The State of Law Firm Partner Pay
In a previous column we discussed the new Georgetown Law School Center for the Study of the Legal Profession Report on the State of the Legal Market, which showed dismal financial performance figures for the legal profession as a whole. In the corporate world such numbers are bad news for shareholders. In the world of law, the partners who are the law firm owners should equally be gloomy. However, it appears not all partners are "feeling the pain" equally.
The Georgetown Report says that as 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 unlike corporate executives, 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. 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 they too become personally saddled with a bankrupt firm's debts.
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