Much like the similarly named Kelis, his milkshake brings all the boys (and girls) to the yard. Peter Kalis, the chairman and global managing partner of K&L Gates, just won a fifth consecutive term at the helm of the global mega-firm. As noted in the firm’s press release, which we received here at Above the Law, the 60 voting members of the Management Committee supported Kalis unanimously.
Kalis assumed leadership of the firm in 1997, back when it was called Kirkpatrick & Lockhart. On Kalis’s watch, the firm conducted eight mergers, including the combination with Preston Gates & Ellis that resulted in the “K&L Gates” moniker. When Kalis took the helm, Kirkpatrick & Lockhart was a regional firm with six offices, all in the Eastern time zone of the United States. Now K&L Gates boasts almost 2,000 lawyers in 41 offices on four continents.
But growth brings with it growing pains. Let’s discuss those, and get some information about partner capital contributions at the firm….
We’ve had a fair amount of coverage of K&L Gates as of late. Last week, we wrote about partner departures, which some media outlets viewed as possible trouble for the firm. But Peter Kalis hit back forcefully against such allegations, in a spirited and detailed response that described the firm’s robust financial health.
In both of our recent stories, we mentioned a report by Law360 (sub. req.) that stated as follows:
[P]erhaps the greatest motivator for attrition is K&L Gates’ strict compensation policies, several sources said. Partners are expected to contribute up to 60 percent of their yearly compensation as capital payments. On average, partner capital contributions can range from 20 to 60 percent, making K&L Gates’ levels on the high end.
We wondered about the precise meaning of this language and the reason for the existence of this range. Was this 20 to 60 percent range across all major law firms, or internal to K&L Gates?
Over the weekend, we received information from a knowledgeable source. New equity partners at K&L Gates are subject to an initial capital contribution, generally starting around 30 percent of target compensation, that increases at a rate of 5 percent a year until it hits 60 percent of compensation, the maximum. So, as a result of this structure, most longstanding equity partners are subject to a 60 percent capital contribution — which does not bear interest, it should be noted.
So it shouldn’t come as a shock that this has led some of them to leave for other firms with lower capital contribution requirements. Let’s say you’re a longtime equity partner with compensation of $1 million; you have to pony up $600,000, a not-insignificant sum, and that money doesn’t earn you any interest. If you move to a firm with a lower capital contribution requirement — Dewey, for instance, required 36 percent — you could free up a significant amount of cash and put that money to work somewhere else. For example, in the case of the million-dollar partner, moving to a firm with a 35 percent requirement could free up $250,000.
Of course, some partners had other reasons for leaving K&L as well. Take the Chicago office. From Crain’s Chicago Business:
Former and current K&L Gates partners attribute resignations this year mainly to expiration of merger-related curbs on pay cuts, and to a mid-January announcement that 2011 firmwide earnings would decline an unexpected 13 to 14 percent.
We’ve heard that some equity partners in Chicago had to take retroactive pay cuts, including some who had excellent years in terms of client originations. Some of these partners felt that the cuts fell disproportionately on equity partners who were not in favor with Peter Kalis or his inner circle. In addition, we understand that some non-equity partners experienced prospective pay cuts. A number of Chicago partners, dissatisfied with their compensation, headed for the exits.
None of this should come as a shock. In order to achieve the fortress balance sheet that Kalis detailed in last week’s firm-wide memo, some unpopular measures must be taken. For example, if the firm is going to operate without debt, as Kalis claims it does, then some partners will have to put up more capital to finance the firm’s operations, and some partners will have to endure pay cuts. Considering that Biglaw firms can be political places, it should surprise no one that partners who are in favor with the powers that be will make out better than partners who are out of favor.
Is there another way? Sure. In today’s New York Times, for example, Peter Lattman shines the spotlight on Cravath and other lockstep firms, which pay their partners based strictly on seniority and don’t have such disputes about how to divide the pay.
But it’s easy to get away with the Cravath system if, well, you’re Cravath — an established, super-white-shoe firm, with numerous longstanding, institutional clients. Other firms, like K&L Gates, will have to find other ways to thrive. There’s no one recipe for law firm success.
Congratulations to Peter Kalis on his reelection as chairman and managing partner of K&L Gates, and good luck to him and his colleagues as they navigate the challenging environment ahead.
K&L Gates’ Peter Kalis Elected to Fifth Term as Chairman [K&L Gates (press release)]
K&L Gates taps Kalis for fifth term [Pittsburgh Business Times]
Kalis Tapped for 5th Term Heading K&L Gates [ABA Journal]
Culture Keeps Firms Together in Trying Times [DealBook / New York Times]