What's at stake? A star not invested in you isn't worth much
"Even if the individual is a superstar, why would you ever want to base a business on such recruits? And forget fluffy stuff about collegiality, why would high performers want a guarantee? They're selling the chance to profit from their delivery..."
April 19, 2012 at 07:03 PM
3 minute read
This piece isn't about the problems ailing Dewey & LeBoeuf, but I am interested in one aspect of the Dewey saga: its use of guaranteed income deals to recruit big name hires. Dewey is an extreme example, but the firm's playbook reflects the extent to which lateral hiring has become a worryingly dominant force in shaping the world's largest legal market.
Yet there is little logic in the practice. Such deals mean bringing outsiders without a direct stake in the firm's fortunes into a business built by owner-managers. Even if the individual is a superstar – a big if – why would you ever want to base a business on such recruits? And forget the fluff stuff about collegiality, why would high performers want a guarantee? They're selling the chance to profit from their delivery.
Here there has been a divergence between the US and UK legal professions. While two or three-year guaranteed income deals had become fairly common in the City during the boom, they largely disappeared in the aftermath of the 2009 recession. And even if they have made a creeping comeback of late, recruiters canvassed for this piece agree that they generally tend towards relatively conservative terms that guarantee a minimum level of equity for a year or two. That's very different to guaranteeing income.
The shift away from such strange hiring practices appears to have somewhat slowed the revolving door of serial movers that jump between US firms in London despite the continued influx of new entrants. That can only be healthy. Guarantees can play a limited role for firms launching new offices or moving into new practice areas, but generally they don't work because the incentives and cultural baggage are all wrong – at least they are for law. However, in the US the fashion for some time has been moving towards increasingly aggressive tactics to buy in senior talent, contributing to surging deals for marquee partners. What all this is constructively contributing to is hard to discern.
Lateral recruitment can unquestionably deliver, but law firms still routinely underestimate the costs, risks and effort involved. And the truth rarely acknowledged is that partner hiring mainly helps law firms whose business is already on an upward track. For a sideways partner move, extra caution is required. As Shilton Sharpe Quarry's Nick Shilton puts it: "If you have a partner moving where they're swapping like for like, those are the ones where you're going to kick the tyres harder."
The addiction to lateral recruitment in sections of the US market has already contributed to institutional instability and pay deals that are starting to resemble the problems inherent in other industries fixated on headline-grabbing hires, such as investment banking and major league sport. The UK legal industry has done well to avoid the worst of these excesses. But with the influence of US-based firms obviously rising in the City, that can easily change for the worse.
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