Thursday, May 5, 2011
Deciding how to allocate a firm’s profits is a sensitive subject. A system that firm members find unfair can lead to any number of problems. On his blog, “Law Practice Management Tip of the Week,” Joel Rose states that implementing a system requires making six basic decisions:
(1) Who or what body will make the decision on allocation of income?
(2) Will the allocation be based on percentages, units or participation?
(3) Will the distribution be prospective (distribution percentages or units of participation determined in advance of the year) or retrospective (distribution percentages or units of participation determined when year-end results are known)? Or will an initial percentage be prospective and a specified amount of dollars or percentage be withheld for end-of-year distribution based on retrospective considerations?
(4) Will the firm determine that the profits to be distributed will consist of all that is left over after overhead is paid, or will profits be considered everything after a predetermined draw (or salary equivalent) is paid to partners or shareholders in addition to overhead?
(5) Will the firm have a class of non-capital partners whose salary and bonus will be exempt from the final distribution of income to general partners or shareholders? Or will there be a gross percentage to be divided among general partners and other pools to be divided among other partners? (The term "partnership" is used to represent either a partnership or a corporate form. The term "partner" is used for a partner or shareholder).
(6) Will hourly rates be periodically established or reaffirmed by or for each partner, associate, or other direct producers of income - law clerks, legal assistants (non-lawyer professionals or paralegals) and sometimes secretaries - so that an equitable base for billing to clients and the resultant gross billings allocation for all partners will be equitably established?
His posting provides considerable advice. Now consider how law school salaries are distributed. It would be so much easier if law schools could measure productivity and value in monetary terms and then split up the revenues.