The $10 Million Lawyers

/ Law Firms / / By

Law firm incomes and structures continue to change.  And the gap between the ‘rich’ and ‘not-so-rich’ lawyers continues to grow.

As more equity and non-equity partnerships develop and as law firms like Slater + Gordon and others develop new remuneration models, the way in which law firms share their profits is continuing to change.

The American Lawyer reported this year about top Am Law partners bringing home $10 million a year, as some firms generate ongoing revenue growth and also boost their top-earning partners’ incomes.

However that growth is also increasing the gap between partners at different levels – not just in the US but also in firms beyond the United States.

Firms are attempting to cut their costs, including for support staff and associates, who are making little progress in many cases, according to this year’s law firm salary statistics and consultations with law firm recruiters and others in the United States market.  However the US trends are reflected in other markets also.

As the American Lawyer reports:  “There is increased stratification within the legal community on compensation,” says Steven Slutsky, an executive compensation and human resources consultant at PricewaterhouseCoopers LLC who consults on law firm compensation. He was an associate at Jackson Lewis in New York City earlier in his career. “One (driver) has been the increased focus on the business of law as opposed to the profession of law. Law is following the trends that we see in almost every other business.”

Law-firm consultant Peter Zeughauser estimates that roughly a dozen firms now have partners earning $10 million. “It’s still rare, but there are many more partners at that level,” he says. “I would say there are likely 40 to 60 Big Law partners making $10 million or more today.” Patrick McKenna, a law firm practice management consultant based in Edmonton, Canada, who works with U.S. firms, concurs with the $10 million figure.

Some of the Key Trends

• The gap between the highest- and lowest-paid equity partners is growing at firms that are boosting rainmakers’ compensation. Some consultants consider that a problem; others don’t. At the very least, it can spell trouble if not managed carefully, they say.

• More senior-level lawyers are nonequity partners and counsels. As the opportunity to advance at many firms increasingly depends on the ability to keep clients and generate new ones, some management experts see the nonequity partner group as being among the most vulnerable in Big Law because many of them don’t have their own book of business.

• Associates’ base pay at the biggest offices of the biggest firms is about $160,000 and hasn’t budged since 2007, amounting to a decrease of 14.5 percent when adjusted for inflation. Firms this year are augmenting salaries with jackpot bonuses­, but these can be slashed in years when firm profits fall. Big flucuations in pay don’t promote stability, experts say. Morover, some consultants question whether firms are as committed as they need to be to training young lawyers to become the next rainmakers.

• More law firms are using salaried staff attorneys (whose titles may vary), and hourly contract lawyers frequently engaged by third-party agencies, often in back offices in lower-cost cities such as Nashville and Tampa. Staff lawyers can earn up to $175,000 at some Wall Street firms but the jobs generally don’t provide opportunity for advancement and aren’t on the partner track. We found some contract lawyers in Nashville earning $18 to $19 per hour—about the same as a manager of a local McDonald’s.

• Law firms increasingly are outsourcing administrative, clerical and technical support jobs to third-party providers and overseas support centers where wages are often much lower. That means support jobs also are more wage-constrained and more vulnerable to downsizing, experts say.

Short Term Thinking?

“My problem with all these trends is that they’re fixated on the short-term profits that can be returned to equity partners at the earliest opportunity, rather than on a longer-term vision of creating a sustainable, multi-generational firm whose next cohort of leaders is in active development,” says Jordan Furlong, a legal consultant in Ottawa, Canada with Edge International.

“Many such law firms are like baseball teams that spend all their money on established free-agent stars while neglecting the farm system and the development of their minor-leaguers. They might win a pennant this year, but they’re setting themselves up for many last-place finishes for years afterwards.”

The $10 million partner 

For firms with the biggest payouts to rainmakers, the equity partner class is increasingly stratified. “There’s a shrinking top tier and it has grown its compensation disproportionately,” says Zeughauser, who is based in Newport Beach, Calif., and consults on compensation matters with Am Law 200 firms. “Firms have had to advance extraordinary partners faster. That’s been everybody’s big challenge.”

The driver, of course, is the lateral market and the ability and willingness of firms to pay premium salaries for significant rainmakers, Zeughauser says. “Firms can basically not keep people in their seats anymore,” he says. “Everybody has a number for which they will leave. It’s that disparity between what someone is making and what someone can get in the market. Everyone has a number.”

Zeughauser says that to increase the compensation of stars, firms often look to adjust the salaries of equity partners in the middle partnership tiers, where he says lawyers are sometimes thought to be compensated too well.

The lowest tier partners have seen compensation grow at a much lower rate, Zeughauser says. “Some of the Am Law 200 firms have first-year partners making as little as $180,00 to $200,000. There are firms where first-year partners make less than some associates at the same firm,” he says.

What’s the secret to being worth $10 million? At firms that consider business generation and proliferation in making partner compensation decisions—and not all do, Zeughauser says—it would be “rare for a partner earning $10 million to be responsible for less than $40 million to $60 million of highly profitable, strategic work,” he says.

But firms that overcompensate rainmakers without regard to other factors, such as the ability to manage, risk collapse in the long term, consultants say.

“We reward people based on the top-line revenue number: You have a $7 million book of business, you must be a big player,” says consultant McKenna. “But you have to determine of that revenue that a particular partner has, how much of that is really profit or do they consume so many resources that there is little profitability in that work? It may surprise some that we have seen partners with their $6 million book of business that don’t add much profit to the firm.”

He adds that partners who work in cutting-edge areas such as drone law and personalized medicine may contribute more to the long-term profitability of a law firm, despite billing fewer hours in the present.

“If we have a system that is just measuring one particular metric like billable hours without respect to whether they are good billable hours or bad billable hours, then the system is dysfunctional,” McKenna says.

Overall, the migration of many law firms to “pay for performance” compensation systems is driven by strategic goals, and away from the lockstep and equal partnership models that were more common in the past. These incentive-based systems are meant to reward individual performance in addition to the firm’s overall success. By contrast, lockstep compensation systems may make it more difficult for law firms to lure and keep top performers in the intensifying global competition for market share and top talent, experts say.

Nationwide, equity partner compensation varies greatly by region, according to a recent survey. For 2014, those salaries ranged from a low of $125,000 at some firms in the South and Midwest to $8 million on the West Coast and in New York City, with a mean of $1.3 million in New York City and $1.01 million on the West Coast, according to proprietary data from recruiter Major, Lindsey & Africa. In New York City and states in the Mid Atlantic and West Coast regions, the minimum equity partner compensation was about $175,000. Major Lindsey defines compensation as the base salary plus bonus received in the 2013 fiscal year, including any bonus from 2013 received in the first part of 2014. (Consultants’ current estimates of top partner pay are higher than figures from the survey, which was conducted months earlier, in April.)

Read more and see the details on regional pay difference here

Nonequity partners are vulnerable

Nonequity partners, who don’t share in the assets and liabilities of the firm, comprise an increasing share of the headcount of many law firms, even as the proportion of lower-paid associates to partners is falling. They include former associates who may one day advance to equity partner if their legal acumen and business-development skills shine, but their ranks also may include former equity partners who have failed to meet their numbers, management experts say.

That can be a problem for the entire firm’s bottom line if too many less-productive lawyers fall join the ranks of this relatively highly compensated group.

Nonequity partner compensation in the Major Lindsey survey in April 2014 ranged from a minimum of $50,000 on the West Coast and $175,000 in New York City up to a maximum of $5.45 million, also in New York City. Some may earn performance based bonuses as well. The mean ranged from $435,000 on the West Coast to $688,000 in New York City, roughly half as much as equity partners.

Ed Wesemann, a law-firm management consultant based in Savannah, Ga., who specializes in strategic issues, says that nonequity partners are especially vulnerable to law-firm downsizing. “There is nothing with less value than a 12-year partner with no business base,” he says. “Most firms feel they have too many nonequity partners and are trying to get rid of them.”


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Law Firm Rainmakers and The Keys to Collaboration

/ Law Firm Management, Lawyers / June 29, 2015 / By
Rainmaker

Heidi-Gardner-110x110Heidi K Gardner is a Distinguished Scholar at Harvard Law School Center on the Legal  Profession and is  writing a book about the legal profession.

True rainmakers don’t need to be convinced to collaborate: referring work to colleagues and developing a loyal team capable of extraordinary client service is the only way they can build an enormous portfolio. But it’s no surprise: the bigger the account, the more stressful leading it becomes.

The more sophisticated the client, the more likely it is that the advisors with the specialist technical expertise needed to address their complex issues are distributed throughout the firm and possibly around the globe.

To appropriately tailor large-scale solutions, domain experts must work closely with colleagues in the local market who have deep contextual knowledge. The combination of large, distributed and global would be tricky enough, but we also have to acknowledge that those needed experts have their own client priorities which often don’t align with the rainmaker’s.

Based on our research at Harvard Law School’s Center on the Legal Profession, we focus on barriers and solutions for experienced rainmakers who are looking to take collaboration in their client account teams to the next level.

Future posts will address collaboration between lawyers and their clients – but we think that fixing issues of collaboration amongst partners is pretty foundational before you start extending it outside the firm.

In our prior posts in this series, we shared empirical evidence on the ways that collaboration can boost a lawyer’s rainmaking capabilities, resulting in higher business development revenues, a heightened personal reputation, and stronger client retention. Clearly the barriers to true collaboration can be quite daunting, and we offered a range of solutions to mitigate the obstacles – no silver bullets, but ways practical ways to make a difference.

https://www.flickr.com/photos/99781513@N04/

Before we dive into more issues and solutions, let’s recognize that highly experienced rainmakers are likely get a number of additional benefits beyond the ones we discussed in prior posts.

Financial benefits of collaboration for experienced rainmakers:     

The more experienced the rainmaker, the more likely they are to focus on client profitability – often because firms hold key client leaders to a higher standard.

The ultimate question, then, is whether multipractice service increases profits and not just revenue. The fear, of course, is that once you get deeply embedded in a client with huge teams from across your firm, the client will start using their buying power to demand discounted rates and other freebies. Why bother doing more work for less money? Our research suggests that this possibility is real, but that – on average – clients served with multipractice engagements are more profitable in the long run. Although I can’t share detailed findings for confidentiality reasons, I’m allowed to reveal this: data from some major international law firms shows that the profitability (in percentage terms) holds nearly steady as more practices are included in a client’s service mix. Naturally the numbers shift depending how narrowly you define practices, which “magnet practice” anchored the initial relationship, and so on, but the results on average show fairly steady margin rates even as the account size grew.

Given that these law firms are earning about the same percentage on much higher revenues, it’s clear that their overall profits stemming from cross-practice service are significant. Plus, if you take into account the significantly lower cost of sales for repeat versus new clients (does your firm capture this data?), then the balance tips further toward the cross-practice work.

I strongly encourage you to undertake similar analyses with your own data; if you find a different pattern, then it should trigger deeper inspection about the mix of practices, nature of your negotiations, and so forth. Overall, I expect you’ll find a pattern that illustrates what one Fortune 100 CFO recently told me about the link he has observed between his company’s outside advisors’ services and their profits: “Margins rise with complexity.”

But let’s be clear: These benefits only flow if clients are delighted by the value their legal teams provide. As Ben Heineman, GE’s former GC, has written, “Bigger isn’t necessarily better.” No GC is willing to pay for inefficient lawyers handing off work among themselves. They expect their legal teams to use adequate project management discipline to control quality and avoid billing for unnecessary work, poor work, and rework. Gurus like David Maister have been saying that for decades and we took the point for granted in prior posts. But at commentators’ urging, we’re now making it explicit.

Deeper benefits of collaboration for experienced rainmakers:

Experienced rainmakers have gotten past the nerve-wracking stage when they were unsure whether collaboration would ultimately pay out. Now that they’re reaping the return on their investment, they can focus on some of the emotional and other less tangible rewards that come from collaborating.

Clearly, money is important not only for purchasing power, but also as a status indicator. But most lawyers conform at least somewhat to models of normal adult development: the older and richer they get, the more likely they are to seek meaning.

And that’s where collaboration helps, too.

1. Intrinsic motivation of complex work: Lawyers tend to crave intellectual challenge. Collaborating across disciplinary boundaries allows them to move up the food chain in their clients, advising people whose challenges are increasingly complex and interesting. As one partner said, “If I’m doing work just in my specialty, then I’m almost certainly talking to clients with a narrow scope and more limited responsibility. Once I move into more sophisticated work, I move up toward the c-suite, and that’s when conversations get interesting.”

2. Power: When a CEO is in crisis and she calls on your team for advice, it’s a heady experience. Whether it’s advising the world’s business elite, directing hundreds of lawyers in a worldwide account team, or winning awards for legal innovation in a major client — all are sources of heightened power and prestige, and they are likely the result of a collaborative effort.

3. Issue spotting for opportunities or problems: Experienced rainmakers who build up a large client service team and who keep open the lines of communication reap huge advantages. First, more brains inside the client increase the odds of someone finding out crucial intelligence before your competitors do. On the flip side, it’s often the frontline lawyers who gain a real sense of how the client feels and whether they have concerns.

The most successful professionals are ones who cultivate an environment in their teams that encourages members not only to stay attuned to client issues and opportunities, but also to relay those messages directly to the partner in charge. One lawyer co-leads a client service team that stretches from Asia to Europe to the US spends enormous effort nurturing these relationships with his team. He said, “I want to focus on building trust with my partners so that I can give them feedback, they can give me feedback – I want to be first person to know, not last one, if I’m doing something stupid.”

4. Legacy: As the Chair of one major firm told me, “Some lawyers are more partner-like than others.  Just as entrepreneurs want to leave a solid business behind for their children, these partners are motivated to pass on a strong client relationship to the next generation.” Research has found that building a legacy – that is, leveraging your achievements and values to help others succeed after you’re gone – is a prime source of enduring happiness. By helping to institutionalize the client relationship across multiple partners, experienced rainmakers build their legacy.

Read more at Bloomberg BNA

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