Parity

All of the partners split the profits of the firm evenly.  This format usually comes out of a situation where two or three lawyers of similar vintage are friends and decide to form a partnership.

When It Works Well

When the lawyers have roughly equivalent abilities to generate business and compatible values and work ethic, they may be comfortable with this format. Frequently they have the same or similar practice areas, so changes in the economy, or other factors outside their control, affect their revenue generation capabilities similarly. They also usually share management and administrative duties fairly evenly.

The format has the virtue of simplicity. It is easy to calculate and avoids arguments over nuances. It supports teamwork and cross-selling because “a rising tide lifts all boats.”

If the lawyers have significantly different practice areas, such as litigation and transactional practices, it can have the benefit of sharing the risks of economic cycles.  Usually transactional practices surge during a strong economy and litigation wanes.  Then when the economy takes a downturn, deals drop off. Litigation experiences an uptick as more conflict arises over money. The temporarily prosperous lawyers should maintain a long-term view, however, and remember that in a new cycle their positions will likely flip.

Executive Committee Monarchy

Both of the prior structures are usually only found in small firms of ten partners or fewer.  In a larger firm, the Monarch structure may be expanded to a ruling executive committee. In this situation a rather stable and predictable executive committee functions like a single monarch. Usually they are the founding partners or otherwise the most experienced and successful lawyers in the firm.

When It Works Well

This structure works when the executive committee, as a body, has the same attributes as the type of single monarch that functions well in this system. They are fair-minded and communicate expectations clearly. In addition, the members of the executive committee must have values and priorities compatible with each other. That enhances their ability to come to a consensus about the compensation to be paid to themselves and other lawyers.  In this highly subjective structure, the more lawyers in the firm, the more important the role trust plays among the lawyers.

Lockstep

This model is used mainly in large, stable, well-established firms that have a lot of institutional clients. It rewards seniority. Usually, all of the lawyers who become partners in the same year are in a class, and make the same compensation. The class as a whole receives an increase in points, which are the basis of allocating profit distributions, when they are elevated to the next level. Typically, the spread between the salary of the highest paid partners and the lowest paid partners is not that large – 3 or 4 to 1 is not uncommon.

When It Works Well

The firm that has existed for decades and serves many clients that need multiple areas of legal expertise, and therefore the clients have strong relationships with many lawyers in the firm, can function well with the lock step system. Often the firm has served Fortune 500 companies longer than the career of any lawyer who could claim origination credit for bringing in the client.

Today the law firm must be highly successful for the system to work, thus most of the ones using this old-fashioned model are in the AmLaw 100.  When everyone makes a lot of money, fewer partners quibble about differences.

Proponents of the system claim that, like the parity system, it facilitates teamwork and collegiality by rewarding the group as a whole instead of highlighting a few stars. The system eliminates conflict over credit for bringing in business, billable hours, management time invested, relationship to clients, and other such issues used to differentiate lawyers.  That, and the simplicity of calculation, saves a lot of administrative time.

Modified Lockstep

Many firms have modified the lock step model to allow a committee to subjectively reward or punish behavior. The modification helps the firm to encourage essential behaviors such as business development, high productivity, recruiting, training and mentoring associates, management, and client relationship maintenance. It also provides the flexibility to bring underperforming partners into line, without having to completely expel a partner.

Some of the modifications may include the ability to promote a partner to a higher level earlier than the other classmate partners or demote a partner to a lower level. There may also be a “slush fund” for allocating bonuses to reward desired behavior. Appendix A (published as the 7^th article in this series) contains an example of provisions that might be included in a modified lock step compensation plan. The author extends her gratitude to Bill McDonald, a partner at Thompson & Knight LLP, whose practice includes advice on law firm formation, for the provisions included in Appendix A.

In Appendix A, the agreement provides for seven lock step levels, but permits the management committee to assign each partner to the appropriate level annually. It also provides that a certain percentage of profit distributions, say 75%, will be made in accordance with the points assigned in each level. The remaining 25% of profits are allocated to the “slush fund” that is distributed by the management committee in its discretion. Thus, there are two mechanisms for modifying the lock step profits and loss allocation: level movement and discretionary distributions.

Eat What You Kill

Each lawyer’s compensation is based on the revenues she generates. Usually there is some kind of formula that attempts to account for overhead, and then distributes all remaining profits to the lawyers based on their collections.

In some systems a flat dollar amount is determined for overhead per lawyer, by dividing up the sum of fixed and predictable expenses, such as rent and shared staff salaries. Everything the lawyer bills and collects in excess of the fixed overhead figure gets paid to that lawyer after subtracting certain firm expenses directly associated with that lawyer such as business development expenses, retirement plan contributions, and salaries of staff or associates who work mostly for that attorney. In that model the firm is more akin to an office sharing arrangement than a partnership.

A variation of the EWYK model does provide for sharing of risk. The firm’s profits are determined, and distributed in accordance with a formula that averages the collected revenues attributable to a partner over multiple years (usually two to four). The averaging slightly shaves off peaks in income, to provide support from partners on the upside of the seesaw to partners on the downside, during cyclical downturns or temporary crises. The income levels remain largely tied to billable hours produced, however.