Biglaw, Money, Partner Issues, Partner Profits

Not A Popular Policy: Withholding 20 Percent of Partner Pay

One firm just started pocketing 20 percent of partner pay.

Many lessons can be drawn from the collapse of Dewey & LeBoeuf. We’ve learned, for example, that it’s dangerous to have a law firm name that’s highly susceptible to puns. (Dewey know why that is? Howrey going to find out? Heller if I know.)

Another lesson: avoid excessive dependence upon bank financing. When a firm starts to spiral downwards, that spiraling can be accelerated by a bank calling a loan, not renewing a credit facility, or otherwise taking steps to protect itself that, while reasonable for the bank, can be damaging to the firm.

Firms have responded by turning to their partners for more financing. An increasing number of firms are issuing capital calls to partners or requiring high capital contributions.

So perhaps we shouldn’t be surprised to learn that one law firm has instituted a new policy of withholding 20 percent of partner pay….

Here’s a report from Julie Kay of the Daily Business Review (noted in Morning Docket):

Gary Rosen, managing shareholder of Becker & Poliakoff, is withholding up to 20 percent of equity partners’ salaries — a move he acknowledges has not been popular.

“The reaction was not necessarily a standing ovation,” Rosen said.

The holdback was not motivated by financial trouble at the Fort Lauderdale-based firm, merely adopting a common industry practice and to shore up cash reserves, Rosen insisted.

The firm instituted the holdback, amounting to 20 percent and applied to equity partners, back in January. Rosen explained that he adopted the policy after going to conferences, talking to consultants, and learning that it’s a common practice.

The policy, while not exactly popular, seems understandable. As Rosen said, partners “are owners of the business. It makes sense to have a reserve.” And as noted by the DBR article, some firms have even higher holdbacks, amounting to 30 or 40 percent of pay.

Of course, it’s hard to evaluate the wisdom of the policy without more knowledge about the firm’s workings. I reached out to Ed Reeser, managing partner turned law firm consultant, for his analysis of the Becker & Poliakoff situation. He noted the following:

[W]e cannot know from [the article] as to (a) whether this is a problem economically, or (b) a problem driven by firm governance restrictions in the partnership agreement, or (c) a growth challenge that they are just internally funding and that is always going to sting a little bit… or (d) something else. A 20 percent holdback to cover cash flow outlays that are recovered later is just internal funding that partners have to help support. If that is the correct characterization, it is astute and prudent….

The article doesn’t really explain WHY they need to do it. But it suggests that they are trying to become something new and different from what they are now. That can be a difficult and expensive voyage when it works, and the last voyage when it doesn’t.

The more serious issue, according to Resser, may be the communication surrounding the holdback as opposed to the policy itself. From the DBR piece:

A former Becker lawyer who asked not to be identified said the way the news was delivered created much of the problem. Instead of discussing it at a partnership meeting, Rosen announced the holdbacks in an email to partners in January, he said.

“We received an email out of the blue, not a phone call, not an equity partnership meeting,” one former lawyer said. “Who does that?” Rosen denies this, saying a meeting was held about the matter.

Another former Becker & Poliakoff lawyer who did not want to be identified cited another partners’ meeting where one lawyer began yelling and another started crying.

I hope the alleged crying was due to something other than the 20 percent holdback. If you’re an equity partner, save your sobbing for bigger problems — like, say, a Biglaw “Red Wedding.”

And dry your tears. Rosen just announced that the holdbacks will be rolled back to 10 percent, starting July 1, and paid back in full by the end of the year.

My guess is that the supposed yelling and crying was over broader issues relating to firm management. I reached out to Anonymous Partner for his take on the situation, and he seems to agree:

A few points. Most important is that most of the complaints seem to revolve around the authoritarian approach the new “managing shareholder” has taken. Less important than the amount of the holdback or whether it is standard practice is the not-so-subtle message to the B&P partnership that even equity partners are now looked on by management as employees to be dictated to, rather than business owners. That grates.

Also interesting is that at the same time as the firm is taking these financial measures to “shore up cash reserves,” the managing shareholder saw no problem in bringing in three new non-lawyer executives (all beholden to him for the opportunity) to help him with his “managing.” With the pleasant side effect of consolidating his power and influence. I am sure these new hires were not cheap. Regardless, the big adjustment that everyone in Biglaw needs to make is reflected in a point I made in this week’s column — that never before in Biglaw has the fates of so many become concentrated in the hands of so few.

Very true. We’re seeing continued expansion in the gap in power and pay between what we’d call “super-partners” — partners in firm management and major rainmakers, who are often one and the same — and rank-and-file partners. Check back later today for more on that subject.

Becker & Poliakoff Policy Withholding 20% Of Partner Pay, Not A Popular One [Daily Business Review]

Earlier: How Are Managing Partners Feeling About 2013?
A Biglaw ‘Red Wedding’: Could It Happen At Your Firm?

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