Patton Boggs is overhauling its compensation plan for partners, retooling a long-held "eat-what-you-kill" system to reward partner cooperation and business development.
Under the new structure, which will be phased in starting next year, partners will have a percentage of their pay set by an 11-member compensation committee. The committee will examine how well partners refer business to each other and will also weigh involvement in associate mentoring and training and whether partners closing in on retirement are transferring clients to the next generation of lawyers at the firm.
It isn't a complete shift: Nearly 85 percent of partners' compensation will still be based on billables. But it does mark a major change for the firm, which says it wants to encourage partners across practices to cross-sell services to clients.
Stuart Pape, the firm's managing partner, says the firm has outgrown its old system. The changes will apply to the firm's 119 equity partners; they will not affect the vast majority of the firm's 111 nonequity partners. The firm has a total of 518 lawyers. "What we're doing here is trying to provide some compensation incentive for doing things that are supportive, collaborative and productive," Pape says. Pape says the committee is still being formed and would not say who, besides himself, will participate. The criteria it will use are also still under development, he says, but it will consider partner efforts to be "proactive in sharing insights and opportunities" with clients and other partners.
The firm has been working on a review of both the compensation system and firm objectives for roughly two years, Pape says, and the internal process concluded with a partner vote in December to adopt the new system. More than 90 percent of equity partners voted for the change, he says.
At the same time, the firm is creating groups of lawyers and lobbyists across practice areas that focus on industries such as health and energy. The change is designed to show clients that the firm has a depth of knowledge about their industry, Pape says, though he declined to name specific clients the firm is targeting for more work.
Pape and firm deputy managing partner Edward Newberry, who led the compensation review, say the process began before the economy collapsed, but the new system is nimbler and will better position the firm during the downturn.
POSTING STRONG RETURNS
Patton Boggs' old system has long had critics, including former partners who complained the system encouraged hoarding work. It also presented hurdles to a merger or acquiring large groups of lawyers from other firms, since reconciling different compensation systems can be complicated. Pape says he won't rule out a merger, but none is in the works, and the possibility didn't drive the process.
Peter Zeughauser, a consultant with the Zeughauser Group, calls the old system an "anachronism."
"For any firm that still uses it, it's kind of like, welcome to the 19th century," he says. "In bad times, a meritocratic system is absolutely the best model. It's the best way to grow business. It encourages client sharing and building client relationships across all of a firm's practices. The firm is rewarded because you have more people working for that client."
The new system will start kicking in next year, when the firm considers partners' 2009 performance. In the first year, the compensation committee will dole out 7.5 percent of the firm's profits. That will rise to 15 percent after that, which means 85 percent will still be based on the factors used under the old system.
Other changes: The firm will now consider a partner's performance for the past three years when setting pay, rather than just the past two years. That allows partners to spread out the impact of a new venture or time spent on business development, Pape says. And the firm is also guaranteeing that under normal circumstances, no partner will see their compensation fall by more than 25 percent in a given year.
Patton Boggs has been posting strong returns in recent years. The firm reports firmwide revenue of about $348.7 million for 2008, a 12.45 percent increase over 2007. Profits per partner were $783,000. Under the firm's current partner compensation model, the highest-paid partner at Patton Boggs made 16 times more than the least. Pape says he does not know whether the new model will shrink that disparity, but says doing so is not the goal.
Newberry says Patton Boggs "needed a system that kept some of the same entrepreneurial incentives."