Compensating Managing Partners

by Joel A. Rose
 

High quality law firm leadership cannot as easily be replaced as retained. Therefore, a firm must be prepared to reward its managing partner for his or her success in as many different ways as success is measured by a particular law firm. To the extent that a firm's partners do not properly compensate their managing partner, yet wish to retain him or her in the leadership role, the firm's managing partner will become discouraged and lack the incentive to continue to perform his or her management and leadership activities, since the firm's success will undoubtedly lead to more dollars for other partners.

Recognizing Time Devotion

Two approaches to reducing managing partners' concern about receiving reduced compensation because they have fewer billable hours and/or lower revenue from their personal production are setting reduced billable hourly goals and paying a fixed stipend for managing the firm. For example, rather than adjusting work goals of the managing partner vis-a-vis other partners, many firms assign a fixed sum to compensate the managing partner for managing the firm, i.e., $40,000, $50,000, etc.

Generally, a managing partner who is responsible for managing the firm and for performing in a leadership role (through an office manager) is among the firm's highest paid partners. However, the managing partner should not be the highest paid partner unless it's justified by factors other than simply holding this position. Those factors may include some combination of business originations, practice contributions and other criteria consistent with the firm's compensation plan.

When the managing partner is also a practicing attorney, those partners responsible for managing relevant substantive areas of the law (in which the managing partner practices) usually provide some input to the compensation committee or to other partners about the managing partner's work as a lawyer, when determining his or her compensation.

Subjective Compensation Systems

At firms using subjective compensation systems, partners' compensation is usually determined by using various factors to evaluate each partner's total contribution to the firm over two or three years, or longer. To the extent that the managing partner maintains a client practice, his or her compensation will be based, to some extent, on these criteria.

However, since the managing partner's role is different than other partners, the former's contribution to the firm will differ from the contributions of other partners, and his or her performance should be based upon different criteria than the other partners. Since the managing partner is responsible for managing the firm's business and substantive operations and for providing a leadership component to the organization, the criteria for which a managing partner's performance is assessed are frequently based upon the extent to which the firm has been successful in dealing with its immediate and longer priorities and achieving its objectives, on the business and substantive sides of its practice. Below are examples of the "other" criteria upon which a managing partner's performance may be assessed when setting his or her compensation:

  • Developing and achieving the immediate and longer term goals of the firm, its practice areas and other offices;
  • Whether the firm achieves and exceeds its revenue and profitability budgets;
  • Profitable firm growth through mergers, lateral hires, geographic expansion;
  • Effectiveness of the firm's business development and marketing functions;
  • Effectiveness of the performance of other lawyer managers;
  • Effectiveness of developing and implementing plans for firm diversity;
  • Enhancing the collegial and respectful relationships between and among partners, associates and the administrative support staffs.

Formula Compensation Systems

Most firms that use a formula-based system allocate partner compensation on the basis of a combination of objective, measurable criteria: business origination from existing and new clients; total revenue from clients attributed to that partner, regardless of who actually performs the legal work; revenue produced from a partner's personal billed and collected hours; profitability of the file or client; etc.

Since a significant amount of the work performed by the managing partner cannot be measured in a quantifiable manner, an adjustment must be made to the formula to accommodate the managing partner's role and contribution to the firm.

Firms employing a compensation formula usually budget an agreed upon number of non-billable hours that will be devoted to managing the firm by the managing partner. Presumably, the managing partner will be able to manage the firm within the pre-determined number of budgeted hours. To the extent that additional hours may be needed, the managing partner would request them from the firm's executive committee, compensation committee and/or other partners. Unless the managing partner is working on an important project that is widely acknowledged by other partners as being a significant drain on his or her time, the other partners may question whether the managing partner could have or should have delegated more of the basic administrative work to the firm's other administrative managers.

The contributions of a managing partner should be quantified, and the managing partner may be rewarded with some form of incentivized compensation program. For example, if the actual costs of operating the firm are below the budgeted amount, the managing partner may receive a special bonus. However, a word of caution about incentivizing reduced expenditures or other quantifiable expense items; by rewarding the managing partner for reducing overhead, it is important to ensure that the quality standard of the administrative functions required to support the attorneys deliver high quality legal work continue to be maintained.

In most firms in which a managing partner proliferates new business from existing clients or develops business from a new client, he or she receives "origination" credit which may be shared, as appropriate. Also, it is recommended that managing partners maintain their client relationships while serving in a leadership capacity. This will enable them to continue to relate to their client relationships when their term as managing partner expires and they resume practicing law full-time.

Performance Bonuses

In either subjective or formula compensation systems, bonuses should be awarded to the managing partner on the basis of achievement of individual and firm goals. At the end of the prior year or the beginning of the new year, managing partners should sit down with the management committee, the compensation committee or the partners to identify the firm's immediate and longer term priorities that need to be dealt with and to negotiate objectives for both the firm and themselves.

If the agreed upon objectives are achieved or exceeded, the managing partner should receive a performance bonus, just as other partners are rewarded for extraordinary performance during the year. This is especially true in firms with subjective-based compensation systems.

Compensation decisions send a "message" to the partners. All partners compare their compensation to that of those whom they perceive as peers within the firm, and look carefully at the compensation of the managing partner and other lawyer managers. The principal message that compensation decisions affecting the managing partners should send is: "The firm takes the management function seriously. The qualities that make our firm successful over the long-term are superior lawyers, client service, appropriate fees, teamwork between and among and between attorneys, utilizing the expertise of others within the firm, marketing the firm's expertise and fairness to the firm's clients and its members."

In practice, that means that the managing partner should not be the firm's highest paid partner unless he or she makes practice-related contributions consistent with these values.

Considering all of the criteria that need to be considered when determining the managing partner's compensation, the most important factor in partner compensation generally is whether partners believe the system is fair in terms of the process for allocating compensation to the partners and for administrating the firm's compensation system.

The ultimate goal of a compensation system is to have the amount of money a partner takes off the table bear a reasonable relationship to what the partner contributes.

Whether a firm employs a subjective or a formula compensation system, by applying the criteria described in this article to the managing partner's total quantifiable and subjective contributions, the partners and the managing partner should be able to agree upon a fair and appropriate compensation for the managing partner.

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