Welcome to the Salaried Partner
Australian law firm partnership structures are under pressure following high growth and intense competition for top legal talent.
The result is a growing move towards salaried partnership arrangements as the pressure goes on traditional equity allocations.
This follows trends in other jurisdictions, such as the ‘black box’ pay model that US firms are adopting to hold onto or to attract rainmakers. Even such market-leading firms like Cravaths, Latham & Watkins and Kirkland & Ellis are making the move towards more flexible pay arrangements with two-tiered partnership arrangements.
Recent data from the Australian Financial Review Law Partnership Survey reveals that nearly two-thirds of new partners at top-tier Australian law firms were appointed on either a partial or full salary basis.
The adoption of salaried partnerships offers multiple advantages, such as permitting firms to promote and remunerate promising lawyers at higher rates while preserving profit distributions for established partners.
This lets firms to retain ambitious talent without diluting the equity pool.
Australian Law Firm Growth
Over the past decade, surveyed firms have collectively expanded their partnership ranks by over 1,400. This growth has stretched equity bands thin, prompting rainmakers to lobby for larger shares of the finite profit pool and challenging traditional lockstep remuneration models.
In response, major Australian firms have opted to use salaried arrangements as a complement to, rather than a replacement for, the limited equity granted to junior partners.
This approach represents a modification of the “up or out” model prevalent in US firms.
The AFR report that the trend is particularly pronounced in some firms, citing the example of 23 out of 25 new partners at Ashurst who joined the law firm on a part-salary basis, while all nine new appointees at Herbert Smith Freehills have a fixed-wage component in their remuneration package.
Herbert Smith Freehill’s embrace of part-salaried positions is noteworthy, given its standing in the upper echelons of the Australian corporate legal market.
The AFR report notes that this part-salary strategy has been the domain of rapidly expanding mid-tier firms such as Mills Oakley, HWL Ebsworth, and Colin Biggers & Paisley.
John Nerurker, CEO of Mills Oakley, highlights that this arrangement “offers several advantages to the firm’s growth strategy and for lawyers,” promoting teamwork and collaboration by rewarding partners based on their contributions and the success of their practice groups.
Importantly, firms like Ashurst, HSF, and Mills Oakley, salaried partners maintain the same voting rights as full equity partners and have the opportunity to increase their equity share over time.
So the dynamic, growing legal market is also demanding change. But with change comes a desire to evolve within the structure and comity of a partnership. Whether that will retain its strength remains to be seen.
