How do law firm partners split profits?

Jan 05, 2023

Written By Yi Kang Choo

Law firm partners are commonly dubbed as one of the richest figures in the city, with exceptional pay/earnings spanning between £50k-£2m per year. According to a survey conducted by the Law Society in 2016, about 75% (private practice) partners in London earned more than £250k, with the top 2% receiving over £2m. So, on what basis do law firm partners split the profits their firms made?

Who are law firm partners?

Before diving into the various profit-splitting methods for partners, it’s important to understand what a partner is. A law firm partner is typically a lawyer (mainly solicitors in the UK) who is promoted to partnership level in the firm after working for a considerable amount of time.

Whilst how long someone has worked in a firm does not necessarily guarantee their promotion to partnership level, partners will ideally have clocked up at least six years’ experience. They should be capable of managing the firm, as well as getting work or winning new clients for the firm.

Traditional methods to split profits

One of the most common ways to split profits is through the Profits per Equity Partner (‘PEP’), whereby profits (theoretically) are being divided equally based on how many equity partners there are in the firm. Even though this might not refer to the actual amount of take-home pay a partner receives, as it depends largely on the individual firms’ remuneration system, it is a clear/simple indication of how profits are being divided between the partners.

However, just as how things are always more complex in reality, this is a similar case for profit-sharing formulas in different law firms. Unless a firm has a partnership agreement that divides profit equally, most allocations might differ across partners based on their seniority or even valuable goodwill.

Lockstep approach

As mentioned above, senior equity partners in law firms with a lockstep agreement will typically be allocated with a larger amount/share of profit as compared to new or junior partners in the firm. This is usually a relatively straightforward approach favoured by smaller firms with only 5-6 partners, so around 35% of firms still follow the lockstep approach in terms of their profit allocations.

Alternative methods of profit distribution

Interestingly, many law firms nowadays are implementing a wide variety of partnership arrangements, which draws a significant distinction from the traditional profit splitting methods. One of them is a ‘modified’ or hybrid lockstep agreement, where even though some profit will still be allocated through a lockstep, a proportion of the firm’s profit can be shared equally or based on the performance of the partners in the financial year.

Building upon that, some law firms are also implementing performance-based profit-sharing models, where partners are being assessed against a set of performance criteria. This is known as the ‘merit-based’ model This may include revenue-based performance targets, leadership qualities or contributions towards the broader business/expansion of the firm. Law firms can also tie in profit allocations and monetary compensations based on their mission, values and long-term business goal – encouraging partners to embody them throughout their work.

As such, this is one of the most favourable options, especially for aspiring mid-tier firms to grow their partnership through lateral recruitment, or to allow junior partners (who are ambitious) to receive the maximum profit allocation, subject to their performances. However, some individuals have raised concerns that the merit-based model worsens competitiveness and leads to a reduction in collaboration.

Non-Equity Partners

Whilst this is not related to the actual profit allocations of a firm, it is important to note that there are also partners who are not paid by the firms’ profits, but with a set salary. They may also have limited or no voting powers (with less responsibilities) in the firm.

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