Cracking Open The Black Box Of Partnership Compensation

0
171

As a general rule of thumb, partner compensation does not scale linearly with book of business.

A law firm’s compensation model for partners is oftentimes as mysterious as the whereabouts of Jimmy Hoffa. When partners look for new firms, they generally have a shortlist of expectations, such as good culture, strong practices and platforms, stable finances without too much debt, stellar reputations, and last but certainly not least, healthy compensation.

There is a common misconception that the compensation scales linearly with book of business from firm to firm. The reality is, very few firms abide by lockstep models, and PPP does not scale linearly with partner compensation either. As we see, average compensation as a percentage of your book of business decreases as originations increase.

For firms with a formulaic compensation model, there is not much wiggle room to influence your numbers, but you will have a good idea from the start about your take-home cash compensation. For firms with closed compensation systems, like the “black box,” a partner uses peer firms with formulaic models to benchmark what he assumes is market. Some firms are somewhere in the middle, open but subjective or semi-open and semi-formulaic. Most are closed, however.  There is not much consistency, so there is no real market to peg your value unless a you create one for oneself. One of the best ways to do this is to work with a veteran legal recruiter who can negotiate the best deal for you by creating a bidding war for your services. While it sounds easy in practice, the firms that can actually absorb your bill rates, meet your personal preferences, and clear conflicts checks are few and far between.

Although there is much uncertainty about partner compensation, here is a general rule of thumb I have seen firsthand and across the board in most regions. Partner compensation does not scale linearly with book of business. I have worked with groups of over 30 million dollars in business and with junior partners with just over a million in business and the compensation models can be much kinder to those on the lower end of the spectrum. As books of business grow larger, they require more and more support staff and overhead to maintain. The marginal compensation for a partner for each extra million dollars in business decreases almost instantaneously. There is a general efficiency ratio represented by:

A partner can only bill so many hours per year, so they need others to work on the excess work they originate. Even if a partner bills out at $1,000 an hour and bills 2,000 hours, that partner can only service two million dollars. If the partner is responsible for bringing in five million dollars, he will need several associates and support partners to help out.

When the book of business crosses the two million mark (i.e., 2,000 hours at $1,000 an hour), the actual take-home return diverges from the expected return as the single book of business starts to cost the firm more resources. This association is approximate and varies from firm to firm, nonetheless the general trend holds true in all of Biglaw. This does not mean that large books are bad, quite the opposite in fact, but it illustrates that it is important to find a firm that will not depreciate your book too drastically.

The law of diminishing returns is especially important for rainmakers when shopping for a new firm. Some firms reward books of businesses differently at the higher levels, and often times compensation is contingent on the firm’s cost structure and profit margins. Some of the most prestigious firms have low profit margins (i.e., someone in the 25 percent range), and if you have a large book of business, you may be better off going to a firm lower on the Am Law 200 list with a higher profit margin that would compensate you on a larger percentage of your book.

Cash rules when it comes to lateral partner moves, but many partners mistakenly believe that they will be more or less equally compensated at any firm. The most difficult part of partner placements is finding a firm with the right culture, with no conflicts, with a comparable hourly billing, and finally one that will fairly compensate a partner for their book of business.

We meet with every Am Law firm to learn not only about their lateral needs, but compensation structures and their platforms. We have a better sense of the factors, other than the book of business, that the firm will “weigh” for purposes of compensation. In addition, we know when the firm is willing to be opportunistic. The bottom line is that it is our job to maximize your options, and my colleagues and I are happy to help.