Exploring How Big Law Pay Rates Work
Ben Thomson* Law partner pay rate models play a crucial role in determining the financial success of legal professionals within a firm, but different big law pay rates apply. As law firms evolve and the legal industry becomes more competitive, it is necessary for law firms to adopt strategies that incentivize partners while aligning with the firm’s overall goals and values.
Understanding the various law firm partner compensation models – equity deal, lockstep, law firm shareholder arrangements, and others – available helps firms design systems that fairly distribute profits, retain top talent, and foster a collaborative culture.
Traditional law firm compensation models, such as the lockstep and formula-based systems, have long governed how partners are compensated. But whole big law salary scale regime (for partners and associates) is slowly changing.
Lockstep compensates partners based on their level of seniority within the firm, while formula-based models reward partners according to their individual contributions to the firm’s revenue, such as billable hours and new client acquisitions.
As client demands and the legal market change, law firms are exploring new approaches to compensation such as the merit-based model that emphasizes core values, client experience, and profitable growth.
The choice of law partner compensation model has a significant impact not only on the financial security of individual partners but also on the overall health and unity of the firm.
Law firms need to carefully assess their organizational goals and values when selecting a model that ensures equitable profit distribution and fosters a positive, collaborative environment for all partners.
Types of Law Partner Compensation Models
Equity Partners
Equity partners are lawyers who hold an ownership stake in a law firm and share in the firm’s profits as a reward for their contributions.
Law firms may have different compensation models for their equity partners, with some being more transparent than others. It is important to have a clear understanding of the compensation model in place to ensure fairness and incentivize high performance, which the equity partnership model and most others are intended to do.
Lockstep System
The lockstep compensation model is a traditional approach to rewarding law partners for their loyalty and seniority rather than their billable hours or individual performance.
Although perhaps somewhat unimaginative in concept, given that it bases its remuneration payrate system on how long partners have been with the firm rather than how valuable they are to it, it has nonetheless remained the most popular such system for big law firms in both the US and the UK.
But lockstep is losing its grip for big law payscale rates as major adherents like Cravath Swaine and Moore, atop our own ‘Most Prestigious Law Firms List’, has moved away from the model to ensure it keeps its top performing partners, as Bloomberg Law reported in 2021.
Equity partners move up the compensation ladder based on their years of service. This helps to promote a sense of unity and collaboration among partners as everyone’s financial success is tied to the firm’s performance as a whole. Hence, teamwork and firm culture are regarded as paramount – with the payrate coming along a very close second – or perhaps tied for first.
Eat What You Kill
In the eat what you kill compensation model, law partners are rewarded based on their individual billable hours, generated business, and other revenue-producing activities.
This model incentivizes partners to actively bring in new clients and bill as many hours as possible, fostering a highly competitive environment. It places a strong emphasis on individual performance and may not always promote collaboration between partners.
In fact, as an entrepreneurial approach to big law pay rates this is a model that has been subject to some criticism and is rejected by many firms for the reasons outlined.
Forbes wrote an article indicating the 16 problems with the model, including elevating revenue to a ‘primacy’ that can be detrimental to the firm, placing legal teams into revenue-earning silos, selling services with financial ‘hooks’ and other disadvantages.
Nevertheless, many firms also use the model.
Formulaic Compensation
Formulaic compensation models for law partners use objective data and complex formulas to determine the appropriate distribution of profits among partners.
Factors like billable hours, client origination, and other metrics are used to create an equitable system of rewards.
The transparency and fairness provided by this model can encourage collaboration and an overall productive business environment, although of course the system will be based upon the nature and measurement of the formula used to measure pay rates.
Open System
An open system is a type of law firm partner compensation model that offers flexibility and adaptability in some ways akin to the formulaic compensation model.
It combines elements of other approaches like lockstep and formulaic systems, allowing the firm to tailor its compensation structure to its unique needs and goals. A firm adopting an open system should carefully design its model to ensure that it aligns with the firm’s values and encourages cohesion.
Key Factors Influencing Compensation
Revenue and Profits
One crucial factor in determining a law partner’s compensation is the firm’s revenue and profits. The profitability of a practice is usually assessed by considering the profit margin and profits per partner (PPP). A compensation model that effectively aligns partners’ incentives with the firm’s financial success is essential.
There are many tales of the huge incomes earned by some of the big law firms, including the recent massive amounts paid to former Kirkland and Ellis London partner Neel Sachdev, which we reported recently, and the ‘banker style’ compensation amounts now earned by some big law partners.
Book of Business
The book of business refers to the clients a partner brings to the law firm. Client origination credit can significantly impact a lawyer’s remuneration. A formulaic compensation system often weighs these factors along with other performance-related indicators.
Banker-Size Pay Rates For Lawyers . .
Individual Performance
Individual performance forms the basis of many law firm compensation models. Partners who consistently demonstrate higher billable hours, realization rates, and other quantifiable achievements are rewarded accordingly.
This will be the basis for the ‘eat what you kill’ model, but variations may also apply in different circumstances.
Incentive structures, such as bonuses, can be tied to individual performance to foster healthy competition and promote overall productivity.
Seniority
In some law firms, seniority plays a significant role in partner compensation. Obviously this is the case with the lockstep model, but even in non-lockstep compensation systems there can be partners with more experience and longer tenures within the firm that may receive higher compensation based on their expertise and perceived value to the organization.
However, seniority is only one of many factors considered when designing good partner compensation models and is but a single factor in the matrix of what law firms need to think about when designing something that will satisfy the partners and the firm culture and objectives.
Firm Citizenship
Firm citizenship refers to a partner’s contributions beyond their direct revenue-generation activities. These include mentoring, marketing, and involvement in firm management or internal committees.
Many firms recognize the importance of these activities in ensuring the long-term viability of the law firm and may reward partners accordingly. Firm citizenship builds a cohesive internal culture and helps drive sustainable growth.
Benefits and Challenges of Different Models
Client Experience
Different law partner compensation models can have a significant impact on the client experience. For instance, a model that rewards partners based on individual performance might lead to prioritizing short-term gains and high billing rates.
In contrast, a model promoting collaboration and long-term client relationships may improve client service and satisfaction.
Collaboration Vs Competition
Compensation models can also influence the work environment, either fostering collaboration or driving competition among partners.
For example, a formula-based compensation model rewards partners based on individual performance metrics, which might encourage a more competitive atmosphere.
On the other hand, a lockstep compensation model provides partners with a fixed share of the firm’s profits based on seniority, encouraging cooperation and a shared commitment to the firm’s overall success.
Accounting Complexities
The complexity of a partner compensation model can translate into accounting challenges for a law firm.
A more complicated model, such as the Eat-What-You-Kill system, may require detailed tracking of each partner’s contributions and billings. This can create administrative burdens and lead to disputes between partners over the allocation of profits. In contrast, simpler models, like the lockstep system, are more straightforward and can minimize internal conflicts.
Burnout and Toxic Work Environment
A law firm’s choice of partner compensation model can influence the work environment and lead to burnout or even create a toxic atmosphere within the office at a time when mental health issues in the law are more significant than ever.
For instance, an individual performance-based model may lead partners to overwork in pursuit of higher billings and profits, increasing the risk of burnout.
Such a model might also incentivize aggressive behavior, leading to a negative impact on the firm’s culture and values. However, compensation models that emphasize teamwork and collaboration can promote a healthier work environment and reduce the risk of burnout.
Practice Management and Compensation
Non-attorney Staff Compensation
Managing a law practice involves recognizing the contributions of non-attorney staff. It is essential to develop compensation models that reward employees for their efforts in enhancing the client experience and contributing to the firm’s growth particularly at a time when law firm pay rates continue to accelerate.
Staff members play a crucial role in the success of a law practice, and their compensation should be carefully considered to maintain employee satisfaction and retention.
Profit Sharing Formulas
Equity partners in a law firm often benefit from the firm’s profits. To distribute these profits fairly, law firm profit sharing formulas are implemented to allocate a portion of the net income to each partner.
The division of profits may be based on factors such as individual performance, collections, billings, and realization rates. Each partner’s share can be determined using predefined formulas and guidelines set forth in the partnership agreement.
Capital Contribution
Equity partners in a law firm are typically required to make an initial capital contribution when joining the partnership. This contribution is used to finance the firm’s operations and growth and can impact a partner’s share of profits.
The more significant the initial capital contribution, the higher the potential profit share for the partner. The terms of capital contributions should be clearly outlined in the partnership agreement to ensure transparency and fairness.
Negotiation of Compensation
Unlike the more formulaic approach taken with profit sharing, the negotiation of compensation often involves a more subjective approach. Compensation for working attorneys, including billing attorneys, can be based on various factors such as experience, performance, and firm needs.
It’s essential that the negotiation process is transparent and equitable to avoid dissatisfaction within the partnership team, which can lead to partner departures or breakdowns within the firm particularly at a time when lateral movements are more frequent and competition has intensified.
Mentoring and Training
Implementing effective mentoring and training is another crucial aspect of practice management and compensation.
But at the end of the day it is compensation systems that makes much of the difference, particularly when attracting younger lawyers into the large firms. The Big Law salary scale, as we have reported in LawFuel, has grown rapidly and produced some eye-watering pay levels as big law firms compete for legal talent.
A strong focus on professional development allows attorneys at all levels to further their skills and contribute more effectively to the law practice. By creating a supportive environment for growth and development, the firm can retain and attract high-quality attorneys and minimize the impact of attrition or partner departures.
Author –
Ben Thomson has written extensively about law firm business and marketing. His last major feature for LawFuel was the 30 Most Prestigious Law Firms List. He may be contacted at webtrafficrules@gmail.com.
