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Bar News - June 21, 2002 Managing Partners: Higher Pay for Harder Work By: Charles F. Huxsaw Law Practice Management Issues THE JOB OF managing partner in a law firm has traditionally been under-appreciated and under-compensated. Productive lawyers, often firm leaders, sacrifice valuable hours from their personal practices to tend to firm-wide duties inherent in the managing partner job description. Law firms have grappled with the challenge of appropriately rewarding the individuals who agree to take on the burdens of law firm management. What is fair compensation for a managing partner? The answer to that question varies, of course, with the particularities of each law firm's situation, needs and expectations. But there are some benchmarks that New Hampshire law firms may find useful. Every other year, the law firm consultants at Altman Weil, Inc., survey law firm managing partners and executive directors. The 2001 edition of AW's Managing Partner and Executive Director Survey reports data about managing partners' responsibilities, time spent on management matters, compensation and job satisfaction. Many of the survey participants were from small and mid-sized firms, making the reported data relevant to New Hampshire law offices. However, many of the firms in the AW study were located in settings more urban than the typical small New Hampshire law office. That demographic tends to skew compensation figures upward. Compensation standards Total compensation for managing partners, which includes bonuses, year-end distributions, and the value of benefits in addition to salary or draw, usually falls between the amount earned by the average partner and by the highest-paid partner in the firm, according to Altman Weil analysts. The smaller the firm, however, the closer managing partner compensation comes to that earned by the highest-paid partner. Data from the Altman Weil survey illustrate the point. Size of Firm: Fewer Than Five Lawyers Median Compensation for:
Size of Firm: Five to 14 Lawyers Median Compensation for:
Size of Firm: 15 to 29 Lawyers Median Compensation for:
To most New Hampshire practitioners, these numbers look high. The most recent NHBA Economics of Law Practice Survey (published in 2000 reporting 1999 data) brings down the Altman Weil scale and allows for an extrapolation of managing partner compensation paid by New Hampshire law firms. The New Hampshire study, conducted by Applied Statistics Laboratory, Inc. of Ann Arbor, Michigan, reported average annual net income for partners by size of firm, but not highest-paid partner data, as below. By computing the percentage step-up from average partner compensation to the managing partner compensation reported in the Altman Weil survey, one can extrapolate an approximate compensation level for New Hampshire managing partners. Size of NH Firm: 2 - 7 partners Median compensation for average-paid
Size of NH Firm: 8 or more partners Median compensation for average-paid
For the smallest firms in the Altman Weil survey, the differential between managing partner pay and average partner pay was 24 percent. Applying the differential to the New Hampshire data, a managing partner in a two- to seven-partner office should earn approximately $101,680. For the larger firms in the Altman Weil study, the pay differential between average paid partner and managing partner was 17 percent to 26 percent. Using the same extrapolation technique, compensation for a managing partner in a larger New Hampshire firm should range between $169,650 and $182,720. Managerial pay or practice-based compensation? The fact that managing partners earn compensation near to the highest-paid partner in the smallest law firms doesn't necessarily mean that smaller firms value their managing partners more highly than larger firms do. More likely, relatively higher managing partner compensation in smaller firms reflects the fact that MPs in small firms commit less personal time to management issues and maintain larger personal law practices while also handling firm management matters. The Altman Weil data confirm that managing partners surveyed in firms with 100 or more lawyers spent 60 percent of their time on firm management and 28 percent practicing law. In firms with 15 to 29 lawyers, managing partners spent only 32 percent of their time on management matters and 57 percent practicing law. Regardless of firm size, the AW data reveal that managing partners remain active as practitioners. Data from all managing partners participating in the survey indicates that managing partners billed a median of 1,500 hours on client matters during 2000. Compensation for handling headaches? What do managing partners do that makes the personal sacrifice of a diminished law practice worthwhile? What do law firms expect of their managing partners? These questions that underlie compensation issues are not clearly answered in the Altman Weil survey. But there are some good hints. Law firms find their managing partners among their veteran lawyers. The typical managing partner in the AW survey was a partner in his or her law firm for 17 years before assuming the duties of management. This may indicate a desire for new challenges and new opportunities among partners whose practices have plateaued. Most managing partners operate without benefit of a formal job description. The Altman Weil survey reports that fully 78 percent of managing partners do not have the guidance that a job description provides. Just over half of the managing partner respondents did acknowledge, however, that they are expected to heed their firm's business or strategic plan. It seems then that managing partners are expected to be flexible and to handle management issues and problems regardless of the specific subject matter involved. Big headaches ahead? Legal industry reports suggest that managing partners will be earning their pay in the months immediately ahead. Partner's Report, A Monthly Brief for Law Firm Owners, published by New York's Institute of Management and Administration, warns in its March 2002 edition that the recession promises tough times ahead for law firms and the managers that must lead them. The Partner's Report analysis is based on reported data on corporate spending trends for outside legal services. Citing a National Economic Research Associates study of 302 top corporate law departments, NERA's 2001 Legal Leading Indicators Study, the management periodical reports that most large U.S. companies expect to spend less or stand pat in spending on outside legal services in 2002. To make matters worse, the study indicates that lower spending levels are only partially attributable to the present economic downturn. Of much greater concern to law firms and their managing partners should be the trend cited by 73 percent of the law departments queried. Those law departments plan "changes in the law department" that include bringing in higher-level in-house talent to handle work now farmed out to firms and still closer scrutiny of billings by outside firms. It would appear that managing partners who devise strategies and management initiatives that result in leaner organizations and that claim or preserve a share of the shrinking corporate client business will, indeed, earn their keep in 2002. Charles F. Huxsaw is the NHBA director of Professional Development and he welcomes questions or comments from Bar members on law practice management issues and services the Bar offers. Contact him at 224-6942 or chuxsaw@nhbar.org. Further detail and ordering information for Altman Weil's 2001 Managing Partner and Executive Director Survey is available at http://store.altmanweil.com. The survey report is priced at $295. To learn more about the NERA report, 2001 Legal Leading Indicators Study, visit www.nera.com. Subscription information for Partner's Report - A Monthly Brief for Law Firm Owners is available at www.ioma.com or by calling 845-526-4351. The annual subscription price is $329.
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