How to divide law partner compensation is an area of practice management that causes more problems for a firm than most other areas.

Generally, the smaller the firm, the easier it is to make a decision on how to split money. But as firms grow larger and more complex, trying to settle on partner compensation becomes increasingly difficult and time-consuming.

A mechanical formula based solely on fees generated or productivity is not the total solution. In fact, there seems to be no perfect method.

Initially, your firm should compensate partners as if they were employees. Basic compensation should be based on what they could earn if they were employed somewhere else.

Normally, equal base compensation for each partner causes problems. All partners are not created equal. If the firm’s profits are not sufficient to provide this base compensation for all partners, then the firm has more pressing problems than compensation planning.

After the base compensation, pay a reasonable return on the partner’s invested capital. Then divide the balance of profits under a discretionary partner compensation plan.

The broad goals of a discretionary partner compensation plan should include:

• Rewards for long-term quality in partner performance
• Recognition of fast-track partners who will reach their potential faster than others
• Encouragement for the firm’s best partners to remain with the firm
• Enhancement of the firm’s ability to recruit highly rated new partners
• A reputation among most of the partners as being a fair and equitable plan

The plan should also be geared to the firm’s long-range goals and short-term needs, such as specialization growth or retirement specifics.

Initially, the plan must have a system for measuring partner performance, including the basic criteria to use, the weight to give to each criterion, ways to measure the performance against the criteria and a reporting system.

Typical criteria include professional competence, new fees generated, personal production and individual profitability.

Many firms think that professional competence means technical competence, but technical proficiency is only one factor to consider. Professional competence also includes leadership, talent, development and training of associates, contribution to the cohesiveness of the firm, promotion of teamwork and enhancement of the firm’s image.

Professional competence is usually difficult to measure on a statistical basis but may be self-evident in all except the largest firms through the knowledge and impressions of fellow partners.

Generating new fees, either through new clients or new business from existing clients, is crucial in light of today’s increased competition. A partner’s ability to bring in new business is particularly important in measuring performance.

Personal productivity includes both chargeable time on client matters and nonchargeable time spent on matters the firm has identified as important, including firm management, associate responsibility and leverage. Individual profitability can carry criteria of fees billed, realization of standard rates and amount of balances carried in receivables, unbilled fees and costs advanced.

Measuring a partner’s performance requires accumulation of statistical data. But to measure a partner’s performance solely on statistical data fails to take into account subjective information on a partner.

To assist in collecting subjective data, devise a form to provide comments by peers and associates on the partner’s performance. The form, perhaps titled “Performance Recommendation or Need for Discussion,” can be completed after each major case. For firms that perform under a teamwork concept as a cohesive unit, peer evaluation can be effective.

Measure performance against targeted goals at least annually. The managing partner would allocate compensation among the partners based on individual successes and failures compared to targeted goals and subjective data. A vote of the partners would then approve the allocations.

If your firm has been growing, perhaps it is time to review your compensation system. Good partners are your most valuable assets.