Owner compensation (article)

Owner compensation
Anonymous. Partner's Report. New York: Jun 2003. Vol. 03, Iss. 6; pg. 2

Abstract (Summary)
"These findings reflect what we're [now] seeing in the law firm market," notes [Altman Weil] principal James Cotterman. "Increasing competition and a slow economy combined with a desire to generate quick increases in partner income create a sharp focus on bottom-line profitability. Behaviors contributing to that focus are the ones rewarded."
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Full Text (570 words)
Copyright Institute of Management & Administration Jun 2003
To ensure survival in these rocky economic times, law firms must reconsider their approach to owner compensation. This must be done with the approval of the managing partner and key senior owners. Know, however, that this can take some effort: A partner from one Boston-based firm says the entire partnership met weekly for a long time to shape a compensation plan that all the partners would accept. Key: To minimize damage to firm culture and morale, everyone involved in and affected by the new compensation arrangement must fully understand the implications and be able to explain them.
To thoughtfully assess any changes in your distributions, owners need comprehensive data. One new, reliable source is Altman Weil' s (AW; Newtown Square, Pa.) 2003 Survey of Compensation Systems in Private Law Firms.
How are partner compensation plans evolving? In the AW data ranking of factors that determine compensation, business origination and personal fees collected are at the top; contribution to firm management falls at the midway point; and community involvement, professional involvement (such as writing, speaking, or teaching), and seniority are at the bottom.
"These findings reflect what we're [now] seeing in the law firm market," notes Altman Weil principal James Cotterman. "Increasing competition and a slow economy combined with a desire to generate quick increases in partner income create a sharp focus on bottom-line profitability. Behaviors contributing to that focus are the ones rewarded."
Additional findings from the AW study show significant differences by firm size:
* The bigger the firm, the more likely it is to have a formal system of business-origination credits. Nearly three-quarters (71.9%) of law firms with 100 or more attorneys use formal origination credits in the compensation process, compared to 63.6% of firms with 50 to 99 lawyers and only 40.1% of firms with fewer than 50 attorneys.
"It is obviously easier to have an intuitive understanding of how new business is generated in smaller firms than it is in larger firms," Cotterman explains. "However, it is good to see that many larger firms approach this issue without resorting to formal credit systems."
* Two-tiered partnership structures are more prevalent in larger firms than in smaller ones. According to the data, 65.6% of law firms with 100 or more attorneys prefer this structure, but only 28.1% of smaller firms do. In the lower tier of partnership, overall, 25% of partners make capital contributions to the firm, 27.2% have voting rights when electing senior firm management, and 53.3% share in profits beyond their salary or draw.
* Larger law firms rely more heavily on compensation committees than do other size firms, with 59.4% of firms with 100 or more attorneys having separate committees compared to 45.5% of firms with 50 to 99 attorneys and 18.8% of smaller firms. The most common configuration is to have a separate committee that overlaps the firm's management group. The partners elect committee members in a majority of firms.
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"Increasing competition and a slow economy combined with a desire to generate quick increases in partner income create a sharp focus on bottom-line profitability.



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For more information: Altman Weil's 2003 Survey of Compensation Systems in Private Law Firms (call 610-886-2000 for details) is based on data collected from 302 law firms in the fall of 2002. All survey data are reported by firm size and form of organization, including proprietorship, partnership, professional corporation, LLC, and LLP. Source: PR staff