Sharing Profits Commercially

 In Practice Management

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profit sharing in law firm

The financial pressures of the last couple of years have seen profits falling in many firms. As the cake shrinks, partners start to ask for a larger slice of the cake to maintain the lifestyles to which they have become accustomed.

Most firms will not address the issue. They will continue to see the short term fall in profitability as more pressing than getting the longer term profit sharing and maximising arrangements resolved.

Why do firms find it difficult to talk about profit sharing internally?

If profit sharing arrangements do not motivate all partners to perform at the margins then the cake may continue to decrease in size. Law firms seem to find talking about their profit sharing arrangements very difficult. This is probably because everyone is perceived as being biased in any discussion. Perhaps firms need a third party facilitator to help them to move towards a more suitable approach to profit sharing.

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There is no right way of sharing profits but there are clearly a number of firms that operate a system that is wrong for them. Traditionally, smaller firms have worked with fixed or equal shares while larger firms have often used lock step mechanisms which help to deal with the fact that the partners earn considerably more than any fee earner and which therefore allow the equalisation of earnings over a number of years.

Grasping the nettle

As the legal world becomes increasingly competitive there seems to be growing pressure in all firms to move towards a system where profit is shared in line with performance. This is perhaps the most sensible way but it can result in huge short term problems as it can cause enormous changes to the way in which profits are shared. The key to any change if it is to be successful therefore is to do it slowly and incrementally, thus allowing partners to change their behaviours and hence performance before it will have too big an impact on their earnings. Once performance improves, so too does the size of the cake and then there is less worry about the relative shares if everyone is earning a larger amount of profit.

A few ideas

Measuring performance is sometimes straightforward but may also require some more difficult and subjective judgements. If partners are only given feedback on their performance at the year end it can lead to arguments about the measurements which have been used. Efforts should be made to provide feedback at the half year stage too so that partners have an opportunity to improve their performance before the end of year scoring which will determine profit shares.

A final thought. Perhaps if ‘performance based profit sharing’ is to be introduced a firm should have a dummy run first for a year without it affecting the way in which profits are shared. This allows even more time for partners to understand the system and the implications for them in terms of their required performance and likely profit shares.

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