The Partner Promotion That Broke the Compensation Grid
Your 22-lawyer firm has a lockstep-ish compensation grid: associates advance one step per year, with lockstep salaries from $95k (year 1) to $175k (year 8). Two senior associates are up for partner this year. Candidate A is a year-7 litigation associate billing 1,950 hours/year at a $340 rate with a 92% realization rate. Candidate B is a year-8 corporate associate billing 1,750 hours at $410 with 88% realization, and brought in $180k of originations last year. The firm's equity partner draws average $420k; income partners average $260k. Cash reserves are $310k, and the firm targets 90 days of operating expenses (~$540k) in reserve. The managing partner wants both promoted to equity to avoid losing them.
1. Using the billing and realization data, estimate each candidate's annual collected revenue contribution. What does this tell you about the economics of promoting both to equity?
Read the worked answer
Candidate A (litigation): 1,950 hrs × $340 = $663,000 billed; × 92% realization = ~$610,000 collected.
Candidate B (corporate): 1,750 hrs × $410 = $717,500 billed; × 88% realization = ~$631,400 collected, plus $180k originations (though originations are only valuable if they convert to collected fees - treat as a separate, less certain stream).
So what? On raw collections the two are close, but the cost of equity differs sharply. Equity draws average $420k vs. income partner $260k - a $160k/year spread per person. Promoting both to equity adds ~$320k in annual draws against a reserve cushion of only $310k (and the firm is already $230k below its 90-day target). The judgment call: the firm cannot afford two equity promotions on this balance sheet without either (a) a capital contribution requirement, (b) a phase-in of draws, or (c) promoting at least one to income partner. The managing partner's instinct to retain talent is sound; the mechanism is not. A defensible answer recommends income-partner status for at least one candidate with a defined path to equity, plus a written capital contribution schedule for any equity promotion.
2. Candidate B's originations are cited as a reason to promote to equity. How would you evaluate whether originations justify the equity premium, and what would you ask for before deciding?
Read the worked answer
Originations are a promise of future revenue, not collected cash. Before treating $180k as justification, I would ask:
- Is it collected or billed? A $180k book at 88% realization and typical collection lag may not hit the bank for 60–120 days.
- Is it portable or firm-attached? If the client came through the firm's brand or a partner referral, B may not control it - and the retention argument weakens.
- Is it recurring? One-time transactional work is worth far less than an annuity.
- What's the margin? Originations at a low rate or with heavy write-downs contribute little.
A reasonable decision rule: credit originations at collected value, discount non-recurring work, and require the originator to sustain the book for 12–24 months before equity. I'd also compare B's $180k against the $160k/year equity premium - the book roughly covers the premium this year but not if it's one-off. Recommendation: income partner now, equity review at the 18-month mark contingent on sustained originations.
3. Draft the core financial conditions you would attach to any equity promotion this year, given the reserve shortfall.
Read the worked answer
Conditions should be specific, written, and enforceable:
- Capital contribution: e.g., $50k–$75k per new equity partner, payable over 12–24 months, bringing reserves toward the $540k target.
- Draw phase-in: start at 70–80% of the $420k average and step up over 24–36 months as collections prove out.
- Origination/collection threshold: equity review tied to sustained collected revenue, not billed.
- Reserve covenant: no distribution increases until reserves reach 90 days of opex.
- Clawback/exit terms: define what happens to capital if the partner leaves within 3 years.
The point is to align the retention goal (keep good people) with the solvency goal (don't drain a $310k reserve to fund $320k of new draws). Both can be satisfied with structure; neither is satisfied by promoting both to full equity on day one.