As we approach year-end and another compensation cycle, it’s appropriate to step back and think about how individual partner compensation is determined. At many firms, there is a natural tendency to base this year’s comp on last year’s, plus or minus an adjustment based largely on the firm’s financial performance. This is entirely understandable. However, there’s an inherent danger: what if a partner’s annual increases have been slightly above those justified by the economics of their practice so that the compounded effect is to have compensation significantly above that warranted by contribution? Or if a valuable partner’s compensation has grown year-by-year at a rate below that of the increase in their economic contribution so that now there’s a sizeable gap that makes them a flight risk?

For these reasons, it behooves compensation committees to take stock of partners’ economic contributions relative to their compensation now before the compensation process gets into high gear. This is not to say that compensation committees should link a partner’s compensation exclusively to economic contribution. There are multifarious factors beyond the profitability of a partner’s practice that come into play in determining a partner’s compensation. Nonetheless, profitability must play an important role if a firm is to be fair to partners and to not defections of high-performing partners to rivals prepared to pay closer to the economic contribution of a practice.

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