In the wake of Dewey & LeBoeuf’s collapse last year, The American Lawyer published an article we had written about an issue that turned out be a major contributing cause of that implosion: the wide compensation spreads within the equity partnership of large law firms. With the release earlier this year of regular Am Law Daily contributor Steven J. Harper's book, The Lawyer Bubble, and a recent American Lawyer survey that detailed the compensation spreads at many large firms, the issue has gained even greater attention.
Let's cut to the core of what's potentially problematic about these widening spreads. Not only must a compensation system be presented and perceived as fair, a firm leader must ensure that it is as fair as can be reasonably expected, consistent with that firm's unique culture. Any system that is patently unfair, irrespective of firm culture, is one that asks, indeed demands, that those within the firm embrace it. There will be examples where that is the case, either because partners and associates sign on to that expectation, or because they have no choice. But remember, the best talent with the best business in today's market does have a choice. And it doesn't always vote with its wallet.
Individual power is related to dependence in most law firms. Depend on a partner for his or her book of business, or even particular skills, especially if that expertise is rare, and that partner's power rises. When any individual acquires influence disproportionately greater than that of other partners, he or she can become almost indispensable to the firm. In many cases the individual can demand special perks or preferential compensation, or break rules others are expected to respect. It does not mean that the firm will cease to exist if this lawyer leaves, only that such a loss would create palpable financial pain for some period of time.
This is where the concept of flexibility enters the picture, and where expedient judgments may dictate that it is in a firm's best interest to provide a special accommodation rather than risk or even initiate the departure of an influential partner. As a consequence, if, as a firm leader, you are giving certain individuals preferential treatment or looking the other way when star performers behave contrary to firm culture, you are fostering a double standard. Will resentment ferment among other partners, creating a dynamic capable of undermining the performance of the entire firm? It darn well should. Trading doing “what's right” for “what's expedient and convenient” is not a viable option for those in leadership positions, yet it seems to have become standard operating procedure at too many firms.
Your final decision as a firm leader comes down to weighing the value of developing a star culture versus the costs of doing so — and those costs are more than simply hard dollars. In our earlier American Lawyer article, we warned about how widening compensation spreads can inadvertently weaken practice groups, especially when collaboration is required; foster tension between peers by alienating near or future stars; and eventually induce midlevel partners to leave — an occurrence that can serve as a leading indicator of potential firm failure. Whether affirmatively adopting a star culture, or just allowing it to develop, there are other considerations for you to study:
DON'T OBSESS OVER THE WRONG METRICS
Star cultures in particular suffer from their oversimplified compensation formulas, exacerbated because "origination" as a criterion for compensation puts no particular value on one form of business versus another. Where many firms err in their star evaluation systems is by being unselective, by being obsessed with gross revenue, and by letting profits per partner become the sole criterion for success.
Success goes beyond a large book of business. There is the often-unexamined issue of growth potential. For example, one partner has a book of $7 million in revenue derived from clients that occupy industries with little growth potential. Another, meanwhile, has a book worth $3.5 million that is largely derived from serving a stable of biotechnology clients that are expected to grow exponentially over the coming decade. Which of these partners is more valuable to your firm? And when?
Similarly, you have a partner who consistently produces 2,400 billable hours a year and keeps a handful of associates very busy, all based on largely commodity work with a low margin/contribution to the partner profit pool. Compare that to yet another partner, who is likely to bill only 1,450 hours this year as he continues to invest heavily in building his skills and marketing his cutting-edge private-public-partnership (P3) practice. Again, which partner is more valuable to your firm?
Finally, you have your partner with a $20 million book of business billed at discounted commodity rates. The practice is notorious throughout the industry for its low rates, slow pay, and write-downs. A candid review tells you that the contribution to the profit pool being made by this partner and the two partners that support her is significantly exceeded by the compensation allocation they are receiving based on gross revenue, as well as the star premium you have committed to paying her. The hard truth is that the firm would be considerably more profitable without her. Contrast that with another partner who heads a lean team charging and collecting close to 98 percent of its recorded time, with an average accounts receivable turnover of about 40 days. This group's contribution to the profit pool is double the other groups, but it is taking out just half as much in compensation. Which do you want to keep, which can you afford to lose?
We don't know that there is one right answer to these questions. What we do know is that the only thing that seems to command power in most law firms today is the individual attorney's book of business, as defined by gross "revenue" and little else. That clearly is a wrong answer.
