Compensation is a critical driver in the movement of partners laterally among law firms. It is also a kind of scorecard for many partners, just as it is for athletes or entertainers. While few partners at successful firms feel underpaid in absolute terms, many are motivated to consider moving when they feel under compensated relative to other partners they view as lesser contributors or even peers.
As a result, managing partners and management committees at many law firms, who must focus on how well partners work and play with each other, have initiated new ways of assessing partner contributions and dealing with compensation. The compensation landscape is constantly changing, and lateral candidates must understand that when considering a move.
Among the variables in compensation schemes that laterals should consider are the following:
1. Open vs. Closed Compensation. Some firms have adopted closed compensation systems in which partners do not share individual compensation figures with other partners. This system would not be a good fit for a partner who feels entitled as an “owner” of the firm to know what other owners make. But it can sometimes make opportunistic lateral recruiting easier - especially in down times - when existing partners might otherwise raise multiple objections to taking a chance on someone new. A firm can better structure deals with incoming lawyers without offending current partners in a closed system, but those incoming laterals who might be attracted by a sweet deal need to understand that they will not have a scorecard of what others make going forward. See “Keeping the Books Closed on Salaries Makes Lateral Hiring Easier” at www.law.com.
2. Objective vs. Subjective Compensation. Objective compensation formulas make the individual scorecards transparent, so that each partner can see clearly how the compensation committee arrived at its conclusions. In a more traditional objective scheme, each partner gets a measurable credit for originations, plus billable or collectible hours, plus some other credit for time spent on management tasks or other work for the firm. But in a subjective scheme, partner scorecards are based on more amorphous considerations of general contributions to the partnership institution. There is not necessarily a set formula for a broader assessment of “team play” that considers development and training of associates, cross-selling and client introductions to other partners, committee work, community and public relations work, and behaviors that promote effective team service and selling.
3. Black Box Formulas. In some firms, the actual method of assessing partner contributions may be hidden from view. Partners must trust management to come up with fair assessments of their overall contributions, which are commonly part of a closed system as well. This kind of compensation system can be effective at thwarting disputes over proper calculation of owner contributions, but only if partners trust management to be wise, competent, honest and fair. Smaller firms that depend on the efforts of one or a handful of major rainmakers are more likely to have such schemes. How those schemes play out in the event of a legal dispute among owners who have certain theoretical rights, either as shareholders in a partnership or equity holders in a professional corporation, could be uncertain.
4. Behavioral Compensation Components. Partners in firms that adhere to any number of compensation schemes may have their professional behavior assessed as part of their compensation scorecard now. Both managing partners and general counsel have made public references to an increasing sensitivity about professionalism. This sensitivity is not based just on ethics and compliance behaviors either, although corporate scandals have escalated concerns about renegade lawyers bringing down an institution. A growing number of firms seek out input on partner misbehavior of all kinds from secretaries, paralegals and associates, and some do so formally with so-called 360 degree annual reviews. Correspondingly, those firms may reward what they consider to be good behaviors that promote teamwork and enhance the firm’s reputation.
5. De-Equitizing of Partners. Many of the largest firms with the biggest marketing platforms are most attractive to lateral candidates. But many of those firms are also moving toward fewer equity partners, according to published surveys. Furthermore, this is not just a trend connected with the down economy, but one that picked up steam in recent years when revenues were popping. See “Firms Predict More Work, Less Equity” at www.law.com and see also “The AmLaw 100: A Look Behind the Numbers” at www.law.com.
In fact, a recent survey by Altman Weil of partners at more than 200 law firms has shown that the vast majority believe that fewer equity partners “may be” or “will be” a permanent trend. Roughly 85 percent of lawyers at mega-firms (1,000 lawyers plus) believe that is the case; an equivalent percentage so indicate for mid-sized firms (250 to 500 lawyers); and nearly two-thirds agree at small firms (less than 100 lawyers).
For partners who are looking to move, this introduces another compensation consideration. They must ask themselves where they might fit into the hierarchy of a targeted firm in five years, and they have to ask how important equity status might be. Right now, as some firms are staring at empty office space and fleeing partners, a well compensated non-equity position (with less risk) could look more attractive.