Creative Compensation for Non-equity Legal Partners

Over the last few years, our law firm clients have continually requested assistance calculating and managing compensation packages for non-equity partners. While understanding the importance of these tenured professional resources, a need to cap rising costs required a definitive change in policy. Following are a few of the primary suggestions and solutions for this growing challenge.

To begin, we advise that cash compensation packages be clearly defined and classified according to 4 primary areas: initial base, quarterly/annual bonuses, periodic profit-sharing, and ongoing benefits. Ultimately, an effective non-equity partner package should be competitive enough to attract and retain top talent, but be balanced in such as way that it doesn’t become a financial burden.

Initial base salaries should be based completely on proven history, education and experience, and adhere to industry-standard levels. For lawyers, this begins with college credentials, professional organizations and outside achievements related to the learning and perfecting of legal practices. This aspect of compensation is meant to directly represent the individual’s contribution to the ongoing success of the firm itself, and is awarded and adjusted according to performance.

In addition to initial base salaries, we advise our clients to create a regular bonus structure (quarterly or annually) that will add to the overall compensation of each individual non-equity partner. In contrast to the base salary (which is tied to individual results), bonuses are tied to a combination of both individual and company results Specific performance targets should be identified for both personal and corporate initiatives. These added incentives are ideally designed to support the mission and goals of the organization on both short and long-term bases.

After an individual’s base salary and bonus structure is defined, company profit-sharing should be established. Going one step beyond bonuses, profit-sharing is reflective of the combined performance of everyone in the firm. While individual considerations certainly play a role in your profitability, it’s the combined effort that realizes success in profit. A serious “team” win and morale builder, profit sharing is an all-or-nothing way for companies to share in their financial health according to their results and ability.

The final initial component of any competitive compensation package includes fringe benefits, such as vacation, insurance, retirement accounts and comfort “perks”. Benefits can often be a advantage for companies located in areas where there is heavy competition for top talent, and serve as an effective recruiting tool.

With an effective initial compensation program in place (one that is financially responsible, yet effective at attracting and retaining professional resources), the biggest challenge for law firms becomes managing base salary increases. For that, we recommend considering the following:

• effective billable hours and the resulting income
• realized bonuses and their accompanying costs
• satisfaction of clientele
• generation of new business
• successful portrayal and representation of the firm and its values
• mentoring and/or team contribution
• community interaction
• professional achievements
• continuing education

By measuring and evaluating each non-equity partner’s professional development and dedication, owners can reward the activities and actions that will contribute to the growth of both the individual and the corporation without allowing things to get “out of control”. Clearly defining expectations and the methodology for base salary increases allows all parties to understand and cooperatively achieve maximum results.

Unlike initial base salaries, regular “raises” are only moderately dictated by market conditions. By properly incentivizing and rewarding specific behavior, law firms can manage overall labor costs and ensure profitability and long term growth goals.

Regardless of the market, area of specialization or experience, all compensation packages must be based on individual performance, measured against concrete metrics and aligned with profitable operating practices. When considered in the scope of the long-term sustainability of the business, individual compensation issues become more manageable.

As an experienced accounting firm, Lescault and Walderman can help you to develop realistic, competitive non-equity partner compensation packages and set up your accounting system to manage them. Contact Lescault and Walderman at 866-496-2042 to schedule a free consultation.