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?
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