As with most bold proclamations of the type that accompanies this month’s column, an important clarification is necessary. Many law firm partners know something about most or even all of the topics below. Moreover, in some cases, especially where partners are members of their firms’ leadership teams, they often know quite a bit about these points.
Nevertheless, after having now worked with partners for 11-plus years, and having been one myself many years ago, I continue to be surprised by the lack of detailed knowledge among most partners about three subjects that will be addressed below.
What is the Partner’s Market Value?
For better or worse, the reality is that law firms are operating in a world in which partners are free agents. Many firms bemoan the loss of valued partners who emigrate to competitors, and thus wish the days in which most lawyers stayed with one firm their entire careers still existed. Somehow, though, those same firms shrug off those ruminations by poaching partners from other firms and the cycle continues, with no sign of ending anytime soon.
Consequently, if you are a partner operating in a free-agent world, doesn’t it behoove you to know what your market value is? Even if you think you’ll retire from your current firm someday, shouldn’t you still know how you stack up against similar lawyers in comparable firms with respect to compensation? Professional athletes are fully cognizant of their values; shouldn’t you be, too?
Granted, it’s not all about compensation, and shouldn’t be, as there are many other factors that come into play in assessing whether you are in the right firm. Nonetheless, unless you’re independently wealthy, or have socked away enough money to make dollars relatively unimportant, falling below market can have serious long-term consequences. Someone, for example, who has 20 more years of practicing ahead of him or her, and is $50,000 below market today, is leaving at least $1 million on the table (and likely much more). Having placed partners whose compensation has jumped by hundreds of thousands of dollars, I can attest that these “what ifs” are not fanciful conjecture.
The data provided by Legal affiliate The American Lawyer provide some help here, as the odds are good that the “average” partner in an Am Law 200 firm is making much less than the “average” partner in Wachtell, Lipton, Rosen & Katz. The average compensation data, and even the PPP figures, don’t really tell an individual partner, though, how he or she stacks up against a comparable partner in a competitive firm.
For example, there are some partners in firms with modest average partner compensation and PPP numbers who are far outdistancing peers in firms that rank much higher in those categories. Whereas someone can figure out, almost to the dollar, what a shortstop is worth who is hitting .285 with 15 homers, 75 RBIs and a fielding percentage of .993, there is no chart that a partner with $2 million in business, annual billable hours of 1,700, an average rate of $725 and a realization rate of 92 percent can consult to figure out his or her market value. A lot of digging and tapping into the knowledge base of those who have that information is important, especially in light of the long-term economic consequences.
What is the True Financial Health of the Partner’s Firm?
Most partners, if not all, are generally aware of whether their firms are on pace to meet budget in the current year. Even those who are out of that loop become instant experts at year-end, when final tabulations are made as to the value of percentage units (or shares) and what final distributions (and/or bonuses) are going to be made.
As we have seen, though, with the rapid decline and eventual failure of some venerable firms that seemingly were doing quite well, the financial strength of a firm goes well beyond how much money there is to be distributed at year-end. For instance, if you are a partner, do you know the answers to the following questions?
• What are your firm’s lease obligations? Other than compensation for all lawyers and staff, lease costs are typically one of the most significant overhead expenses for firms, especially ones with multiple offices. Even though most partners have no personal recourse as to lease obligations, these costs often weigh heavily in determining a firm’s financial strength.
• How deep is your firm into its line of credit? It is normal for firms to go into their lines in Q1, and even early in Q2, but they should be out by midyear. Even though financial information may be shared that includes data on subjects like the credit line, most partners pay little attention to it.
• Does your firm pay salaries and bonuses out of its line of credit? Most financial experts believe that if the answer is in the affirmative, it is a prescription for disaster.
• What are the covenants with the firm’s lenders and landlords that could trigger defaults (and where does the firm stand with respect to them)? As has been reported in the press, the days in which obligees have tacitly greenlighted defaults on covenants are gone. The failure of Dewey & LeBoeuf, Howrey LLP, Heller Ehrman, Brobeck, Phleger & Harrison and others in recent years has only made this type of scrutiny much more intense.
There are many other important financial questions a partner should be able to answer, but the point here is that blissful ignorance is far too dangerous today. It is essential that partners, as owners of a business, probe much deeper as to how their firms are doing and what the future may portend for firms they consider joining.
What Is Your Firm’s Notice Provision?
At a more macro level, most partners know very little about their firms’ partnership or shareholder agreements. To the extent they have even seen those documents, the likelihood is they were scanned rather quickly. It thus is not surprising that very few partners know about more micro points, such as what their notice obligations are if they should decide to leave the firm someday.
Although some firms show partners the door once they announce their intention to leave, notice provisions can have serious consequences in most other situations. While 30 days’ notice may be the apparent standard, some firms’ agreements require partners to stay for 60 or 90 days, or even longer. Garden leave policies are all the rage overseas and often theoretically trigger even longer obligations.
It is outside the realm of this particular article as to whether lengthy notice periods are ultimately enforceable, especially if trying to stop a partner from leaving negatively impacts clients. Nevertheless, firms can use the prospect of restraining a partner from leaving to their advantage. This is especially true in the critical first few days after notice has been given, as the playing field tilts in their favor as to what can be said to clients at that time. Partners who are considering a move have to at least be prepared for this and should know what the policy is and how it has been enforced (or not).
Firms that have lengthy notice provisions, and even those with shorter requirements that elect to play hardball with departing partners, should rethink that strategy. As noted at the outset of this article, partner movement is a two-way street today. Even though a potential lateral partner hopes his move will be the last one he makes, he at least needs to be apprised of the notice provision, and how firms treat departing partners, so he knows how well his clients’ interests can be protected if he should ever need to leave down the line.
If a firm tries to enforce long notice requirements and/or takes a hard line with departures, what partner with a good practice is ever going to want to join that firm? The specter of coming in but hardly being able to get out should be a deal breaker. After all, walking into such a situation would imperil all the work that went into building a terrific practice if the partner has to sit on his or her hands, post-resignation, while a firm categorically tries to take his or her clients. While it may be tempting for a firm to play tough, it will only come back, many times over, to hurt the inflow of strong laterals if the word gets out as to that manner of conducting business.
Moreover, if you are a partner in such a firm and fully believe you will never leave, it would still be foolhardy not to be concerned about this. Attracting new laterals is an important revenue source for virtually every firm. If yours has policies in place that imperil that revenue channel, it does not bode well for the firm’s future and inevitably will impact you.•
Frank Michael D’Amore is the founder of Attorney CareerCatalysts, a Pennsylvania basedl egal recruiting and consulting firm that focuses on law firm mergers and partner placements. He is a former partner in an Am Law 200 firm, general counsel in privately held and publicly traded companies, and vice president of business development. He can be reached at email@example.com.