Law firm incomes and structures continue to change. And the gap between the ‘rich’ and ‘not-so-rich’ lawyers continues to grow.
As more equity and non-equity partnerships develop and as law firms like Slater + Gordon and others develop new remuneration models, the way in which law firms share their profits is continuing to change.
The American Lawyer reported this year about top Am Law partners bringing home $10 million a year, as some firms generate ongoing revenue growth and also boost their top-earning partners’ incomes.
However that growth is also increasing the gap between partners at different levels – not just in the US but also in firms beyond the United States.
Firms are attempting to cut their costs, including for support staff and associates, who are making little progress in many cases, according to this year’s law firm salary statistics and consultations with law firm recruiters and others in the United States market. However the US trends are reflected in other markets also.
As the American Lawyer reports: “There is increased stratification within the legal community on compensation,” says Steven Slutsky, an executive compensation and human resources consultant at PricewaterhouseCoopers LLC who consults on law firm compensation. He was an associate at Jackson Lewis in New York City earlier in his career. “One (driver) has been the increased focus on the business of law as opposed to the profession of law. Law is following the trends that we see in almost every other business.”
Law-firm consultant Peter Zeughauser estimates that roughly a dozen firms now have partners earning $10 million. “It’s still rare, but there are many more partners at that level,” he says. “I would say there are likely 40 to 60 Big Law partners making $10 million or more today.” Patrick McKenna, a law firm practice management consultant based in Edmonton, Canada, who works with U.S. firms, concurs with the $10 million figure.
Some of the Key Trends
• The gap between the highest- and lowest-paid equity partners is growing at firms that are boosting rainmakers’ compensation. Some consultants consider that a problem; others don’t. At the very least, it can spell trouble if not managed carefully, they say.
• More senior-level lawyers are nonequity partners and counsels. As the opportunity to advance at many firms increasingly depends on the ability to keep clients and generate new ones, some management experts see the nonequity partner group as being among the most vulnerable in Big Law because many of them don’t have their own book of business.
• Associates’ base pay at the biggest offices of the biggest firms is about $160,000 and hasn’t budged since 2007, amounting to a decrease of 14.5 percent when adjusted for inflation. Firms this year are augmenting salaries with jackpot bonuses, but these can be slashed in years when firm profits fall. Big flucuations in pay don’t promote stability, experts say. Morover, some consultants question whether firms are as committed as they need to be to training young lawyers to become the next rainmakers.
• More law firms are using salaried staff attorneys (whose titles may vary), and hourly contract lawyers frequently engaged by third-party agencies, often in back offices in lower-cost cities such as Nashville and Tampa. Staff lawyers can earn up to $175,000 at some Wall Street firms but the jobs generally don’t provide opportunity for advancement and aren’t on the partner track. We found some contract lawyers in Nashville earning $18 to $19 per hour—about the same as a manager of a local McDonald’s.
• Law firms increasingly are outsourcing administrative, clerical and technical support jobs to third-party providers and overseas support centers where wages are often much lower. That means support jobs also are more wage-constrained and more vulnerable to downsizing, experts say.
Short Term Thinking?
“My problem with all these trends is that they’re fixated on the short-term profits that can be returned to equity partners at the earliest opportunity, rather than on a longer-term vision of creating a sustainable, multi-generational firm whose next cohort of leaders is in active development,” says Jordan Furlong, a legal consultant in Ottawa, Canada with Edge International.
“Many such law firms are like baseball teams that spend all their money on established free-agent stars while neglecting the farm system and the development of their minor-leaguers. They might win a pennant this year, but they’re setting themselves up for many last-place finishes for years afterwards.”
The $10 million partner
For firms with the biggest payouts to rainmakers, the equity partner class is increasingly stratified. “There’s a shrinking top tier and it has grown its compensation disproportionately,” says Zeughauser, who is based in Newport Beach, Calif., and consults on compensation matters with Am Law 200 firms. “Firms have had to advance extraordinary partners faster. That’s been everybody’s big challenge.”
The driver, of course, is the lateral market and the ability and willingness of firms to pay premium salaries for significant rainmakers, Zeughauser says. “Firms can basically not keep people in their seats anymore,” he says. “Everybody has a number for which they will leave. It’s that disparity between what someone is making and what someone can get in the market. Everyone has a number.”
Zeughauser says that to increase the compensation of stars, firms often look to adjust the salaries of equity partners in the middle partnership tiers, where he says lawyers are sometimes thought to be compensated too well.
The lowest tier partners have seen compensation grow at a much lower rate, Zeughauser says. “Some of the Am Law 200 firms have first-year partners making as little as $180,00 to $200,000. There are firms where first-year partners make less than some associates at the same firm,” he says.
What’s the secret to being worth $10 million? At firms that consider business generation and proliferation in making partner compensation decisions—and not all do, Zeughauser says—it would be “rare for a partner earning $10 million to be responsible for less than $40 million to $60 million of highly profitable, strategic work,” he says.
But firms that overcompensate rainmakers without regard to other factors, such as the ability to manage, risk collapse in the long term, consultants say.
“We reward people based on the top-line revenue number: You have a $7 million book of business, you must be a big player,” says consultant McKenna. “But you have to determine of that revenue that a particular partner has, how much of that is really profit or do they consume so many resources that there is little profitability in that work? It may surprise some that we have seen partners with their $6 million book of business that don’t add much profit to the firm.”
He adds that partners who work in cutting-edge areas such as drone law and personalized medicine may contribute more to the long-term profitability of a law firm, despite billing fewer hours in the present.
“If we have a system that is just measuring one particular metric like billable hours without respect to whether they are good billable hours or bad billable hours, then the system is dysfunctional,” McKenna says.
Overall, the migration of many law firms to “pay for performance” compensation systems is driven by strategic goals, and away from the lockstep and equal partnership models that were more common in the past. These incentive-based systems are meant to reward individual performance in addition to the firm’s overall success. By contrast, lockstep compensation systems may make it more difficult for law firms to lure and keep top performers in the intensifying global competition for market share and top talent, experts say.
Nationwide, equity partner compensation varies greatly by region, according to a recent survey. For 2014, those salaries ranged from a low of $125,000 at some firms in the South and Midwest to $8 million on the West Coast and in New York City, with a mean of $1.3 million in New York City and $1.01 million on the West Coast, according to proprietary data from recruiter Major, Lindsey & Africa. In New York City and states in the Mid Atlantic and West Coast regions, the minimum equity partner compensation was about $175,000. Major Lindsey defines compensation as the base salary plus bonus received in the 2013 fiscal year, including any bonus from 2013 received in the first part of 2014. (Consultants’ current estimates of top partner pay are higher than figures from the survey, which was conducted months earlier, in April.)
Nonequity partners are vulnerable
Nonequity partners, who don’t share in the assets and liabilities of the firm, comprise an increasing share of the headcount of many law firms, even as the proportion of lower-paid associates to partners is falling. They include former associates who may one day advance to equity partner if their legal acumen and business-development skills shine, but their ranks also may include former equity partners who have failed to meet their numbers, management experts say.
That can be a problem for the entire firm’s bottom line if too many less-productive lawyers fall join the ranks of this relatively highly compensated group.
Nonequity partner compensation in the Major Lindsey survey in April 2014 ranged from a minimum of $50,000 on the West Coast and $175,000 in New York City up to a maximum of $5.45 million, also in New York City. Some may earn performance based bonuses as well. The mean ranged from $435,000 on the West Coast to $688,000 in New York City, roughly half as much as equity partners.
Ed Wesemann, a law-firm management consultant based in Savannah, Ga., who specializes in strategic issues, says that nonequity partners are especially vulnerable to law-firm downsizing. “There is nothing with less value than a 12-year partner with no business base,” he says. “Most firms feel they have too many nonequity partners and are trying to get rid of them.”
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