This article surveys three broad models of income and expense allocation regarding law firm compensation for partners: the true partnership model; the modified partnership model; and the eat-what-you-kill model. The goal is for young lawyers to understand the fundamental differences among these compensation models even as there are myriad ways to allocate income and expenses

Schremmer, Joseph A.

English

University of New Mexico

10-2019 
A New Associate’s Field Guide to Partner Compensation 
Joseph A. Schremmer 
University of New Mexico - School of Law 
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Joseph A. Schremmer, A New Associate’s Field Guide to Partner Compensation, October 2019 The 
Journal of the Kansas Bar Association 18 (2019). 
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18    The Journal of the Kansas Bar Association 
A New Associate’s Field Guide to Partner Compensation
by Joseph A. Schremmer
There’s a certain topic of conversation shared among all lawyers, except, it seems, new ones. It’s a topic that, as a newly minted lawyer myself, I never asked about—
partly from ignorance and partly intimidation. Now that I’m 
slightly more broken-in as a lawyer, it’s a topic I’m asked about 
frequently by new associates. The topic I speak of is law firm 
compensation for partners.1 This topic entails a deeper ques-
tion of how firms allocate income and expenses among firm 
owners. 
Despite its off-limits perception, profit allocation is an im-
portant issue to understand for lawyers new to a firm. Not 
only does it dictate how one would be compensated as a part-
ner of the firm, but it can also reveal subtle details about the 
firm’s values and goals. This article attempts to provide a basic 
field guide to the most common forms of law firm profit allo-
cation. It must be understood, however, that there are as many 
ways to allocate income and expenses among co-owners of a 
law firm as there are law firms. The summary set forth here is 
not, and could not be, exhaustive of this topic. 
Those who took business associations in law school know 
the basics already. Law firms are usually organized as a part-
nership, limited liability company, limited partnership, lim-
ited liability partnership, or a professional version of one of 
these. In general, partnership income and expenses are allo-
cated and distributed among partners in proportion to each 
partner’s pro rata share of the partnership. Limited liability 
companies, limited partnerships, and limited liability partner-
ships all permit this type of allocation but also permit devia-
tions from the general rule as agreed among the owners of the 
entity. In other words, in most law firm settings, allocation of 
income and expense (and therefore partner compensation) is a 
matter of contract among the owners. There tends to be three 
broad models of income and expense allocation; we will call 
them the “true partnership model,” “the modified partnership 
model,” and the “eat-what-you-kill model.” Variation within 
each model is wide and significant. We will survey the basic 
characteristics of each below. 
The True Partnership Model
Firms that utilize this model simply allocate items of in-
come and expense to partners proportionally to the owner’s 
interest in the firm. Consider the hypothetical firm of Dewars 
 www.ksbar.org  |  October 2019   19
Walker & Ardbeg, LLC. The firm’s operating agreement au-
thorizes 100 units of membership interest, which are owned 
by the three members of the firm as follows: 45 units to Dew-
ars, 35 units to Walker, and 20 units to Ardbeg. The operat-
ing agreement provides for allocation of income and expenses 
among the limited liability company members on a unit basis. 
During April, Dewars brings in $45,000 in total fees, Walker 
$20,000, and Ardbeg $35,000. At the end of the month, the 
firm has netted $20,000 in profit and has $20,000 in free 
cash available for distribution to the members. Based on their 
membership interests, Dewars will receive a distribution (be-
fore tax) of $9,000 (being 45 percent of the total distribution), 
Walker $7,000 (being 35 percent of the total distribution), 
and Ardbeg $4,000 (being 20 percent of the total distribu-
tion). For purposes of allocating profit, it does not matter that 
Ardbeg collected more fees that Walker during the month. 
Except in firms that pay partners a “salary” or guaranteed 
payments throughout the year, as described more below, part-
ners in true partnership model firms generally do not enjoy 
perfect predictability in the timing or amount of distributions 
from the firm. The firm, and thus its partners, may be flush 
with cash some months and receive relatively little during oth-
ers. The transition from being a salaried associate to a partner 
at one of these firms can feel abrupt. 
True partnership model firms are probably the least com-
mon of the three models today. Most firms that follow this 
model are generally small, likely having fewer than 15 part-
ners. The pros and cons of this model are obvious. On the 
one hand, partners are not compensated strictly based on their 
productivity or profitability, although these considerations 
(and others) usually bear on the determination of partnership 
percentages. It is not uncommon for such firms to cross-subsi-
dize younger partners by awarding them a greater partnership 
percentage than would be justified by their annual receipts. 
On the other hand, partners are incentivized to share clients, 
refer matters internally, and handle cases together. True part-
nership model firms largely avoid intra-firm disputes over al-
location of expenses (e.g., staff salaries, copier rentals, etc.), 
which can be sources of strife under other models. 
The Modified Partnership Model
The modified partnership is probably the most common 
model. It is almost certainly the most common among larger 
firms. It is also susceptible to the greatest variation among 
firms that follow the model. The modified partnership model 
embellishes on the true partnership model with the goal, usu-
ally, of directly rewarding productivity, profitability or both. 
In these firms, ownership is often granted initially in a lock-
step system that vests partners with set amounts of equity 
based on seniority. To incentivize junior partners—whose 
equity stake is often relatively small—to be productive, these 
firms devise ways to reward high achievers with various kinds 
of bonuses. Chief among these are the year-end bonus and the 
origination bonus.
Year-end bonuses are what they sound like—annual pay-
ments of additional compensation above a partner’s distribu-
tive share calculated under predetermined criteria. The usual 
criteria for year-end bonuses for partners are based on pro-
ductivity or profitability of the individual lawyer. There are 
many ways to quantify things like “productivity,” and, there-
fore, there are many ways to calculate year-end bonuses. Pro-
ductivity is often determined in large part by billable hours, 
actual receipts of fees (i.e., revenue), or a combination of the 
two. Origination bonuses are rewards for bringing a new cli-
ent (or sometimes a new matter for an existing client) to the 
firm. “Origination,” as it is often shorthanded, can be deter-
mined in a number of ways. It is typically calculated as a set 
percentage of the total fee associated with the new client or 
matter. Origination bonuses can be significant and, as a result, 
firms often develop thorough and detailed rules for awarding 
them. Each firm will define “origination” differently—at some 
shops, for example, origination would include bringing back 
a former client, whereas other shops would not award origina-
tion on a client the firm represented in the past. At still other 
shops, the origination might be awarded to the lawyer who 
first brought in the client rather than the lawyer who brought 
the client back. 
At many firms, partners accumulate origination credits that 
factor into the calculation of a lump sum bonus. Origination 
bonuses may be paid at the end of the fiscal year along with, 
or as part of, a year-end bonus. Partners who receive origina-
tion bonuses sometimes share a portion of the bonus with 
other junior partners or associates who contributed meaning-
fully in bringing in or working for a particular client. 
Many, perhaps most, modified partnership model firms also 
pay partners a “salary” or guaranteed payments. Many firms 
pay partners a “salary” at regular intervals throughout the year 
such that each partner’s individual cash flow does not change 
significantly from when they were associates. But partners 
qua partners do not enjoy a “salary” within the term’s usual 
meaning. Instead, partner “salaries” or guaranteed payments 
are usually subject to repayment at the end of the fiscal year to 
the extent that the total received exceeds the share of profits 
to which the partner is entitled under the partnership agree-
ment. If, on the other hand, a partner’s aggregate annual sal-
ary or guaranteed payments falls short of the partner’s share of 
profits, the partner will be entitled to an additional bonus to 
true-up compensation with percentage ownership. 
What happens if a partner receives $300,000 in salary pay-
ments during 2018 but the partnership share at year end would 
entitle that person, under the partnership agreement, to only 
$275,000? In this case, the partner would owe the partnership 
the difference ($25,000). Likewise, if the partner’s proportion 
of firm profits at year end would total $400,000, the firm 
a new associate’s field guide to partner compensation
20    The Journal of the Kansas Bar Association 
would owe the partner $100,000. This year-end true-up usu-
ally results in partners getting more from their distributive 
share than they received in guaranteed payments, in which 
case, they enjoy the bonus. But stories exist of partners paying 
the firm back for excessive guaranteed or salary payments. 
The Eat-What-You-Kill Model
Some eat-what-you-kill firms may resemble office-sharing 
arrangements more so than law firms. Shops that follow this 
model allocate most income and expense items to the part-
ners who earned the income or incurred the expense. Cer-
tain shared expenses such as office space rent, copier rentals, 
Westlaw or LexisNexis and library subscriptions, breakroom 
snacks (the list of expenses is long!) are allocated among part-
ners based on their proportional use of the expense item. Eat-
what-you-kill firms can and often do hire associates; and those 
associates’ salaries are generally allocated to the partners on 
the basis of each partners’ use of the associate’s time. 
Let’s return to our hypothetical firm, Dewars Walker & 
Ardbeg, LLC, for an illustration. Assume Dewars Walker & 
Ardbeg’s operating agreement provides for items of income 
and expense to pass through to the member who earned the 
income or incurred the expense. Assuming the same facts as 
stated above about the month of April, Walker would be enti-
tled to $35,000 in fees collected but would be responsible for 
the incurred share of firm expenses. Assume the monthly sal-
ary for Walker’s legal assistant is $4,500 and that 75 percent of 
the assistant’s working time is spent working for Walker and 
25 percent for Ardbeg. Walker’s $35,000 in income would be 
reduced by 75 percent of the legal assistant’s salary, or $3,375. 
The same calculation would occur for all shared expenses the 
firm incurred during April. Certain expense items are passed 
through completely to Walker, like Walker’s membership 
dues for the Kansas Bar Association. At the end of the month 
Walker will receive the positive difference between income 
and expenses. 
Like true partnership model firms, eat-what-you-kill firms 
are often small or medium sized. Junior partners may find 
it challenging to make ends meet at these firms. To ease the 
transition from associate to partner, these shops often allocate 
a relatively small portion of large expenses, like rent, to junior 
partners. The major advantage of an eat-what-you-kill system 
is that it clearly aligns partners’ efforts and success with their 
compensation. Partners who want to make more money can 
do so by finding more clients and generally working harder.
If you’ve read to this point but haven’t recognized any of 
these general descriptions as describing your firm, do not be 
surprised. There are myriad ways to allocate income and ex-
penses. The key for young lawyers is to understand the fun-
damental differences among the broad compensation models, 
and to inquire about the specific method utilized by any firm 
the individual is considering joining.  n
1.  We will use “partner” throughout this article to refer generally to 
an owner of an equity interest in a law firm regardless of the firm’s form 
of organization.
About the Author
Joseph A. Schremmer has left his position as a 
partner at Depew Gillen Rathbun & McInteer, 
LC in Wichita, to accept an appointment to the 
faculty of the University of New Mexico School 
of Law. Joe holds a B.S., a B.A., and M.B.A. 
from the University of Kansas and received 
his J.D. from the University of Kansas School 
of Law. Joe served as the Editor in Chief of the 
Kansas Law Review. He currently serves on the 
executive committee of the KBA’s Oil, Gas, and 
Minerals Section, and co-authors the Oil, Gas, and Mineral Law 
chapter of the KBA’s Annual Survey of Law. Joe previously taught oil 
and gas law at the University of Kansas School of Law.
joe@depewgillen.com
a new associate’s field guide to partner compensation


A New Associate’s Field Guide to Partner Compensation

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