the subjective ones obtained from evaluations (to be defined how) of each partner.

It is always good to remember that for each cause there is a consequence  and the definition of the mix of factors will determine, in the mid and long run, how the partners and the entire team  will behave.

1 – Capturing – This is probably the most famous one and more easily obtained in any office, representing the quantity (in amounts) of clients obtained by a given partner in a given period.

2 – Portfolio – What percentage each partner holds from the total client portfolio of the office. To obtain it, it is necessary to have a correct and updated record file of each partner and his/her client.

3 – Production – What is the value generated by the partners and/or by his/her team in relation to the total generation of the office.

4 – Maintenance: This is probably the least used one and more difficult to obtain. It represents how much of the clientele was kept in the office (taking the increase, decrease or loss of revenues into consideration).

5 – Strategic Vision – What is the capacity of each partner to interfere and add positive insights in the office strategy.

6 – Financial – Economic Vision – It is the capacity of each partner to analyze and understand the entire financial functioning of the office.

7 – Team Management – It is the affinity of each partner to manage and motivate his/her team and the people in the company.

8 – Technological Updating – More and more this attention to the novelties and the technological trends becomes important and essential when one thinks about the life of an institution in a horizon of 5 to 10 years.

9 – External Recognition – represented by the participation in associations, entities, intellectual and academic production in order to project and to consolidate the name of the institution in certain areas.

10 – Dedication Time –it represents the time each partner has dedicated in his/her life towards the institution.

Finally, the variables (to be found) are the participations of each partner and the equation then assembled would be like this:

(n1* f1 + n1*f2+…n1*f10) + (n2* f1 + n2*f2+…n2*f10) …… +(nn* f1 + nn*f2+…nn*f10) =100%

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f1+f2+f3+f4+……+f10     f1+f2+f3+f4+……+f10                     f1+f2+f3+f4+……+f10

where:

“f” is each one of the defined factors

“n” is the evaluation of each partner in each factor.

As already mentioned, in any form of profit distribution or remuneration for partners, be it traditional or aggressive, the definition of the factors to be used and their relative weights   among themselves will determine the result of the equation, which, in the end, will determine how the institution will behave internally and externally.

Finally, every company is a living entity that evolves and is molded according to the internal interactions and the market influences. I reiterate that the offices are not different and are also changeable along the time and this ends up inserting another factor in our equation: the time itself.
One shall always have in mind that the solution of the equation is not eternal and unchangeable because, as the office grows and adapts to new conditions, some of its factors may and must be reassessed.

Which is the ideal solution? What should the reassessment time be?

In my opinion, there are not ready answers for these questions. Each Law Office must find theirs!

The support by an outsourced and experienced consultancy firm which is also exempt from internal political interactions may indeed help in the working out of this challenge as well as in the definition  of the management model and the future strategy.