Law Firms as a Business: Types of Partnership and Remuneration Systems, by Yi Kang Choo - Corporate Law Programme Coordinator.
Being considered the pinnacle of most solicitors’ career life, partners are commonly the group of senior lawyers who runs their law firms, and those who are responsible for winning clients or working for their teams. Whilst you might heard of the term ‘partner’, have you ever wondered, what are the different types of partnerships in a law firm?
Equity-Based Partnerships – Lockstep Model
One of the most common types of partnership within the legal profession is the lockstep model, where the proportion of profits is being shared amongst equity partners depending on their seniority in the firm. This may infer that the longer someone had worked in a firm, the higher amount of money/compensation will be paid to them, as compared to their junior peers.
This can also correlate with the typical ‘single-tier’ approach, where partners are being promoted from senior lawyers who have committed a certain number of ‘years of experience’ in the specific firm. Even though such a strict model provides certainty and clarity for its lawyers in terms of partner/career progression, it might oversee valuable incentives such as the financial performance and experience of a lawyer – especially since they are no longer being paid or promoted based on merit.
‘Modified’ and Hybrid Lockstep Approach
That is why most of the top law firms in the city, including some of the magic circle firms like Linklaters, are implementing a modified lockstep model, where partners are being appointed and paid not entirely based on the ‘years’ they spent in the firm. The concept of ‘merit-based’ pay has been quite popular in the legal profession, where associates and partners are being further incentivised (financially) to increase their performances and to win more clients for their firms.
Such a flexible partnership model is also a great opportunity for law firms to integrate their values and mission within the promotion/recruiting criteria for partners. Existing partners can also rely on these criteria to determine whether they will still be a good fit for the firm, or to consider how they would like to strategise their work moving forward.
Different Levels of Seniorities
Depending on the size of the firm, the titles of partners (and actual power) might differ. For example, in smaller firms, or even a ‘Solo firm’ that is being run by a single partner, it will be more common to see a ‘monarch structure’ of partnership. This means that a single or fairly small number of partners dictates the firm's direction and management, especially since they might be the sole generator of business. They usually set their own rates, and make decisions about the firms all by themselves.
In larger or international firms, it might also be common to see partners with different seniority/titles, such as having a senior partner and managing partner. They typically work under a clear hierarchical structure – with the managing partners sitting at the top of the leadership hierarchy. They are also usually the ones who take on a management role and set key operational or directional strategies in the firm, on top of their ‘legal’ work/practice.
Non-Equity Partnership – ‘Two-Tier model’
Whilst being an equity partner could be a lucrative role, there are also multiple burdens that one will need to bear, especially being directly responsible for the growth and development of the firm’s business as one of its ‘owners’. This might not be an ideal model for all partners, and that’s why some partners are actually non-equity partners – where they are compensated by a fixed salary as opposed to a share of the firm’s profits.
This is what we usually call a ‘two-tier’ partnership model (with equity and non-equity partners). Nonequity partners do not have to buy-in to the firm, and will not possess an ownership stake in the firm. However, some firms may confer limited voting rights to their non-equity partners, but this largely depends on the structure and constitutions of the respective law firms.
So, How Do Law Firm Partners Split Profits?
Being influenced by popular legal dramas like Suits, law firm partners are commonly dubbed as one of the richest figures in the city, with exceptional pay/earnings spanning between £50k to £2m per year. According to a survey conducted by the Law Society in 2016, about 75% (private practice) partners in London earned more than £250k, with the top 2% receiving over £2m. Thus, on what basis do law firm partners split the profits their firms made?
Traditional Methods to Split Profits Amongst Law Firm Partners
One of the most common ways to split profits is through the Profits per Equity Partner (‘PEP’), whereby profits (theoretically) are being divided equally based on how many equity partners there are in the firm. Even though this might not refer to the actual amount of take-home pay a partner receives, as it depends largely on the individual firms’ remuneration system – but it is a clear/simple indication of how profits are being divided between the partners.
However, just as how things are always more complex in reality, this is a similar case for profit-sharing formulas in different law firms. Unless a firm has a partnership agreement that divides profit equally, most allocations might differ across partners based on their seniority or even valuable goodwill.
‘Lockstep’ Approach
As mentioned above, senior equity partners in law firms with a lockstep agreement will typically be allocated with a larger amount/share of profit as compared to new or junior partners in the firm. This is usually a relatively straightforward approach favoured by smaller firms with only 5-6 partners, and according to the MLA survey, around 35% of firms still follow the lockstep approach in terms of their profit allocations.
Alternative Methods of Profit Distribution
Interestingly, many law firms nowadays are implementing a wide variety of partnership arrangements, which draws a significant distinction from the traditional profit splitting methods. One of them is a ‘modified’ or hybrid lockstep agreement, where even though some profit will still be allocated through a lockstep, a proportion of the firm’s profit can be shared equally or based on the performance of the partners in the financial year.
Building upon that, some law firms are also implementing performance-based profit-sharing models – where partners are being assessed against a set of performance criteria. This may include revenuebased performance targets, leadership qualities or contributions towards the broader business/expansion of the firm. Law firms can also tie in profit allocations and monetary compensations based on their mission, values and long-term business goal – encouraging partners to embody them throughout their work.
As such, this is one of the most favourable options, especially for aspiring mid-tier firms to grow their partnership through lateral recruitment, or to allow junior partners (who are ambitious) to receive the maximum profit allocation, subject to their performances.
Non-Equity Partners
Whilst this is not related to the actual profit allocations of a firm, it is just useful to note that there are also partners who are not paid by the firms’ profits, but with a certain amount of salary. They may also have limited or no voting powers (with lessened responsibilities too) in the firm.
No ‘One-Size-Fits-All’ Partnership and Remuneration Model
As demonstrated in this article, there really isn’t any ‘one size fits all’ approach when it comes to determining the partnership models, or partner remuneration model in a firm. Multiple factors such as the size, the culture, the profitability, the constitution, and the structure of a firm might eventually contribute to its final structure. Whilst all are being called a ‘partner’, there are indeed many types of partnership and methods to retain revenue/profitability within the legal profession.
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