In Part I of this series, I explored the possibility that a key metric—average partner profits—has lost much of its value as a measurement of anything meaningful about big law firms. Within equity partnerships of eat-what-you-kill firms, the explosive growth of top-to-bottom spreads has skewed the distribution of income away from the bell-shaped curve that underpins the statistical validity of any average.
Part II considers the implications of that shift.
Searching for Explanations Beyond the Obvious
In recent years, equity partners at the top of the pyramid in most big firms have engineered a massive redistribution of income in their favor. Why? The next time a senior partner talks about holding the line on equity partner head count or reducing entry-level partner compensation as a way of strengthening the partnership, consider the source and scrutinize the claim.
One popular assertion is that the high end of the internal equity partner income gap attracts lateral partners. In fact, some firms boast about their large spreads because they hope it will entice laterals. But with his recent analysis, Professor William Henderson demonstrated that lateral hiring typically doesn’t enhance a firm’s profits, though selective lateral hiring does sometimes work. But infrequent success doesn’t make aggressive and indiscriminate lateral hiring to enhance top-line revenues a wise business plan.
According to Citi’s 2012 Law Firm Leaders Survey as cited in the 2013 Citi-Hildebrandt Client Advisory, even law firm managing partners acknowledge that, financially, almost half of all lateral hires turn out to be no better than a break-even proposition. If leaders are willing to admit that this practice has a failure rate approaching 50 percent, imagine how bad the reality must actually be. Even worse, the nonfinancial implications for the acquiring firm’s culture can be devastating, but there’s no metric for assessing those untoward consequences.
A related argument is that without the high end of the range, legacy partners will leave. Firm leaders should consider resisting such threats. Even if such partners aren’t bluffing, it may be wiser to let them go.
“We’re Helping Young Attorneys and Building a Future”
Among the other supposed benefits of recruiting rainmakers at the high end of a firm’s internal partner income distribution: the supposedly new opportunities that they can provide to younger attorneys. But the 2013 Citi-Hildebrandt Client Advisory [PDF] shows that lateral partner hiring comes at the expense of associate promotions from within. Homegrown talent is losing the equity partner race to outsiders.
In a similar attempt to spin another current trend as beneficial to young lawyers, some managing partners assert that lower reduced equity partner compensation levels lower the bar for admission, making equity status easier to attain. Someone under consideration for promotion can more persuasively make the business case (i.e., that potential partner’s client billings) required for equity participation.
Such sophistry assumes that an economic test makes any sense for most young partners in today’s big firms. In fact, it never did. But now the prevailing model incentivizes senior partners to hoard billings, preserve their own positions, and build client silos—just in case they someday find themselves searching for a better deal elsewhere in the overheated lateral market.
Finally, senior leaders urge that current growth strategies will better position their firms for the future. Such appealing rhetoric is difficult to reconcile with many partners’ contradictory behavior: guarding client silos, pulling up the equity partner ladder, reducing entry-level partner compensation, and making it increasingly difficult for homegrown talent ever to reach the rarified profit participation levels of today’s managing partners.
Broader Implications of Short-Term Greed
In his latest book, Tomorrow’s Lawyers, Richard Susskind writes that most law firm leaders he meets “have only a few years left to serve and hope they can hold out until retirement. . . . Operating as managers rather than leaders, they are more focused on short-term profitability than long-term strategic health.”
Viewed through that lens, the annual Am Law 100 rankings make greed respectable while masking insidious internal equity partner compensation gaps that benefit a relative few. Annual increases in average partner profits imply the presence of sound leadership and a firm’s financial success. But an undisclosed metric—growing internal inequality—may actually portend failure.
Don’t take my word for it. Ask lawyers from what was once Dewey & LeBoeuf and a host of other recent fatalities. Their average partner profits looked pretty good—all the way to the end.
Steven J. Harper is an adjunct professor at Northwestern University and author of The Lawyer Bubble: A Profession in Crisis (Basic Books, April 2013), and other books. He retired as a partner at Kirkland & Ellis in 2008, after 30 years in private practice. His blog about the legal profession, The Belly of the Beast, can be found at http://thebellyofthebeast.wordpress.com/. A version of the column above was first published on The Belly of the Beast.
Editor’s note: The American Lawyer will be releasing data on compensation spreads within Am Law 200 firms later this month as part of this year’s broader coverage of The Am Law 200.