All Partners Are Equal, But...

Published on: 
03/04/2013
In George Orwell's novel "Animal Farm," cows and sheep and horses threw off their human oppressors and united to govern themselves under the slogan "all animals are equal" ... until the pigs took control and modified the slogan to say, "all animals are equal – but some are more equal than others."

That brings us to today's law firm partnership.

Becoming a firm partner has long been the unquestioned goal of most lawyers. But in today's big law firms, with many hundreds of partners, is this still a desirable goal when a given partner's voice may have little influence over the direction of the firm, and when a partner's income is determined by a "compensation committee" that lacks transparency?

Partners often feel entitled to be rewarded by virtue of their partnership status alone, similar to the rewards given their fellow partners. Is this still a realistic expectation in most large firms?

A new report by Georgetown Law School's Center for the Study of the Legal Profession shows that it is not. According to the report, firms have struggled with sluggish demand growth and low productivity, they have increasingly raised the bar for equity partnership and (in many cases) increased the number of lawyers in non-equity partnership positions.

In fact, the report points out that among the country's 200 largest law firms, 169 have two-tier partnerships. Similarly, the percentage of lawyers who are equity partners in these firms dropped to 25 percent in 2011, down from 34 percent in 2005 and 36 percent in 2000.

Finally, evidence is cited that spreads in compensation between the highest and lowest paid partners (even within equity partner ranks) have widened in recent years. Traditionally, such spreads were typically in the 4:1 or 5:1 range, but they have now increased to 6:1 or 7:1 and in some firms have gone much higher still.

This suggests that corporate law firms are increasingly mirroring their corporate clients. The pay of the CEOs at companies in the S&P 500 now is 380 times larger than that of the average employee, compared to 42 times larger than in 1980.

When non-equity partners in a law firm become lumped with "average employees" in a corporation, the disparity is almost inevitable. But corporate executives and law firm partners own the firm and thus are responsible for its debts. What happens when partners have unequal rewards but share equal risk?

According to many accounts, you get the now-bankrupt Dewey & LeBoeuf, a firm that hired many lawyers with very high compensation guaranteed for a number of years. When the fortunes of the firm sagged, the high-rollers bailed, the firm died – and the rest of the partners were left holding the bag.

The lesson is that lawyers who work in multi-partner firms owe it to themselves periodically to review their partnership agreement. Of course, far too many law firms do not have a written partnership agreement. And rarely is any agreement drafted with the deftness of the U.S. Constitution, which has withstood the test of time for more than 225 years. The best firms will have a mechanism for periodic review and possible modification to maintain fairness to all partners over time. Absent such a mechanism, every partner should take personal initiative to assess governance and compensation – before it's too late.

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