A handful of South Florida law firms confirm they have de-equitized partners.
The recession has given law firm leaders the incentive -- some legal consultants would say the courage -- to make the tough decisions to demote or fire low-performing partners.
"We'll continue to see firms taking -- not just a long, hard look at associates and other attorneys -- but continue to take critical looks at their partner ranks," said Tom Troxell, regional managing director of Citi Private Bank's law firm group for Florida, Washington, Texas and Atlanta. "These times afford them a better opportunity to do that than when the industry is growing."
When asked whether any partners were de-equitized at Becker & Poliakoff, Alan Becker, the firm's managing shareholder, said his firm hasn't done that but said some left on their own when de-equitization was imminent.
"We may have had an equity partner or two leave during the course of the year, ... but their decision to leave was their own," he said. "It didn't get to that point. We really never de-equitized anybody."
He also said the firm hasn't had any layoffs because of the recession, but the firm let attorneys go based on performance.
"We've had a handful of performance turnover, but we don't have fewer attorneys or staff than we had at any point at last year," Becker said, with the firm at more than 125 attorneys.
The firm implemented a temporary 12 percent pay deferral for all of its attorneys last May to avoid layoffs and ensure the firm hit its projected 2008 budget of $62 million in gross revenue, up 5 percent from the previous year. Attorneys who remained with the firm were repaid the amount withheld from their salaries. Becker said the firm fell nearly $4 million short of the 2008 gross revenue goal. He attributed the shortfall to the departure of 11 attorneys who left the firm's West Palm Beach, Fla., office in August.
"Although we now have that office up to about the same level of staffing and revenue as it was before the departures, it obviously took a toll on short-term cash flow," he said in an e-mail. "But keep in mind that when you have 11 fewer attorneys for a period of time, you not only have lower revenue but also lower payroll expense, so we were able to stay in balance by the end of the year."
The firm has a gross revenue goal of $59 million for fiscal year 2009.
George Yoss, managing partner of Coral Gables, Fla.-based Adorno & Yoss, said his firm has demoted one equity partner to non-equity status based on performance. He declined to specify when.
"Yes, but not on a large enough scale to make it worth talking about," he said. "There are always situations where you have to re-evaluate an equity partner. It has nothing to do with any factors you would consider to be relevant."
Hugh "Bill" Perry, managing partner of Gunster, said the West Palm Beach-based firm has had voluntary de-equitizations.
"We've had partners come to us and say, 'We want to do something different.' We've tried to afford them that opportunity," he said. "We haven't had any forced de-equitizations."
Not all partner layoffs and demotions are based on performance.
"The truth of the matter is some are based on the economy stinks and the amount of available work has dropped," said Joseph Altonji, a Chicago-based vice president at Hildebrandt International. "In a particular specialty, if you have to eliminate people, you'll focus on the weakest people. In today's world, you may have a weaker bankruptcy lawyer survive and have a decent real estate lawyer [leave] because there's not enough work."
Demoting an equity partner to non-equity status isn't necessarily the best way to address the problem of a less productive partner, Troxell said.
"Rather than de-equitizing someone who sticks around, you can take partners who should no longer be part of the firm, and you can ask them to leave," he said.
Non-equity partnership should not be a place to leave low-performing partners but a place for rising partners, Altonji said.
"It has been used by some firms as a way to avoid making tougher decisions by demoting them into that category as opposed to letting them go," he said. "In many firms, you have a mixture of rising stars and stagnated lawyers. That's an unfortunate situation. That's one reason you're seeing a lot of terminations in those positions. It should be a step along the way from being a young lawyer to being a full owner of the firm."
Although U.K. firms such as Linklaters, Clifford Chance and Ashurst have had partner cuts, Altonji said layoffs are more likely among non-equity partners and associates at U.S firms.
"I would say in the U.S., there's probably been more focus on laying off non-owner lawyers than partner ranks," he said. "That doesn't mean it won't happen. It doesn't mean it hasn't happened but probably at a slower pace than for the non-owner lawyers."
Troxell said a demotion can be a motivating force for attorneys to improve performance, or it can demoralize them.
"You see income partners that have been de-equitized get into that category of billing fewer hours than some senior associates," he said. "The thought is some of those senior associates are putting themselves on a partnership track. You could be demotivating someone when you de-equitize."
