What Constitutes a Mid-Size Law Firm
Mid-size law firms typically gain entrance into the club at around 20 attorneys. This number can vary, but we are using 20 in our analysis. At this size, a law firm generally has sufficient financial resources to provide higher than average compensation packages to attract and retain partners. At this size, a law firm can "afford" to hire individuals who have the experience or practical skill that will allow management to devote significant time to building the institution. At this size, a law firm can compete with more seasoned and better known firms on talent. Drugging through its own future ownership program – if the law firm has one – mid-size law firms can offer seasoned partners an attractive and quickly vested equity stake. Once the law firm realizes that size is important, it is important that mid-size firms maintain this size. Yes, they should stay aggressive in trying to attract out-side talent to increase their numbers, but not if it results in dilution – and we are only talking about 50% partner dilution before a law firm decides that is enough.
One of the primary reasons that size is important is related to the difference between a small and mid-size law firm. The compensation committee of a 20 attorney law firm is going to be more restrained than the compensation committee of a 50 lawyer law firm. Management of the mid-size firm is typically going to wield some measure of control over the compensation committee . Law firms that are too small, with numbers in the teens or lower, cannot afford to pay above-market rates for long. These firms face all of the same pressures as mid-size firms, but often lack the internal financial strength to give above-market compensation packages to partners in order to buy good talent. They also cannot afford to give all of their partners scale (or as close to it as possible) for the same reason.
Mid-size law firms are very likely to have significant transactional business. In this business, there is often competition between firms for the work. That competition ultimately leads to different bills being submitted for the same work for the same quality. Paying under-market scale to try and win the work just doesn’t work for long. In a 10-20 attorney law firm, the departures of good transactional lawyers cannot be easily replaced. Because law can be something of a cradle-to-grave profession, experienced lawyers get pushed to find firms or cities to grow with over the course of their career. Without the resources to pay for expansion, the small force becomes stale and must rethink its place in the legal economy.
In the intro, we talked about the possible issues at larger firms and the possible benefits or value at smaller firms. In the next section, we will continue our look at small, mid-size, and large law firms with a look at small law firm compensation and what we view as the causes of the ongoing decline in lawyer headcount at those institutions.
Factors Impacting Partner Compensation
The factors that are key in determining how much firm partners in a mid-size firm are paid or how the base compensation is set are many, and they are all specific to the client’s situation. Those that influence partner compensation include the location of the firm, the specialty of the firm, the amount of business coming into the firm and competition for hiring in the market.
Geographical Location
Geographical location is the reason many firms pay their senior attorneys more than their clients. For example, a Minnesota attorney says Minneapolis pays partners more than other cities of similar size, particularly for younger partners. To come to Minneapolis, the firm has to pay partners a fair amount more for a couple of reasons. First, partners can take client matters to Minneapolis. And second, the Twin Cities is a high-income tax state, while neighboring Wisconsin and Iowa have far lower income taxes, and the Dakotas are low-business states. Also, some regions have higher salaries due to the higher cost of living. A partner in New York City typically earns a much higher income than one in a small town mainly due to the cost-of-living difference. "When law firms recruit, they pay people commensurate with the area they are in," says Clarke.
Specialty of the Firm
Mid-size firms have a tendency to pay more to partners whose specialty is investment management, securities and income tax.
Amount of Business
For these firms, business is everything. A law firm in a remote location with no possibility of business, but with tight competition for partners, must pay partners well. On the other hand, a firm with strong business and a lot of partners may be able to get by with paying lower salaries, but the employee must produce enough to generate revenue. The market also places limits on those figures.
Overall Compensation Packages for Partners
As with national trends in the corporate world and beyond, the most recent compensation surveys for the mid-sized law firms found that the average salary for partners dropped slightly in 2018, down from $530,000 to $505,000. Not surprisingly, Philadelphia (where the average is $630,096) appears to be the hottest of the cities with mid-sized firms, with the highest partner compensation. Washington, D.C., Los Angeles, and Miami come in second, tied at an average of $614,688. Austin follows closely behind that, at $600,000. San Francisco, and New York follow, with a healthy $610,870 and $599,631, respectively, rounding out the top five cities for salaries among mid-size firms. Houston and Chicago come in next, at $505,000. As is the case with most compensation surveys, the generally larger number of associates in the firms surveyed has a moderating effect on the overall average. The proportionate effect of the addition of newer associates to the data set is typically larger at the lower end of the market and thus has a moderating effect on the lower ends of the averages.
Compare to Large & Small Law Firms
When comparing mid-size law firm partner salaries with those of larger and small firms, there are several factors to keep in mind. Large law firms have a well-established system for determining partner salaries, which typically involves a detailed analysis of the firm’s finances and the individual contributions of each partner. This can lead to higher salaries for partners at large firms, but also makes the process of determining salaries less transparent and predictable.
Mid-size firms, on the other hand, may not have as clear-cut a process for determining partner salaries. This can lead to some excitement and uncertainty , as partners might not always know what their salary will be from year to year. However, at mid-size firms, partners may have more input into their own compensation, as well as into the overall direction of the firm.
Small law firms often have the lowest salaries for partners, as they may not generate as much revenue as larger firms. However, partners at small firms may have more autonomy in their work and greater job satisfaction, as they have more control over their day-to-day tasks and responsibilities.
Other Compensation and Benefits
Additional forms of compensation and benefits some mid-size firms may offer to partners include bonuses, profit sharing and retirement plans. The expectation of distributions from a practice of law does not usually influence the salary offered. However, standard practice for some firms is to offer annual bonuses—typically based on profitability. The bonus can be paid in the form of cash or a guaranteed distribution for the next year. Mid-size firms are usually flexible on this issue.
Some firms also offer guaranteed distributions for those partners making a commitment not to leave the firm. This gives the individual assurance of income for the next 1-5 years. In turn, the firm expects to have another lawyer dedicated to its productivity. This option provides substantial income security for a time but, if the partner chooses to exercise his or her right to leave after the guaranteed time period expires, the impact to the rest of the partnership can be damaging. The number of departing lawyers is one of the key factors deterring potential clients from entering into a relationship with a young firm.
Profit sharing—generally, 25% of the partnership’s profits after expenses, may also be offered.
Retirement benefits, in the form of a 401(k), are offered by some mid-size law firms. 100% vesting is common, as it has become standard for many other employers.
Future Salary Trends
The legal industry is in a constant state of flux, often paralleling the economic and technological changes felt in the larger market. Law firms in 2018 are under increasing pressure to ensure their ongoing competitiveness as the fight for top talent gets fiercer while revenue and client bases remain stagnant. As such, it’s likely that partner compensation models will continue to shift as firms scramble to expand their bottom lines. Several trends can be seen as having a ripple effect on partner compensation moving forward.
The Rise of AI
Law firms are notorious for being slow adopters of new technology. As the costs of operation increase, however, many firms are identifying the benefits associated with technological advancements. With everything from virtual assistants to robotic process automation, firms are beginning to adopt artificial intelligence applications, which should, in theory, have influence over the bottom line.
As legal tech adoption rises, it is likely that firms will cut back on hiring support staff and office temp workers in favor of tools and software that help do more with less. In the near future, firms may be able to automate basic paralegal tasks and administrative work, such as filing motions or conducting research, and leave attorneys with more time to both focus on business development and take on high-level work.
Increased Competition Among Other Firms
As many mid-size law firms continue to struggle with soliciting new business , many face extreme pressure to offer meaningful incentives to potential partners. A 2017 survey conducted by Simon Kutcher & Partners found that among the top incentives sought by prospective partners were:
Competitive salaries, equity and profit-sharing options were attractive to nearly 75 percent of respondents who would consider accepting an offer with another firm.
Some firms have dealt with talent shortages by beefing up their benefits packages — prioritizing maternity and paternity leave and health, wellness or child-care benefits first to attract new talent. Others have taken more drastic measures, such as Dixon Hall Lewis LLP, which recently became the first major law firm to offer employees unlimited vacation.
The Future of Legal Fees
Most notably in 2018, the conversations surrounding legal fees and rates have expanded from simply being ones reserved for negotiating hourly fees to talk of flat fees or contingency retainer arrangements stretching across the life of a client-firm relationship. As clients drag their feet on payments and disputes continue to arise around firm billable hours, the next big change in the mid-size firm business model may come in the form of a universal overhaul of their fee arrangement structure.
While flat fees and contingency arrangements will push partners to become more judicious with their time, they are designed to make it easier for clients to see a quantifiable value for their services offered. If the contingency or flat fee pricing structures catch on in the coming years, some of the pressure will be off of partners to negotiate what they believe is their worth — they’ll be working with a different system altogether.