Compensation Issues in Small Firms

Source: The Marc Rosenberg Blog

The following includes excerpts, reproduced with permission, from a blog entry by Marc Rosenberg. 

A two-partner firm may have been created with an “understanding” that one partner is the rainmaker and the other is a self-acknowledged technician. Thinking that both are critical to making the firm successful, they agree to split the income 50-50. But as time passes, the rainmakers [in small firms] inevitably realize that (1) they originate most of the firms' revenue, (2) they manage the relationships of the firms' biggest clients and (3) their billable hours, though not as high as the technicians', are at a healthy level nonetheless.

The rainmakers realize that they are underpaid, perhaps grossly so. And that's when the difficulty begins. Instead of the technicians being grateful that their firm is blessed with rainmakers and rewarding them accordingly (a situation that puts a lot of money in their pockets!), they get upset that the rainmakers are reneging on the original deal. Compounding matters, the technicians often stubbornly insist that working the billable hours is just as important as originating revenue and managing client relationships. We often find that the technicians are doing staff-level work instead of partner work.

There's no question that firms are best served by operating as a firm vs. the silo model. But at very small firms, there is a limit to how much the partners are able to work together on the high volume of small clients they typically handle. So, well-conceived formulas may work for these small firms.

The one I like the best is the 20-50 system: Partners receive credit for 20 percent of their client base and 50 percent of their billable time (rate x hours x realization). Some trial and error adjustments are always necessary, but the system can work.

The entry goes on to discuss the advantages of having a dominant, founding MP; problems that arise when partners do administrative work; and the fallacy of the argument that a partner's compensation should increase because he or she uses less staff labor.

For the complete entry, read “Partner Comp is the Most Difficult at Smaller Firms.” 

From The Marc Rosenberg Blog, September 26, 2016, blog.rosenbergassoc.com.