Tom Blandford, legal sector partner at accountants Armstrong Watson, provides interesting insights into the various costs and benefits of being a partner, financial and otherwise. (11 May 2021)
The Law Society Law Management Section ('LMS') benchmarking survey for 2021 has arrived. It’s a great read and there is something useful for everyone in there. Although there is a reason that we at Armstrong Watson do individual benchmarking exercises for our legal clients, rather than rely on these UK-wide trends – it can be tricky to spot the key metrics hidden in so many pages of data and ask yourself the pertinent “So what?” question.
The survey shows that average salaries range from £37k to £71k, and are sometimes higher in niche or international firms. The median (£50k) increased by 1.2% from last year. This data tallies with what we see with our legal sector clients – fee-earners' pay has had to increase recently, due to a real lack of good quality lawyers in the 2-7 years PQE area. Put simply, working as an employee can result in a decent return.
So if being a 'senior fee-earner' is a decent job, paying a decent wage, and you have received some decent pay rises recently, why take the leap into the extra risk of partnership?
The accountant’s answer may well be the 'super profits' – the additional share of profits available to partners after their notional remuneration for doing 'the day job'. The LMS survey suggests that this equates to a median of £59k per partner – or £35k assuming the partner is a higher rate taxpayer. Whilst our own figures (that we collate for our clients from similar exercises) are a little lower than this, at face value it would seem to be attractive to earn approximately 218% of a senior fee-earner's pay 'just for being a partner'.
So the question is, what are the partners doing for that extra remuneration? Quite apart from their own fee-generating responsibilities (which could well be set at levels higher than 'normal' fee-earners), there is the additional management, leadership and running-of-the-firm work. Each partner’s role in their firm will be different, but on the assumption that these additional responsibilities involve just four extra hours a week (and it is very likely to be much higher), there is already an additional 10% of workload. In practice, therefore, it is likely that much of the 'extra' 118% of pay comes from this extra workload (or what one senior executive refers to as her “5-9pm workload”).
Furthermore, and unlike other senior executives, partners are investors in their business – through their capital and current accounts. Our own data suggests that the average capital account is £272k (versus the LMS survey figure of £230k). Often these capital accounts are funded through personal lending, which could well be costing the individual 2-4% in interest and can fluctuate as the business needs working capital. Were the firm to go to the bank and ask for sudden injections of cash month to month with no security and no clear repayment plan, you can imagine that the headline interest rates offered could be very much higher – if they were offered at all. Then there is a notional cost to the partner of providing this capital instead of an external party, especially as it is often provided at short notice (eg by changing drawings from one month to the next).
Thus the median figure of £59k of super profits is swiftly eroded by the additional tax paid on it, the additional fee-earning work, the additional management responsibilities, the need to service personal debt, and the risk of having considerable personal capital tied up in the business (often for years).
Is it worth being a partner? There is a weak financial argument as set out above, but much better ones in terms of career development, in having the freedom to set your own agenda, in having a say in the future of your firm, and in turning an average firm into a high performing one.
Yes, it is absolutely worth being a partner in a law firm – but the 'worth' cannot solely be measured by the figures in the LMS survey.
This blog is based on Tom Blandford's 10 May 2021 article of the same name on the Armstrong Watson website.