Law firm partners earn a combination of salary and profit sharing. They are responsible for bringing in business and presiding over teams of associates on high-profile cases.
The profits per partner (“PPP”) numbers reported in American Lawyer and other legal journals are calculated by taking the total profits of a firm and dividing it by its number of equity partners.
Billable Hours
Becoming a law firm partner is the ultimate goal for many lawyers. It’s a high-prestige role with significantly higher compensation than associates, with partners earning five times the amount of associates in the same firm.
The number of billable hours a partner works is a significant factor in the calculation of their compensation. Some firms may have minimum partner billing quotas, and failing to meet these requirements can have serious consequences.
Law firm partners may also be given ‘origination credit’ for business that they bring to the firm, and this can increase their compensation. However, the attribution of origination credit is often complicated and depends on the specifics of the matter at hand.
Equity partners are rewarded for their hard work with a share of the law firm’s profits, while non-equity partners receive a salary. The salaries of equity and non-equity partners vary by location, with the highest rates typically found in larger cities. In 2016, for example, law firm partners in Silicon Valley earned an average of $1.3 million, compared to $564,000 in Seattle.
Experience
Becoming a law firm partner is a career milestone that offers financial rewards and prestige. However, earning this status can be difficult to attain. Becoming a partner takes a significant financial investment as well as time and skills.
Different law firms employ various compensation systems to determine partner earnings. Generally, equity partners are compensated with a share of the firm’s profits in exchange for their initial buy-in payment. Non-equity partners do not receive a profit share but instead earn salary compensation similar to that of an associate.
When determining partner compensation, firms consider factors like billable hours, billing rate, and the amount of business originated by the partner. Some firms use a formulaic approach while others use black box/subjective methodologies that are decided behind closed doors and vary from year to year. Some firms also offer hybrid compensation systems which include a combination of both subjective and formulaic methods.
Firm Performance
The amount of money a law firm partner earns in a given year depends on several factors. These can include their department, the overall profitability of the firm, and their personal performance.
In addition, many firms pay their equity partners a set annual salary in addition to their profits. This model is called a “modified lockstep,” and it can be an effective way to incentivize performance.
Unfortunately, even in a firm that utilizes a modified lockstep model it’s not uncommon for some partners to feel undervalued. There are many reasons this can happen, including a firm’s decision to stop taking certain practice areas.
In some cases, this can create serious issues for the partnership. For example, if a law firm’s leadership decides to focus on corporate matters and stops taking employment work, some partners may be asked to leave the firm. This can be a difficult transition for nonproductive partners, but it’s necessary to ensure the firm continues to thrive.
Equity
For many associates in BigLaw, making partner is the pinnacle of success and a reward for years of hard (and often grueling) work. However, not all attorneys entering BigLaw fully understand what the path to partnership really entails and the financial impact it can have.
Equity partners own a share of the firm and are compensated through profit distributions. They have higher job security than non-equity partners. Non-equity partners, also known as income partners, are paid a salary or other fixed amount. Depending on the compensation structure, they may receive origination credit for clients brought in by an equity partner, similar to commission-based sales positions in other industries.
When moving to an equity partnership, lawyers must move from a W-2 to a K-1, which can result in increased self-employment taxes and estimated quarterly tax payments. Power Forward Group can assist with maximizing deductions and optimizing a legal professional’s investment portfolio to mitigate these additional costs.
