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Finance
Long Hours Limit Partner Income
July 2006
It turns out that hard work and long hours limit the income of law firm partners. How can that be? While it may appear counterintuitive, it is really simple. The owners of a service business make more money when they can leverage off of the work of others. In order to do that, you have to have the work for them to do. You have to give them the work to do. And you have to find, hire and train them.
That is not happening in the majority of midsized firms. A new survey of midsized law firms is confirming what I frequently find when working with individual midsized law firms. Partners are logging more billable hours than their associates. Law firm partners are hoarding work rather than handing it off to others. Rather than bringing in new business or training others, they are piling up their own billable hours.
Not only are most midsized firms not fully utilizing their existing associates, their partners are not investing enough time in business development or recruiting and mentoring talent. Where AmLaw 200 firms have about three associates for every partner, midsized firms average only a 1:1 ratio. Even the best, the top performing 20 percent of midsized firms, only average 1.7 associates to each partner. The result is what you would expect: midsized firm partners make less income than their counterparts in larger law firms.
Let me add that leverage does not depend on the billable hour, nor does it require exploitation of the young. It is simple economics. For a law firm, people are required to generate work. Work generates revenue, regardless of how that work is priced. Likewise, the more revenue producers per partner, the more income that partners can enjoy. The table below shows the clear correlation between leverage and per-partner income. Results were compiled from responses of 243 midsized firms participating in the annual survey of midsized law firm economics conducted by Juris, Inc. in cooperation with The Remsen Group and the Managing Partner Forum. Final survey results are expected to be released in July.
Per Partner Income, Leverage & Realization |
||||||
|---|---|---|---|---|---|---|
| Top 20% | 2nd QUIHT | 3rd QUIHT | 4th QUIHT | Bottom 20% | Average | |
| Per Partner Income | $654,644 | $308,315 | $201,684 | $137,789 | $45,943 | $270,091 |
| Partners | 15 | 14 | 13 | 10 | 8 | 12 |
| Associates | 26 | 16 | 10 | 5 | 5 | 12 |
| Leverage | 1.7 | 1.1 | 0.7 | 0.5 | 0.6 | 1.0 |
If long hours, hard work and inadequate use of associates actually reduce income why do partners do it? Why do they hoard the work? The answer is a simple one: Why shouldn’t they? If a partner’s distribution is based largely on their individual production, what else would one expect?
It is time to rethink partner compensation in the midsized firm. Consider rewarding partners for nothing more than a hygienic level of production. Additional rewards would then come from bringing in new business and handing off work to others. Consider the merits of a compensation system that includes the following four elements:
- Personal production up to a maximum hygienic level
- Bringing in new business (based on fee revenue for the initial 18-month period)
- Associate billings on clients’ work under the partner’s control
- A subjective element based on relative performance in such categories as:
- Recruiting
- Mentoring
- Associate survey
- Administrative staff survey
- Public relations
- Playing by the rules
- Client satisfaction surveys
- Etc.
By limiting earnings for personal production to a “hygienic” level, partners will no longer be incensed to pile up billable hours at the expense of making rain and developing the skills of their associates. The short 18-month origination credit period keeps the pressure on “new” business development rather than continuing compensation for prior successes. Origination credit under the above approach is never handed off. Once someone has been paid for new business, it becomes property of the house. By basing compensation on associate fees, the emphasis is shifted from personal production to developing and using the profession skills of associates.
The firm gets a bonus out of the new approach. The firm gains a farm team out of which the future partners and leaders of the firm will come.
About the Author
M. Thomas (Tom) Collins is one of the pioneer entrepreneurs in the information services industry and is the founder and former President of Juris, Inc. He began his career as a CPA with Price Waterhouse. Today he shares his 30 years of experience working with midsized law firms through his insightful blog www.morepartnerincome.com.