Incentivising partners in a partnership structure
Produced in partnership with Tony Williams
Incentivising partners in a partnership structure

The following Share Incentives guidance note Produced in partnership with Tony Williams provides comprehensive and up to date legal information covering:

  • Incentivising partners in a partnership structure
  • Introduction
  • Evolution of partnerships
  • The key remuneration options
  • Lockstep
  • The performance model
  • The hybrid
  • Which is the right model?
  • Tax treatment of partnership remuneration

Introduction

Partnerships of all sizes often struggle to devise a remuneration structure for their partners that is fair, rewards the 'right' behaviours and encourages all partners to perform effectively. This Practice Note looks at how partnership remuneration structures have evolved, the three key models for designing a partnership remuneration system, and the challenges that firms face in developing and operating their remuneration system.

Evolution of partnerships

When partnerships were small the remuneration structure was relatively simple. The partners came together, formed a partnership and agreed how the partnership profits would be allocated. Initially profits were often shared equally. Indeed, the Partnership Act of 1890 envisages the equal sharing of profits and losses in the absence of an agreement otherwise.

As partnerships developed, they often wanted to add partners who were not part of the founding group, in many cases by promoting existing employees of the firm. Some new partners would buy into their firm and be treated equally for remuneration purposes while some would have a lower level of remuneration while the founders maintained control and most of the profits.

As partnerships grew, and the original founders retired, the firms continued to develop their remuneration arrangements. However, partnerships were still relatively small. Even professional partnerships were limited to a maximum of 20 partners until the mid-1970s and for other partnerships