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The Aspiring Lateral: Money Talks

Ed. note: The Aspiring Lateral, a new series from Levenfeld Pearlstein, will analyze a variety of issues surrounding lateral moves, drawing on the firm’s experience in the lateral market as well as the individual experiences of LP attorneys. Today’s post is written by Peter Donati, the chair of Levenfeld Pearlstein’s Labor & Employment Group and the head of its Compensation Committee.

We’ve been conditioned to believe that lateral moves are all about money. Popular thinking — which may not be far from the truth — holds that law firms, held in collective thrall by the American Lawyer’s profit-per-partner numbers, focus on lateral hiring as the first step in a virtuous cycle that will increase their PPP metric, in turn attract more profitable laterals, and so on and so on. Laterals themselves, meanwhile, are viewed as economic actors lured away from their firms primarily through the prospect of increased, or guaranteed, compensation.

(Given the prominent role that guaranteed compensation is said to have played in the downfall of Dewey, and the pains Weil Gotshal took to point out its relative lack of compensation guarantees when announcing its recent layoffs, this particular carrot may be falling out of fashion. Even Weil conceded, however, that it has compensation guarantees in place for first-year laterals.)

In light of the focus on dollars in connection with lateral moves, it may surprise the reader to hear the head of a compensation committee say that in many cases, lateral candidates do not talk enough about money. To be more specific, lateral candidates often don’t scratch beneath surface questioning about their prospective new firm’s compensation system. If they did, their answers would inform them more deeply not only about their future paychecks, but the character of the firm they are considering….

As most laterals know, law firm compensation structures come in two general flavors. In the first, compensation is determined formulaically (e.g., X revenue from personal working time x Y revenue in originations = Z income). Other firms take a broader approach that bases compensation on a lawyer’s total contributions to the firm, including factors such as leadership and teamwork.

While most firms incorporate elements of both approaches, they tend to fall towards one end of the spectrum or the other. Also, most firms retain a bonus pool — ranging from 5% of profits to 15% or beyond — to be paid out based on any range of criteria.

What, beyond these obvious features, should laterals be inquiring about?

  • Does your firm have an open or closed system? At “open” firms, all equity partners know what their fellow partners make. At “closed” firms, partners know only their own point level or percentage of profits. Some firms prefer closed systems because it gives management greater discretion to act — for instance, to make a strategic investment in a particular practice area — without having to justify the decision in all cases to the larger partnership. This is as much a cultural issue as anything.
  • Is compensation focused on short-term or long-term results? Firms vary in how heavily they weigh a partner’s previous year’s performance, as opposed their longer track record. The size of the firm’s bonus pool will have an impact here (tending to reward short-term performance), but this element also reflects whether the firm has a long-term orientation generally.
  • Who belongs to the compensation committee? A firm that reserves seats on its compensation committee for particular geographic locations or particular practice areas — rather than simply selecting a cross-section of well-respected partners — could be indicating a territorial mindset where each member of the committee is expected to fight for the compensation of attorneys in that member’s practice area or geographic location.
  • What kind of input will I have into compensation decisions? Most firms allow individuals to “make their case” in some manner, whether through written submissions or an interview process. What form that process takes, how seriously it is considered, and whether the firm follows up with individuals after compensation decisions are made will indicate how genuinely they listen to their individual lawyers.

For the most part, there is not a right or wrong position on any of the above issues. But by probing about them, lateral candidates can certainly get a fuller picture of any firm they’re evaluating. They say money talks, and in this case they’re right.

Disclosure: This series is sponsored by Levenfeld Pearlstein, which is an ATL advertiser.

Chicago-based Levenfeld Pearlstein (LP) was born of the desire to create a different kind of law firm. While many firms promote a “value proposition” of high quality work, responsiveness, efficiency and reasonable fees, to LP, those are just the basics of doing good work for clients. LP’s focus is building business relationships with clients as trusted strategic advisors who understand their clients’ business and industry inside and out, seeking legal solutions that support the client’s long-term business strategy as well as short-term needs. LP’s top talent and entrepreneurial setting translate into the sophisticated skills and resources of a big law firm in a more manageable environment.