When lawyers make partner they transition from an employee of the firm to a self-employed individual who owns a share in the firm. This means that the way they get paid is very different. To address the question “how do law partners get paid?” here is a quick breakdown of how the compensation system works.
Non-equity partner vs equity partner
Many large law firms have moved to a two-tiered partnership model with equity and non-equity partners, both of which get paid differently. Equity partners are considered to have ownership stakes in the firm, therefore they share in the firm’s profits and losses. Non-equity/income partners, on the other hand, are generally paid a fixed salary which is much higher than associates but they have limited voting rights when it comes to the firm operations. Although non-equity partners will not make millions if the firm has a great year, they will also not be asked for a capital contribution if the firm has a terrible year.
How equity partners get paid
First, just let me highlight that there are numerous methods of compensation for law partners: it depends on the firm size and overhead collection, partner hours billed on own work originated, partner hours billed on work received from another attorney, business origination, additional partner or associate hours billed to assist client matters, bill rates, and collections just to name a few. As you can see, it’s complicated. To answer the question “how do law partners get paid?” here is an example of how it is worked out using the most common approach when it comes to compensation: a “modified eat what you kill” system.
- An equity partner is compensated for his/her contributions to the firm.
- Therefore compensation is calculated by looking at three areas (a) how much total billable work is attributable to clients/matters the lawyer brought in (origination), (b) how much billable work the lawyer personally did in the past year, and (c) a shared pool of billable work, usually all billers who are not equity partners (e.g., associates, paralegals, etc.).
- In a profitable year, you determine those figures, value them according to the preexisting formula and that will be the partner’s share of the profits.
- Lastly, deductions are taken off for various personal expenses, such as health care or a draw, and portions will go to pay income tax, loan repayments and the retirement pot.
- What is left is the partner’s pay.
The more business a lawyer brings in, the more they get paid
At the beginning of the article, I positioned myself to answer the question “how do law partners get paid?” As mentioned throughout, a partner’s pay is a complex matter as it depends on a whole variety of factors. One thing is clear, however – the more business a partner brings in and the more billable hours they have to work on their own cases, the more money they are going to bring in.