5 Things To Find Out About Your New Firm Before Making A Lateral Move
Lateral candidates, look before you leap.
Ed. note: This is the latest installment in a series of posts on lateral partner moves from Lateral Link’s team of expert contributors. Today’s post is written by Elizabeth Katkin, a Senior Director at Lateral Link, where she focuses on partner and practice group transitions and developing strategic relationships with top international firms and companies in the Middle East and Europe.
Do you have one or more of the following frustrations with your current law firm? Inadequate overall or relative compensation. No platform to support or develop your practice. Feeling shut out of management decisions — or even having a voice.
Perhaps you are just beginning the search for a new firm, or perhaps you know where you are headed next — a place with a great footprint, support in the practice areas you need, and a group of lawyers that feels like a good fit. In the world of law firm management today, you already know that what you see is not always what you get. It is essential to gauge the financial and management health of a firm before you move, both to ensure your happiness and viability at the firm and to ease your exit in the event that there is trouble in paradise.
Here are five things you should understand before giving your withdrawal notice to your current firm:
First, what is the new firm’s compensation spread? Partner compensation spreads in the current market vary widely among firms, from as low as 3 to as high as 24. As a lawyer specializing in emerging markets for much of my career, I am quite familiar with the Gini coefficient, or Gini index, which is a number between zero and one that measures the degree of inequality in the distribution of income in a given society. The coefficient would register zero for a society in which each member received exactly the same income and it would register a coefficient of one if one member got all the income and the rest got nothing. Countries with lower Gini coefficients tend to be prosperous, stable democracies, such as Sweden, Norway, Canada, and most of Western Europe, while countries with higher Gini coefficents are often subject to instability, upheaval, poor economic growth — think Zimbabwe, South Africa, Haiti, Rwanda, and Angola, to name a few. The Gini index has been on a steady rise in the U.S. over the last four decades, and unfortunately, many U.S. law firms are setting the pace. Why does this matter? High Gini coefficients — in the case of law firms, wide compensation spreads — can foster ill will among peers, lead to poor collaboration among practice groups, impede work flowing to the right lawyer, and lead to over-concentration of management power.
Second, how much do you know about the new firm’s capital accounts? Is there transparency? Is there actual capital in the capital accounts? Recent law firm failures have demonstrated that substantial numbers in the “capital accounts” column don’t necessarily mean that there is substantial cash in the bank. Cash may go out the door the minute it is contributed — to finance office openings, partner departures, funding newly acquired groups until they become profitable, or just flow into the pockets of select partners. Does the value of a partner’s share equal the amount contributed? Do partners at the firm have access to enough information to make informed decisions? Do the partners receive a call for more capital? Understanding the capital structure of the firm is critical to evaluating the firm’s health and sustainability.
Third, is there a salary or equity draw hold back? Typically, an income or salary partner will be subject to a salary hold back (generally in the range of 10 to 20 percent of anticipated income) that is paid the following year, as are most discretionary bonuses. Similarly, many equity partners are subject to a hold back of their draw that can reach as high as 40 to 50 percent of scheduled income. In both cases, it is common for the “held back” amount to be retained by the firm after a departure, making a resignation after the first quarter of the year an extremely expensive proposition.
Fourth, in the event a break-up is inevitable, what is the new firm’s policy on return of capital? One year, three years, five years, ten years? Historically only applicable to equity partners, in the current market, many income and “special” partner classes are also required to post some form of capital contribution. And while in the past, return of capital was generally full and immediate, extracting capital in the present market may be subject to complicated policies and procedures that may include installment payments over a number of years, often without interest, as well as execution of releases and non-disparagement clauses, the violation of which may lead to the firm retaining your capital.
Last, but not least, are there confidentiality and other provisions in place at either your current firm or the new firm that might prevent you from getting fair treatment? These can be formally in the partnership agreement or separation agreement, or part of unwritten policy. Is there a required mediation or arbitration of all disputes? Are there forfeitures of accrued income, past bonuses, retirement benefits, or other “departure taxes”? Don’t forget that in addition to the firm partnership agreement to which you are currently a party, you have certain fiduciary duties to the firm that are in effect to the last day you are a partner, and some beyond. In addition, there are sensitive issues with respect to compliance with the applicable rules of professional responsibility/ethics and when and how to inform clients, partners, associates and staff of your move that must be navigated with great care.
Some voyages are relatively smooth, others can be stormy. You don’t always get to call the weather accurately. But you can make sure that you know that your itinerary is correctly booked to take you to Sweden as you wished, and not Zimbabwe — unless, of course you intended to go there.
For the future: a few things to know about your current firm, if you don’t already, before you hand in your withdrawal notice.
(Thank you to Edwin Reeser for support in writing this article. You can access for free many of his articles on law firm capital, management, compensation, and lateral moves over at JD Supra.)
Disclosure: This series is sponsored by Lateral Link, which is an ATL advertiser.
Lateral Link LLP is one of the largest legal recruiting agencies in the world, with 13 offices in the United States and Asia. Lateral Link has been recognized by the Wall Street Journal, The American Lawyer, the ABA Journal, the Daily Journal, and the National Law Journal for its innovative approach to legal placement. Lateral Link recruiters are former practicing attorneys who have consistently succeeded in placing partners, associates, general and corporate counsel into some of the most reputable law firms and organizations in the world.
