Income Spread

October 28th, 2007 by Jim Cotterman

The spread is usually described as a ratio of the highest paid partner’s income to the lowest paid partner’s income.  So a firm where the highest paid partner earns $1,000,000 and the lowest paid partner earns $100,000 has a spread of 10:1.  We are often asked about whether a particular firm’s compensation spread is appropriate.  There are two answers to that. 

The first is what most firms are initially asking — are we in line with what other similarly situated firms are doing?  Now the simple solution is to turn to survey data, determine the comparables and compare.  But let’s explore this a bit further.  Are we asking about all partners or just equity partners?  Firms with two tier ownership might be interested in a different number then a single tier structured firm.  Do we exclude the part-time or semi-retired partner?  Do we exclude the outlier partner at the top of the pay list who is an anomaly?  The ratio is going to vary, possibly quite a bit, based on how we address each of these questions.

What we have found in our research is that the acceptance of a greater spread (higher ratio) increases with size.  Also the differences between single tier and multiple tier spreads becomes noticeable in firms with more than 10 lawyers and significant for firms with more than 75 lawyers.  While smaller law firms (20 or fewer lawyers) are generally comfortable with all partner ratios under 3.0; large law firms (over 150 lawyers) are more likely to have all partner ratios of 4.0 to 9.9 to 1.0.  The diversity of views on this is remarkable.  6% of these large law firms have ratios in the 2.0 to 2.9 range while another 6% have ratios in excess of 20 to 1.

The second answer is related to the culture of the firm.  Here the answer depends on the individual firm’s ownership environment.  Some law firms manage the spread and some do not.  When they do manage it, the reason is often a cultural attribute.  It is their collective sense of propriety for the relationship among the owners.  A partner once asked me if I make 10 times one of my partners, is that partner really a partner of mine?  Interesting question that articulates the relationship that exists between pay and culture.  When the ratio is managed it is in a structured compensation/ownership system of points or tiers or similar arrangement.  Other firms take a decidedly different view — one that says this is an unimportant and/or irrelevant factor.  This is more likely in confederation style law firms or law firms that prize individual enterprise as the key differentiating factor.  Note that while one might expect that firms with formulaic compensation systems would have higher ratios, this has not been borne out in our research.  Certainly there might be a greater tendency for this result in a system that is unmanaged by subjective factors, but it appears that the lawyers drawn to law firms with such systems tend to join and stay together because there is not a significant performance difference among them.

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