Help explain compensation for new law firm partners?

[Anonymous]

My husband just made partner at his law firm. Yay! Very proud of him. He doesn’t have info yet on new compensation structure, but many colleagues have said to expect “significantly” less pay this year as a partner vs. in the past. Can someone give me a general overview of how this works? My husband has asked colleagues to explain and either he hasn’t gotten a clear explanation from them or I am not understanding, cause I don’t get it! I suppose I can wait a few days until he gets more info but I am impatient! Anyone a law partner (or understand this) and can explain? His salary as a senior associate was 305k. It is a large global firm.

[Anonymous]

Taxes and benefits play a large part.

[Anonymous]

There’s also a capital contribution, which is usually spread out over a few years.

[Anonymous]

I assume the 305 salary was before bonus, and that he's now equity partner. If he's non-equity he presumably will just be salaried with a bonus, just like associates are.

You won't know his total compensation until the end of the year (since it's essentially a percent of profits he receives) and though this number might be large (hopefully at least a bit larger than his current salary + bonus, to start), you must subtract from it benefits (he's now the employer and the employee), taxes (way more taxes than a salaried employee, often paid in many many jurisdictions), and capital contribution (this works differently at every firm).

It's very, very complicated. My DH is the partner, and he understands it less than I do, since managing the finances is my responsibility. And I barely understand it (although I can follow line by line when it's explained to me). You'll need an accountant.

All I can say is: don't dramatically increase your spending. And I hope you have some savings to give you a cushion during the transition. As long as you don't go out and buy a new car or house or something, you'll be fine, but there's a period of uncertainty.

[Anonymous]

Equity partner? Non equity “partner”? Huge difference.

[Anonymous]

Anonymous wrote:There’s also a capital contribution, which is usually spread out over a few years.

. It’s called a buy in. If you are a true equity partner then you have to purchase your portion of the firm (like a condo) at my old firm, when one made partner, there is the shaking of hands then the new partner us escorted to the turns bank where a substantial luu I an is taken out by the new partner. The firm immediately got its share and the new partner takes the debt. It depends on the firm

[Anonymous]

OP here - this is maybe going to make this post sound made up, but he was just offered “partner” and not sure if it is equity or non equity. Do all firms use that model? This sounds so bad that neither one of us know what we are getting into here, ha! I know some of his salary will be withheld each paycheck. He gets all benefits through my work. Assume more info will be forthcoming. The 305 was before bonus but his bonus was never much, maybe 5-10k? I am guessing from these reactions that he was/is underpaid. He isn’t in litigation or any rainmaker practice groups.

[Anonymous]

He’s a large global firm which I presume has an HR department, correct? Not sure why he can’t figure this out through them.

[Anonymous]

OP again - no plan to dramatically increase spending at all, but want to make sure we can still cover current expenses! (Mortgage, day care, current savings and investments, etc). We both work - I make 180k and suppose could cover all our essentials if need be, but our savings rate would likely have to decrease, which I am not crazy about. I like to have things planned out so this new comp model isn’t a great match, ha!

[Anonymous]

Anonymous wrote:He’s a large global firm which I presume has an HR department, correct? Not sure why he can’t figure this out through them.

Hopefully he can, those meetings just haven’t happened yet. Just asking to see if I can get a bit of a head start and know what questions he should ask when those meetings take place.

[Anonymous]

Firms can be quite different in how they actually structure partnerships and partner compensation. There are 3 in our family and each of our firms have different structures.

Generally, though, the reason the others are saying this to your husband is that he will now not be treated as an employee for the overhead items. His tax structure will be different (and you'll be paying in multiple locations), his benefits will be different and cost you more, he may have to pay in capital to the partnership, he may or may not have a guaranteed base and so his comp may fluctuate wildly with his work + equity + attribution. So for a few years, junior partners can have less take home pay than senior associates. It is a temporary situation, and if it isn't, well, then he won't be a partner for long.

[Anonymous]

IME, as a partner he will no longer be an employee so the firm won’t cover health insurance. But it sounds like you can switch to yours.

[Anonymous]

Anonymous wrote:OP again - no plan to dramatically increase spending at all, but want to make sure we can still cover current expenses! (Mortgage, day care, current savings and investments, etc). We both work - I make 180k and suppose could cover all our essentials if need be, but our savings rate would likely have to decrease, which I am not crazy about. I like to have things planned out so this new comp model isn’t a great match, ha!

Only on DCUM would someone be concerned about the possibility of having to live on over $180K and that savings and investments might have to take a backseat for a little while.

[Anonymous]

Anonymous wrote:OP here - this is maybe going to make this post sound made up, but he was just offered “partner” and not sure if it is equity or non equity. Do all firms use that model? This sounds so bad that neither one of us know what we are getting into here, ha! I know some of his salary will be withheld each paycheck. He gets all benefits through my work. Assume more info will be forthcoming. The 305 was before bonus but his bonus was never much, maybe 5-10k? I am guessing from these reactions that he was/is underpaid. He isn’t in litigation or any rainmaker practice groups.

He must know whether it is equity or non-equity.

[Anonymous]

OP, he needs to talk to HR or whoever is in charge of shepherding him through this process. It’s different at every firm. My firm is structured as a professional corporation, and I’m equity. However, I get a W-2 for the vast majority of my comp. My firm also allows us to do the buy-in over a long period of time out of our comp (a percentage of my comp gets automatically deducted for this purpose until I’m paid up). Some firms with a large buy-in make you take out a bank loan. In short, it totally depends on how the firm is structured and how they’ve chosen to structure comp.