Professional Services Accounting ARTICLE -
Compensating the Unique Practice Partner

Target Audience: Practice Partners, Unique Practices, Partnerships, Law Firm Professionals, Lawyers, Law Firm Associates

Partner compensation can have a significant impact on the partnership. Based on perceived fairness or unfairness, it can be constructive, creating a happy partner alliance, or destructive, causing partnerships to all but crumble. So how does the “unique practice” partner fit into the compensation mix? The answer depends largely on all of your partners and how your firm operates.

What makes a practice unique?

Many law firms have specialized practice partners, but being specialized isn’t the same as being unique. In fact, unique practices are rare, so before you set out to establish a special compensation or economic arrangement for a particular lawyer, make sure his or her practice is truly unique.

When making your assessment, ask:

Is the practice outside the firm’s main services or client base?
Does it function as a standalone, self-supporting operation — for instance, does the partner and his or her staff work exclusively within the unique practice and with a client base separate from your firm unlike other practice areas that cross over and share clients?

Can the practice sustain itself, even through tough economic conditions?

Answering “yes” to one or more of these questions can mean a practice is unique. But to deter any future misunderstandings and contention, ensure partners agree with its classification.

Before designating a practice as unique, consider the profitability of the unique partner as well as the need for the unique practice in your firm. Determine whether it complements other practice areas and the level of client demand.

How is compensation determined?

Once you’ve reached consensus that the practice of one of your partner is unique, there are two significant factors that affect how your firm should compensate him or her:

• The method of remunerating partners at the firm, and
• The nature of the relationships among all the partners.

In firms that function more individually, such as when partners are more independent and they make decisions about their own practices’ issues, and receipts and expenses generally are allocated directly to each “profit center.” In this case, a partner with a seemingly unique practice may not be so unique and likely would eat what it kills like everyone else.

In firms that function more as a team, such as when partners work with the same clients, pooling resources and following a common philosophy, a partner with a unique practice most likely will operate in accordance with the firm’s policy for developing and servicing clients. However, there may not be a lot of cross-selling opportunities available for your firm unless the unique practice partner makes a concerted effort to introduce other members of the firms to his or her clients.

This may or may not create problems when trying to determine compensation for a unique practice partner. For instance, if a law firm pays its partners using objective metrics, such as business generated, business managed and billable hours, it will likely find compensating the partner with the unique practice area a bit easier. That’s because these metrics apply equally to a unique practice partner as to other partners. Also, it may be easier to segregate and judge the unique practice in terms of costs and pay-for-performance than it is for other practice areas that co-exist.

But if a firm shares in the economic rewards (for example, a tiered, lock-step or equal-share system), establishing the unique practice partner’s compensation may be more complex. The partner may feel a greater sense of ownership if, because of the unique practice, he or she is the only one able to recruit and service the client and reap the financial rewards.

Moreover, taking into consideration subjective factors — such as a partner’s management capabilities, training skills, leadership or marketing results — can further complicate compensation matters if some of these traits aren’t applicable to the unique partner.

What are the compensation options?

It’s important to establish what your firm hopes to gain from a relationship with a potentially unique practice partner and how the relationship will be viewed. If the partner’s practice is considered unique but still part of your firm, consider assuming the risks and rewards. If the intent is to segregate the partner’s practice, a separately negotiated compensation arrangement, such as one you might devise with lawyers designated “special counsel” and “of counsel,” may be the best solution.

When deciding that the relationship warrants a special compensation arrangement, it’s important to clarify how risks and rewards will be shared. Firms with unique partners commonly use these strategies:

Split fees. The unique practice partner generally is entitled to a range from 10% to 33% of the fee received from work he or she generates, and 40% to 66% of the fee from work he or she originates and services. The remainder of the fee goes to the firm to cover overhead and other expenses. In addition, the unique practice partner may arrange a special rate for servicing other clients in the firm.

Share fees. In this scenario, the unique practice partner and firm take an agreed-upon fee and then split anything above the agreed amount. This allows cash to flow through to each party.

Allocate expenses. The unique practice partner’s costs are directly allocated. These include:

• Malpractice insurance,
• Rent and support staff,
• Fringe benefits, and
• Mandatory employer contributions and taxes.

In this instance, the fees belong to the unique practice partner, who is then charged back for direct overhead and the agreed-upon rates for firm timekeepers who work on his or her matters.

Reaching an agreement

There are a number of ways to structure compensation for a partner with a unique practice. For all parties involved, the best fee agreement is one that recognizes the elements of origination, servicing and overhead, and simplifies the tracking and accounting for each.

Find out how our expertise in professional services accounting can add value to your business. Email us or call us at 1 (888) 875-9770.

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