Maybe it is the lasting effects of Dewey & LeBoeuf’s collapse partly over guaranteeing partners high salaries for years. Maybe it is a shift away from rewarding revenue toward prioritizing profits.
For a number of reasons, firms might start to put their foot down when it comes to rainmakers who threaten to leave unless their salary is increased. These partners might not be shown the door in an era where capturing revenue is key, but the firms won’t block the exit—that is, if the circumstances are right.
“Firms are willing to let rainmakers walk if they feel like they are being extorted and they feel like they can keep the work,” recruiter Mark Jungers of Lippman Jungers said. “But if they don’t feel those two things, then hell no. They can’t lose it.”
Frank D’Amore of Attorney Career Catalysts said firms have learned from the demise of their competitors that paying solely on origination is not a sustainable culture for long-term survival. But that understanding is competing with the tension created from shrinking revenue streams and the need to keep revenue in the door at almost all costs. He said firms are saying one thing and doing another when it comes to wanting to stand up to rainmakers and actually letting them walk out the door.
Much of a firm’s calculus comes down to whether the work that partner was doing has been institutionalized, Jungers said. A practice that requires a number of other attorneys and is made up of matters that span months or years is difficult to switch firms even if the lead partner leaves.
“It’s difficult to move an army and it’s difficult to move things mid-case,” Jungers said.
Dewey & LeBoeuf was a prime example of a firm that made guarantees to partners that outpaced what those laterals actually brought to the firm. Since that time, signing bonuses for laterals are smaller, guarantees are much shorter and they often include an “out” clause if the lateral’s projections don’t come to bear, Jungers said. He said laterals often provide a prospective firm three takes on their book of business—an optimistic outlook, potential problems that would affect an average book and the worst-case scenario.
It used to be that firm leaders would have laterals bump up projections knowing the voting partnership would expect the actual number to be lower. Now, Jungers said, firms are going straight to that worst-case scenario when looking at a lateral’s potential.
D’Amore shared a similar sentiment that, while rainmakers are in higher demand than they have ever been, firms are much more cautious about signing deals.
Jungers was clear that he viewed rainmaking as being worth more on the dollar now than it was even four years ago. He said, however, that firms may be looking to minimize the number of outliers who are stretching the spread between the highest- and lowest-paid partners. Squeezing that top end becomes more bearable when the partner’s work is institutionalized, Jungers said.
Marcie Borgal Shunk, a senior consultant with LawVision Group, told The Legal earlier this week that while the compensation spread among the highest- and lowest-paid partners grew significantly during the recession as firms threw money at rainmakers to keep them from jumping ship, some firms are now taking a stand. She said they are putting culture over dollars and letting those attorneys walk out the door. Firms can’t just think about this year’s revenue but where revenue will come from three to five years from now. In order to do that, they have to maintain a culture where people want to stay, Shunk said.
It is the time of year when these issues might come to a head, according to Los Angeles-based Edwin Reeser, an attorney to law firms and lawyers and former head of Sonnenschein Nath & Rosenthal’s office in the city.
Firms now have a pretty good idea of what their profit pools will be at the end of the year and they are starting the budgeting process for 2014, he said. It may become more common for firms to let rainmakers walk out the door in the coming years because of the lessons learned from other firms’ breakups, a shift by firms away from compensating based on revenue and looking instead at profitability and a general acceptance that the market is not going to return to pre-recession levels or form, Reeser said.
Reeser said rainmakers are clearly still critical to the business of a law firm. Compensation comes down to paying all of a firm’s partners fairly and the problem occurs when a partner’s view of what is fair differs from the firm’s view.
“You have to have at some point the ability and the willingness and the backing of your partners to stand up to a partner who is asking for too much,” Reeser said.
A system that pays different amounts to attorneys for the relatively same contributions is problematic, he said.
“They are sending a message to you as a leader that they value their personal interests over the collective interests of the firm,” Reeser said of partners who demand too much. “As soon as that happens, that is poison.”
Firms had often compensated based on the gross revenue a lawyer brought into the firm, Reeser said. But a $10 million book with a low profit margin isn’t worth as much as a $7 million book with a much higher profit margin, Reeser said. Firms are starting to recognize that and are beginning to pay accordingly. He said they can be some difficult conversations to have, but it is something firms have to address.
“If what I’m asking for is a negative to the firm, you’ve got no choice,” Reeser said. “You are better off if I leave.”