For 2010, many partnerships and boards are considering adjusting partner compensation, perhaps in a different direction that in past years. This article will present some principles and models for consideration.
Compensation philosophies vary widely based on the composition of partners, but for the purposes of this article the assumption is that partners are "working partners" - in other words, practicing professionals, not paid corporate administrators. As such, there needs to be a blending of the partner's own "book of business" and overall firm objectives. The most effective way of blending these is through a tiered system of compensation. The accompanying table shows a typical tiered compensation structure for partners.
How a partnership views each one of these tiers or categories can vary, but the following principles should be considered:
1. The simpler the better. It should be administratively simple to calculate and easy for other partners to understand and administer.
2. The base component should relate logically and mathematically to base compensation for all partners. This does not mean it must be identical, but there must be some logic, either a relationship to gross revenue, tenure or some other logical discriminator.
3. There should be a flexible incentive compensation component. This component can move up or down based on the market and the general fortunes of the firm on a year-to-year basis. Common characteristics of this component include:
* The bonus amount should be sufficient to motivate performance.
* The goals for the bonus should be set annually and be related to the business strategy for that year.
* The goals should be meaningful and integrated with the goals and performance of all partners and overall firm performance.
* There should be benchmarked performance metrics. Data is available to benchmark partner compensation on both the national and regional level. Compensation should be viewed externally - in other words, market competitiveness sufficient to attract and retain talent - and internally, in that it is generally equitable. (For example, if one partner handles a large number of nonprofits where the firm has agreed to lower rates, and another partner handles litigation support at a very high rate, there should be some logical target compensation in each of these areas.)
4. The last component should focus on the overall profitability of the firm.
DETAILS OF COMPENSATION
1. Base compensation. This normally relates to all partners. If there is a spread between partners, then this should be logical and based on market factors. There may also be a part-time base related to part-time work. In our experience, base should be no more than 60 to 70 percent of total target compensation.
2. Bonus component. Goals and performance categories should be broken up into areas such as leadership, operations, mentoring junior staff, handling administrative matters, and, most important, gaining new client business. These goals are often termed "stretch goals" and provide incentive compensation for efforts over and above base compensation. In other words, this compensation must be earned each year.
3. Firm profitability. This is really driven by top-line revenue as well as bottom-line net income, and should be built off the firm forecast or budget. In the ideal world, the annual forecast (or profit objective) should be built from the bottom up, based on practice area or however the partnership is divided, with each partner taking responsibility for a portion of the overall gross revenue.
Following this model provides some logic and provides you some external benchmarks to consider. Since gross payroll approximates 70 percent of the total expenses for the typical firm, a logical way to address partnership compensation is critical. Under this model, one can easily see that approximately 30 percent of partner compensation is "at risk" and can flex up and down with the actual performance of the firm on an annual basis.
It was recently reported that one of the country's largest law firms, Reed Smith LLP, is not only cutting billable rates to clients, but also cutting the pay for first-year attorneys and reducing their hourly bill rate, as a concession to clients who insisted that these junior lawyers had the least practical experience and were least valuable. On the partnership side, the firm reported that for the first time it is asking over 300 of its non-equity partners to contribute approximately 15 percent of their pay to the firm's capital base. It is estimated that this move will raise almost $18 million in equity capital for the firm this coming year.
In a bid to address alternate forms of partnership and compensation for senior professionals, many accounting firms have developed a non-equity partner tier, and this move by a national law firm may have implications in the accounting field as well.
Paul Finkle is chief executive of SharedHR (www.sharedhr.com), a human resources consulting and technology firm. Reach him at email@example.com.
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