Intrinsic to a system of equal compensation of the more senior partners is the requisite that the work contributions of individuals should be reasonably equal. Thus, the system provides that certain performance levels must be achieved by each individual in order for him or her to participate fully in the income opportunities which are provided. For purpose of this illustration, we are using billable hours and accounts receivable collections as the subjective criteria.
The various numeric parameters which are used in this plan are for illustrative purposes only. Different progressions of income points, or goals for client hours worked may be desired. Such changes do not affect the basic characteristics of this system.
Defining Compensation. This illustrated system can be applied to the total value of any compensation related items a firm decides constitutes part of the compensation package for its partners. Such items will always include direct compensation (whether in the form of salaries or bonuses,) but may or may not include contributions to pension or profit sharing plans, automobile allowances, or special expense allowances.
It is very important that the included and excluded items be clearly stated at the outset, so there will be no misunderstandings and disappointments at a later time.
Compensation Points. The funds which are available to pay compensation to the partners are divided into three tiers which are determined by the Executive Committee prior to the beginning of the fiscal year. The allocation of the first two tiers of compensation, in this illustration, is based on the compensation points assigned to the various partners. Partners must achieve a certain minimum percentage of goals of billable hours worked and fees collected to receive the full proportionate compensation for their points. The third tier of compensation (if realized) is divided equally among those partners who achieve their goals for billable hours worked and fees collected.
Compensation points are assigned for each of the first two tiers. The number of such points assigned to each partner depends on his or her length of service with the firm and their respective expected billing rate. Usually, points assigned to partners increase with each year of service according to a definite schedule, such as the following:
Prior to the beginning of each fiscal year, the Executive Commit- tee sets a value per point for the compensation points for the following year. The per point value for points in both Tier I and Tier II are the same.
The distribution of funds available for partner compensation each year is determined according to the following schedule of priori- ties:
Generally, compensation points are assigned by the Executive Committee, and it is anticipated that the adopted schedule would be followed. However, the Executive Committee may decide not to advance a partner according to the schedule if his or her performance is not satisfactory.
Partners who join the firm laterally with "advance standing" would have their position on the schedule determined by the Executive Committee.
Goals for Billable Hours and Fees Collected. All partners are assigned annual goals for billable hours worked and for fees collected. For firms in which billable hours generally are in line with national averages, the goals for billable hours worked might typically be as follows:
Goals for fees collected are set annually by the Executive Committee prior to the beginning of each fiscal year. Such goals are the annual goals for billable hours worked times the standard hourly rate assigned to each partner by the Executive Committee. Standard hourly rates are based on each partner's experience and the field of law in which he or she primarily practices.
For partners to receive their full share of compensation based on their compensation points, they must achieve at least 90% of their goals for billable hours worked and fees collected. If either billable hours worked or collected fees fall below 90% of goal, the partner's compensation points for that year's distribution would be adjusted by the lower of the two percentages which he or she achieved for either billable hours worked or fees collected.
Example: A partner works 85% of his or her billable hours goal andFor partners to be eligible to receive any bonus compensation in excess of the assigned value for their compensation points, they must reach both their goals for billable hours worked and fees collected. In other words, only those partners who reach their goals will participate in that third part of compensation which is shared equally by eligible partners.
achieves 92% of his/her fees collected goal -- his/her compensation
points are adjusted by 85%. The adjustment would apply equally to
Tier I and Tier II points.
The Executive Committee may set a limit on credit for management time for any partner. In unusual circumstances, the Executive Committee may also give credit to a partner for other non-billable activities which are of particular benefit to the firm. Examples of such circumstances are instances when a partner accepts a time- consuming office with the State Bar or a local bar association, or if he or she participates in an important community activity. Also, credit may be allocated for major other activities like training or marketing.
However, hours carried forward cannot exceed carry-over fees collected credit divided by the partner's standard hourly rate:
Example: A partner's goals are 1800 billable hours worked and
$360,000 ($200 per hour). He/she actually works 1930 hours and
collects $370,000 for his/her work. The attorney can then carry
over $10,000 and 50 hours ($10,000 divided by $200) toward his/her
goal for the next year.
If a paralegal or law clerk works on a matter, the time value of their work is first deducted from the fee, and the balance of fee receipts is allocated among the lawyers who worked on the matter in proportion to the value of their time.
A partner can stipulate a special fee allocation, different from the proportionate time value, if he or she believes that an unusual circumstance warrants such a special allocation. However, all such special allocations must be approved by the Executive Committee.
Fee credit for all contingent matters is given at standard time value, regardless of the fees which actually are received. However, no matters with contingent fee arrangements can be accepted by the firm without the approval of the Executive Committee.
Should any partner have financial needs which necessitate that he/she receive funds in addition to the draw, the Executive Committee may agree to give an interest free loan to such a partner which would be repaid out of any additional compensation to which the partner would be entitled at the end of the year.
Example of the Plan. The following example illustrates how such a plan would work. For purposes of the illustration, it is assumed that a value of $1200 has been assigned to the compensation points, and that total distributable income for seven partners was $1,400,000. Also, it is assumed that all partners have reached their goals and thus are participating in the third tier of income. The Executive Committee, in this example, has decided not to make any special discretionary allocation of third tier compensation funds.
* The remaining $250 might stay in retained earnings or distributed in some arbitrary fashion.
If you have questions on any aspect of this plan please give us a call.