Law firms are relatively secretive institutions. Since they’re not public companies — at least not here in the United States, in the year 2014 — they aren’t required to reveal that much about their internal workings. Here at Above the Law, we do what we can to shed light on how law firms work, but there’s only so much we can do.
Every now and then, public filings disclose information about law firm operations — including information about one of the most sensitive subjects, partner pay. Sometimes we learn about partner compensation when a partner files for bankruptcy. Sometimes we hear about it when a partner goes through an ugly divorce.
That’s once again the case today. A complicated divorce, complicated enough to spawn ancillary litigation in the form of contempt proceedings, sheds light on how one white-shoe law firm pays its partners….
Yesterday the Massachusetts Appeals Court issued its ruling in Hoort v. Hoort. The court reversed a contempt judgment against a Biglaw partner who was accused of not paying enough to his wife. The substance of the contempt ruling is less interesting than the law firm financial data contained in the opinion of Justice Andrew R. Grainger, which begins:
Steven Hoort (husband), the former husband of Nancy Hoort (wife), appeals from a judgment of contempt entered by a judge of the Probate and Family Court. At issue on appeal is the interpretation of language contained in a temporary order that was in effect for a two-year period during the parties’ divorce proceedings requiring the husband to pay the wife “a sum equal to one-third of his year end distribution after taxes.”
Background. The parties were married for thirty-one years, although they lived separately during the last two of those years. The husband is a partner in a large law firm; the wife does not work outside the home. In 2007, the wife filed a complaint for divorce on the ground of irretrievable breakdown of the marriage. On October 20, 2008, the court entered the temporary order here in dispute.
The opinion doesn’t specify which large law firm, but LMGTFY — ah, okay, Ropes & Gray. According to Steve Hoort’s firm bio, which lists him as a retired partner, he had a national bankruptcy practice focused on the healthcare industry and served as co-head of Ropes’s restructuring department from 2003 to 2012. He graduated in 1975 from the University of Michigan Law School.
How much did he earn at Ropes, and how were the payments structured? From the opinion:
The husband’s approximate annual compensation in 2008 was $970,000. [FN1] The husband’s annual compensation includes the following types of draws or distributions: (1) a $10,000 monthly draw; (2) three “tax draws” in the amount of approximately $110,000 paid in April, June, and September; and (3) a year-end distribution that is received in January of the following year. [FN2] The husband’s year-end distributions for 2008 and 2009 — the two years pertinent to the dispute–were $245,023 and $249,934 respectively.
These numbers don’t add up to $970,000 — ($10,000 x 12) + ($110,000 x 3) + $250,000 = $700,000 — but footnote 2 points out that Hoort also got “‘incentive draws,’ which may be paid at any time and are not guaranteed.” Another footnote explains that “the 2008 compensation level was generally typical of the surrounding years” (in case you’re wondering whether 2008 was an outlier year).
In 2008, according to the Am Law 100, Ropes & Gray enjoyed average profit per partner of a little under $1.4 million (see here, noting that 2009 PPP of $1.405 million represented a 2.2% increase from 2008). Assuming that (1) the Am Law 100 figure is correct and (2) all or most of the firm profits got paid out to the partners, Hoort was earning less than
the average Ropes partner Ropes’s average PPP, despite being a department head.
Digging deeper into the numbers, that $10,000 monthly draw seems a bit on the low side. Recall, for example, that Dewey & LeBoeuf paid its partners a $25,000 monthly draw. But considering that Ropes is alive and well and Dewey is, well, dead, perhaps there’s a lesson about financial prudence here. (Feel free to email us with information about partner draws at different firms; if we get enough data points, maybe we’ll do a follow-up story.)
Speaking of prudence, note how partner compensation comes in spurts. This is why associates about to make partner are warned about the need to build up their savings; you go from getting a guaranteed $300K or so a year to payments that can greatly exceed that number in total but are far more irregular (and you have to pick up some new expenses as a partner, like your own health insurance). This is what it means to be an equity partner, i.e., a business owner: greater rewards in exchange for greater risk.
So there are advantages to being a non-equity partner; you get handsome rewards for limited risk. And there are advantages to being the ex-wife of an equity partner too. Just convince your husband to ignore Kanye’s advice and not get that prenup, and your risk/reward profile may be the best of all.