What’s the typical pay structure for non-equity and equity partners? Eat what you kill? Or something different?

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Totally depends on the firm, and there are radical differences in the way pay systems are set up. So you really have to research whatever firms you are particularly interested in.

That said, non-– equity partners often are paid on a salary that may or may not be connected in some way to the share partner compensation scale. So, for example, a non-– equity partner might have his or her salary pegged to the budget value of 36 shares, or something like that. And they typically are eligible for a bonus, which is ordinarily earned only if they substantially outperform their base compensation in a particular year.

Although some law firms divide their net income equally among all equity partners, in most firms equity partners are allocated a particular number of compensation shares that entitle them a pro rata share of the firm’s net income. Shares are typically allocated in tiers, so you might have a group of partners at 26 shares, another group of 30, another group at 34, etc. Shares are usually allocated or reallocated every year or two. At the beginning of the year, a budget is established under which, for example, each share is expected to generate $20,000 for that year. So if you are a 50 share partner, your budgeted income for the year is $1 million.

Many firms pay a relatively small monthly draw to their partners, and then distribute income on a pro rata basis once a quarter. Typically, distributions in the first 3/4 of the year or small even for fairly high share partners. Then partners will receive a very substantial distribution following the close of the books For the fourth quarter, which might be payable all at once, or might be payable in installments over a period of time.

In addition, many firms have partnership bonus pools from which bonuses are paid to partners who, in a given year, substantially outperform their share allocation for that year. At the end of the day, what you earn as a share partner is your pro rata share of the firms income, after all other bills are paid and bonus pools are funded, plus any bonus you get. Btw in my experience partner bonuses are 100% discretionary.

My firms have been pretty good at hitting budget most years. Once in a while we end up being pleasantly surprised or being paid less than budget. But you never really know what your annual income will be until the year is over. Partners also have to pay quarterly taxes to the government, because payroll withholdings are not taken from non-– employee shareholders. That essentially involves filing four tax returns per year. It is not uncommon for your quarterly tax bill to be larger than your distribution, particularly as a lower share partner, so many partners maintain a personal line of credit that they draw down during the early part of the year and then pay off at the end of the year with their largest distribution. Learning to manage cash flow and income expectations is one of the weird Aspects of moving from associate/employee to partner/owner. You might also be interested to know that in all law firms that I know of, partners pay 100% of the cost of their health insurance, bar fees, and most other expenses, which comes off the top of their draws and/or distributions. They receive no firm subsidies.

Different firms incentivize different behaviors and do so in different ways. Business generation typically is an important factor, as is personal collections for the work performed personally by the partner. But many firms also pay significant attention to non-billable contributions such as being a good citizen, doing a good job in leadership roles, or even serving in a practice that may not be profitable but is important to the firms reputation or prestige. Some lateral partners also get guaranteed compensation levels for the few years they spend with the firm, before being moved into the regular partnership pool.

Lastly, different firms have very different ways of establishing the share tiers for their partners. A some firms, there is a massive spread between the highest share income partners and the lowest. In extreme cases the top earning partners might make 20 or more times what the lowest earning partners earn. In other firms the table is much more compressed, and yields top to bottom partner pay differentials of more like three, four or 5 to 1. 

All of these variations can have a huge impact on firm culture. In my experience, firms that have a demonstrated track record of incentivizing partner conduct other than generating business tend to be more collegial and less sharp elbowed. The same is true of firms with flatter compensation tables in which there is less difference between the top of the food chain and the bottom. As an associate, It is often valuable to ask about your firms particular partner compensation system and philosophy. You may not get actual numbers, but if you have a decent relationship with a partner you can usually get a general description of how that particular firm divides the pie and you might even get personal views on how the firms compensation system affects from culture. Learning that sort of thing early in your career can help inform you about the kinds of firms that you might want to form a long-term relationship with, given the economic opportunities and cultures created or contributed to by different partner compensation systems. 

I know there’s a lot there. I hope I answered your question. If not, feel free to ask more specific questions.

likehelpfulsmart

Much like Lawyer 1 said. Firms are different. In my experience, firms try to make a profit on non-equity partners. The profit ( or margin ) might vary based upon the importance of the practice area the non-equity is in. If it’s an important practice area and the NE is a key player in it, the profit margin might be low. If there are others in the practice area with similar skill sets, the target profit margins are higher. For equity members, you typically see some variation of lock step, modified lock step and pure eat as you kill. In modified lock step, firm’s will weight seniority, productivity and “ other “ ( citizenship, practice area, management, mentorship, etc. ) differently.

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My firm utilizes a modified version of the share system described above with equity partners, and an eat what you kill system for income partners. By the time you get to equity partner, you're very good at money management after surviving years of wildly fluctuating monthly income as an income partner.

I'm an income partner. I've had months where my gross was over 100k, and months where my gross was negative in theory (as in, I didn't collect enough to pay for my benefits, so the firm floated that cost for me until next month). It all averages out in the end, but man, that was a frustrating first year or so until I built up a large cash reserve to insulate me from this.

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Wow thanks, this was helpful!

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One other super fun thing that equity partners have to do in most firms that I forgot to mention is purchase their shares. Some firms finance them. Others arrange for bank financing. Some do neither, meaning that the partner has to come out of pocket for the assigned a value of his or her shares when first made a partner, and then anytime in the future when his or her share allocation is increased. This required investment in the firm easily exceeds $100,000 in most sizable firms, and can be much more than that. Unless the firm provides financing or a bank is willing to lend you money to buy in, it’s not uncommon for new partners to make less than they did as associates, after paying all of their unsubsidized expenses and the cost of their shares. No one told me any of that before I was welcomed into the inner sanctum.

likehelpful

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