Wednesday, January 02, 2008


Our last 2007 business day at the firm closed with a bang. Putting together the numbers so that my partners and I can decide on a fair way to divide the profits is always a challenge. For the past several years the other partners were content to have me figure all of that out. To have any sort of hope of getting the division just right requires us to collect the data as close to the end of the year as possible. Then we need to analyze it, decide on a division proposal, present it to the other partners and get their approval, and then notify our payroll manager (Paychex) of how it should cut the checks. Our deadline was 2 PM on Monday. Carol called Paychex about 1:55!

But this year, Carol and I started early in putting together a format for allocating revenues and costs in a deliberate manner, using our commercial time and billing system and figuring out how to import its data into Excel spreadsheets we invented ourselves. Carol really worked hard at the task, and I put hours in on the matter. At one point, we engaged our accountants to help us, but we realized that beyond their confirming that our general approach was correct and helping Carol with some adjusting entries (as they do each year anyway), the real work was up to us.

During the year, Carol had collected a number of articles concerning compensation approaches for law firms that I found very helpful. Of course, having been in law firms since 1972, I have had experience with all sorts of approaches. One of the articles showed a sort of history of law firm compensation that exactly reflected my own experiences. When I began practicing, the compensation scheme was basically seniority driven and that lasted well into the 1980s until the firm essentially exploded because the younger partners felt the system unfairly held them back economically. Then we moved into a struggle between the "origination" approach and the "billable hour" approach, with "originations" finally prevailing, at least for awhile. But that contributed to firm instability in a big way. In all of these approaches, firm management sought to capture just the right "formula", a sort of deus ex machina solution. This way, with a formula, one wouldn't need to actually sit down and look at his partners in the eye and say, "This is how much I think you are worth and how much I think I am worth", and then sit back and see if anyone is upset to the point of walking out. But that's really the way it is, finally, whether that the explosion (or not) takes place at the end of the year in fast motion or whether the explosion occurs in slow motion, taking several months thereafter finally to pull the relationships apart.

We worked hard to put together a formula that was mainly based on "production", that is, how many dollars came in the door as a result of one's billable hours. We then worked on attributing dollars to partners that were earned by non-partners. Finally we allocated costs to each partner and came out with a "net revenue" number for each of us.

But we didn't distribute on the basis of net revenue. We took those numbers and added intangibles to it. One intangible was a sense that we should treat each other the same. Another was "originations" - how much recognition should be given to the partner who brought in the client in the first place, regardless of how much he worked on the client's case. And other factors as well. When we finished massaging the numbers, one could ask why we had gone to the trouble of getting to the "net revenue" numbers in the first place. But that number was the platform upon which our gestalt allocations could be made. And everyone had the spreadsheets that got us to the "net revenue" numbers. So there was full disclosure. Finally, when we had our meeting with 2 PM breathing down our necks and reached agreement on the numbers, everyone at least seemed to be happy.

So we got that big stone up to the top at 2 PM December 31.

Of course, it rolled down the mountain yesterday, and I'm beginning to walk down after it this morning. I know a lot of people are making that walk this morning. If it's happiness I feel, it is a strange sort of happiness.

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