November 20th, 2007 by Jim Cotterman
The recent article in the National Law Journal entitled, Should Law Firm Leaders Get CEO Pay?, raised some interesting points. One of my first blog entries dealt with the transition of managing partner compensation. Today lets look at how law firm leaders are generally paid while in the role.
There are three broad approaches to compensating management:
- Based on inputs. Discuss and arrive at an appropriate hours budget with the incumbents for each position. Attribute working lawyer fee credits for the time spent up to budget at the individual’s average effective rate. Attribute hours in excess of budget only upon approval—the incumbent should justify why the additional time was required. This may occur in a year of a relocation, significant technology migration, merger exploration or other episodic and important event.
- Based on results. Pay a percent of firm fees and/or a percent of the partner income pool—a small percent designed to yield a pay decision that compensates at about what they are making now if the firm performs the same level, more if they advance the firm’s performance or less if they dilute performance. Alternatively pay a percent of average partner income to position the person again where they are now if the firm performs the same. It is difficult to get partners to forgo marketing and practicing law and undertake a significant management role if they are to be paid less by doing so.
- Fixed. Pay a stipend based on the demands of the job or add a bonus to factor in how well you do that job.
The method used is largely a product of the firm’s size, management sophistication and the partners’ collective sense of the appropriate role of a law firm leader. At the end of the day, paying for leadership is a “tax” paid by all partners for the centralization of management functions and the benefits of leadership in running a more competitive law firm. The very large law firms with full-time lawyer leadership positions have come to realize that they need a compensation program that is specifically geared to their leaders; yet aligned with the values and culture that all partners are compensated under.
The Altman Weil 2007 Senior Leadership Survey provides insights into the leadership roles, responsibilities and compensation of managing partners and executive directors. We have conducted this survey five times over the past 15 years. The link below opens a table that illustrates for all firms the relative compensation position of the managing partner and executive director relative to other partner compensation benchmarks.