How do partners in a law firm make money?

Jan 11, 2023

Written By Claudia Chan

A law firm ‘partner’ refers to a senior lawyer, usually an expert in their given field. There is no universal partnership model as such, the remuneration system may vary from firm to firm. The article will explain the different types of partners, explain the traditional law firm profit sharing formula and explore two alternative law firm distribution methods; and finally explain why this all matters.

Types of partners

‘Salaried partner’ or ‘income partner’: a partner that usually remains on the same payroll of an employee that has an expense of the partnership, usually at a fixed salary

‘Fixed share equity partner’: a partner that receives a fixed profit share out of the firm’s profits. They have a small amount of capital invested in the firm.

‘Full equity partner’: a partner that receives a percentage of profits generated by the firm. They have more capital invested in the firm than a fixed share equity partner.

Often, these types of partners are divided simply into ‘equity partner’ and ‘non-equity’ partner. As seen above, they are paid differently: non-equity partners receive salaries, while equity partners receive income purely based on incentive compensation or percentage of profits, they do not receive salaries as such.

Traditional law firm profit sharing formula

The lockstep model is the most traditional partner-compensation model used by law firms. This model is based purely on seniority: all equity partners of the same tenure are paid the same and are subject to automatic annual pay increases.

Supporters of this model argue that it ensures loyalty, collegiality and stability in the firm: a partner is rewarded for dedicating more time to the firm, meaning there is greater certainty.

On the other hand, opponents claim that it fails to recognise merit. This model does not reward individual performance as such, it allows underperforming partners to ‘coast’, at the expense of higher performing partners. It fails to encourage excellence, thus in the long-term, this may harm morale and partner retention as higher performing partners may choose to leave.

Some firms have recognised the shortfalls of the lockstep system, as a result, they opt for a more merit-based pay system. Yet many top law firms, such as Slaughter and May, remain loyal to the lockstep model.

Alternative profit sharing formulae

1. Modified lockstep, or merit-based system

Incentive pay is determined by performance rather than pay for the number of hours worked. It rewards partners who meet or exceed key performance indicators (KPIs). These may include: meeting financial targets, sourcing new clients, client retention and satisfaction, and developing staff.

Incentive pay is often implemented to encourage employees to hit certain performance figures or financial targets in a given year. It is a form of merit-based compensation that aims to motivate employees to improve performance.

The benefits of this system compared to the lockstep are clear. Partners are recognised and rewarded for their individual hard work; there is no fear that one will be weighed down by underperforming partners so high-performing partners are happy. Furthermore, there is transparency in the firm: a partner who achieves more KPIs can be expected to earn more.

However, some argue that the modified lockstep system is volatile. It is prone to potential rifts amongst partners as the task of determining compensation is a difficult job. If one partner’s share goes up, someone else’s has to go down; there may be disagreements within the firm as to the decisions made.

2. ‘Eat what you kill’

The ‘eat what you kill’ model essentially promotes the somewhat predatory idea of it’s every person for themselves.

The concept behind the model is simple: partners are paid according to what they bill, clients they can ‘poach’, and what they can bring to the firm. This model contrasts the lockstep model as it rewards performance and benefits high-performing partners.

On the other hand, the main limitations of this model are twofold. First, it discourages teamwork. Another partners’ success has no impact on anyone else. Thus, it inevitably promotes self-serving attitudes amongst partners, thus implicitly undermining teamwork and collegiality.

Second, this production-based compensation model creates the risk of internal competition within a law firm. Partners are incentivised to prioritise their own wins rather than bring in other practice areas that could serve their client’s needs.

Why should you care?

The notion of making partner seems like a long way for budding lawyers, so why should you care about partner compensation if it does not concern you yet?

In reality, the model used has a big impact on the firm culture and its priorities. This is an important factor when deciding where to train as it is ultimately useful that future solicitors know about the environment they intend to commit to. Knowing the different compensation models and their wider implication for the firm can help you make more well-informed decisions when deciding where to work.

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