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A recurring theme of this blog has been that smaller law firms have much less tolerance for poor management. The loss of just a few clients or even one partner can have a disproportionately large impact than in a larger firm.

One of the biggest risks to a small law firm -- and one that is frequently overlooked or, in some partnerships, deliberately ignored -- is its partner compensation system.

The partners do not have to be at each other's throats for partner compensation to pose a latent threat to the stability and sustainable financial performance of the firm. This is why we recommend that small firms, especially, should conduct a comprehensive review of their partner compensation structures and policies to ensure that they still:

  • incentivize and reward the behaviors that the firm needs to continue to compete;
  • provide a stable platform for leadership succession;
  • support the aspirations and meet the expectations of partners; and
  • above all, are perceived to be fair.

Is partner compensation an asset or liability in your firm?

Consider these questions. A "yes' answer to any of them usually is a good sign that a law firm needs to review its partner compensation system:

  • Has it been more than 10 years since you conducted a complete "no assumptions" review of your partner compensation system --- not just tinkering around the edges? 
  • Are you thinking about the possibility of merging with, or acquiring, another law firm sometime in the next five years? 
  • Are more than 10% of your equity partners more than 55 years old? 
  • Have you recently lost senior associates or non-equity partners to other law firms? 
  • Have you failed in recent efforts to attract lateral partners? 
  • Are a relatively small number of partners "carrying" the rest of the firm in terms of billing or business development?

The answers to these preliminary questions, and the solutions that might eventually flow from them, are highly firm-specific. There is no magic formula or structure that succeeds for every firm. In some instances, Walker Clark clients have concluded that a traditional lockstep works best. A few others have found that a system that is primarily performance-based (even "eat what you kill") better meets their needs. Most of our clients, however, usually adopt a carefully crafted hybrid in which a few critically important factors are each given appropriate weight to produce the measurable financial results that the firm needs.

Click here for more information about how Walker Clark can help you and your partners discover and respond to the hidden risks in your partner compenation system -- both for today and the future. Most law firms can recover the costs of a Walker Clark Partner Compensation Review in less than nine months, and also realize even greater additional long-range benefits such as more stable partner retention and sustainable improvements in individual and group performance.

Norman Clark