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Unlocking The Black Box Of Partner Compensation

Ed. note: This is the latest installment in a series of posts on lateral partner moves from Lateral Link’s team of expert contributors. Michael Allen is Managing Principal at Lateral Link, focusing exclusively on partner placements with Am Law 200 clients.

A law firm’s compensation model for partners is oftentimes as mysterious as the disappearance of D.B. Cooper, but the payoff for solving this mystery is many times more rewarding.

When partners look for new firms, they generally have a shortlist of expectations, such as good culture, strong practices and platforms, stable finances without too much debt, stellar reputations, and last but certainly not least, healthy compensation.

There is a common misconception I observe with junior partners. Many of them assume that the compensation for their book of business will scale linearly from firm to firm…

For firms with a formulaic compensation model, there is not much wiggle room to influence your numbers, but you will have a good idea from the start about your take-home cash compensation. For firms with closed compensation systems, like the “black box,” a partner uses peer firms with formulaic models to benchmark what he assumes is market. Some firms are somewhere in the middle, open but subjective or semi-open and semi-formulaic. As you can see, there is not much consistency, so no real market unless a partner creates one for oneself.

Although there is much uncertainty about partner compensation, here is a general rule of thumb I have seen firsthand and across the board in most regions. Partner compensation does not scale linearly with book of business. I have worked with groups of over 30 million dollars in business and with junior partners with just over a million in business and the compensation models can be much kinder to those on the lower end of the spectrum. As books of business grow larger, they require more and more support staff and overhead to maintain. The marginal compensation for a partner for each extra million dollars in business decreases almost instantaneously. There is an efficiency ratio represented by:

A partner can only bill so many hours per year, so they need others to work on the excess work they originate. Even if a partner bills out at $1,000 an hour and bills 2,000 hours, that partner can only service two million dollars. If the partner is responsible for bringing in five million dollars, he will need several associates and support partners to help out.

As you can see, when the book of business crosses the two million mark (2,000 hours at $1,000 an hour for this case), the actual take-home return diverges from the expected return as the single book of business starts to cost the firm more resources. This association is approximate and varies from firm to firm, nonetheless the general trend holds true in all of Biglaw. This does not mean that large books are bad, quite the opposite in fact, but it illustrates that it is important to find a firm that will not depreciate your book too drastically.

The law of diminishing returns is especially important for rainmakers when shopping for a new firm. Some firms reward books of businesses differently at the higher levels, and often times compensation is contingent on the firm’s cost structure and profit margins. Some of the most prestigious firms have low profit margins (i.e., someone in the 25% range), and if you have a large book of business, you may be better off going to a firm lower on the Am Law 200 list with a higher profit margin that would compensate you on a larger percentage of your book.

For example, a firm like Jeffer Mangels has a low cost structure coupled with an enormous profit margin. Because the firm is lean, Jeffer Mangels can afford to pay productive partners above market on their book of business without compromising the quality of service. Just recently, the firm picked up a real up and comer, Eric Fromme, whom I imagine was partly enticed by the firm’s generous compensation model.

Cash rules when it comes to lateral partner moves, but many partners mistakenly believe that they will be more or less equally compensated at any firm. The most difficult part of partner placements is finding a firm with the right culture, with no conflicts, with a comparable hourly billing, and finally one that will fairly compensate a partner for their book of business. I, along with my colleagues, have worked with partners in every major city in the U.S., and the bottom line is that it is our job to maximize your options.

Previously from Lateral Link:

The Women’s Biglaw All-Star Team Of 2014
Picking The Right Law Firm And Practice Area For You
The Men’s Biglaw All-Star Team Of 2014
A Former Partner’s Perspective On Legal Recruiters And Lateral Partner Moves
Headhunters. Huh. What Are They Good For?

Lateral Link is one of the top-rated International Legal Recruiting Firms. With over 14 offices world-wide, Lateral Link specializes in placing attorneys at the most prestigious law firms in the world. Managed by former practicing attorneys from top law schools, Lateral Link has a tradition of hiring lawyers to execute the lateral leaps of practicing attorneys. Click ::here:: to find out more about us.

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