Biglaw

2020 Will Be The Hardest Compensation Year Since The Great Recession

Law firm leaders: brace yourselves for agonizing partner compensation decisions.

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Back in March, the sky seemed like it was falling. COVID-19 went from background noise to an all-consuming issue seemingly overnight. Firms were suddenly faced with instantly and safely transitioning their attorneys, staff, and practices to long-term teleworking. The economy sputtered to a stop, and no one knew what next week held, much less next month or next year.

Since then, at least in the legal industry as a whole, things seem to have gone sorta, maybe, possibly okay. Hard recent statistics are difficult to come by, but anecdotally it seems that most midsize and large firms were able to avoid catastrophe. An industry-wide strong Q1 gave most firms momentum to carry them through the initial uncertainty, and many appear to have tightened up their collections timelines to bring revenue in more quickly and cover the gaps caused by COVID-19 in Q2. As the economy reopened in fits and starts across the country, many firms saw their new matter and revenue numbers climb back after a distressing down period.

Looking Closer

But while the 30,000-foot view may suggest the industry experienced a gentle tumble and smooth recovery, as we zoom in we see a vastly more variable experience. Some practices and attorneys have seen their books boom. If Zoom’s outside counsel legal spend hasn’t increased since March, I’ll eat my hat.

Other practices haven’t been so lucky. Lawyers may have seen their biggest clients go dormant, or even out of business. Some entire practice areas are idle. It doesn’t take a rocket scientist to know 2020 may not be a banner year for hospitality, commercial leasing, and aviation lawyers.

Managing this thrash and variability has been a significant challenge for firm leadership in the past several months, as some practice groups struggle to stay afloat while others rake in the dough. Those issues are set to truly come to a head as we reach the end of many firms’ fiscal years and enter compensation and bonus season.

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Deciding how to split up the firm pie is a contentious, painful affair in the best of years. 2020’s compensation season is shaping up to be one of the hardest since the Great Recession. While firms aren’t in the aggregate seeing the same revenue contractions they saw in ’08, the volatility and uncertainty of COVID-19 pose a different, but just as tough set of challenges.

Lawyers who had a COVID-driven bad year are in the tough spot of having their book torpedoed by essentially an act of God. No one wants to admit they caused their firm a net loss on the year, much less take a pay cut in the next year. Some might be justifiably expecting a huge bounce back or even a boom period in 2021 as things return to normal. Those attorneys will argue long and hard to keep their comp from getting slashed.

But every dollar paid to currently underperforming attorneys is a dollar that’s not available to reward those folks who made the firm bank despite, or perhaps because of, the pandemic. Those attorneys will surely want to see bonuses and will be demanding a higher base comp figure heading into next year. Those who don’t get their demands met could credibly threaten to walk out the door to a firm that will be happy to pay them more.

And we can’t forget that COVID-19 demanded a huge amount of firm leadership and staff. Hours upon hours of nonchargeable time were poured into fundamentally reshaping how our firms operate day-to-day. Without that tremendous lift, many firms would have sputtered out. Rarely, if ever, has more been demanded of lawyers and staff on the administrative side of the law. Those efforts to keep the ship afloat have to be rewarded, right?

All of this is happening against the backdrop of some of the most uncertain times in living memory. Many management teams will see that uncertainty and want to trim back the compensation budget to weather any further hits to the economy. Even in cases where this is a prudent move, some leaders will view this as politically untenable and may choose to roll the dice, close their eyes, and hope 2021 ends up better than many economists predict.

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Money’s Not The Answer

The entire point of money is that there’s never enough of it. Our markets are built around this scarcity principle. It’s why we’re motivated to work for the Benjamins. Even in the biggest of boom years, where every partner in a practice smashes their revenue records, there will be battles over who gets what share of the pie. The battles will still happen because attorneys will always want to argue their case, do better than their neighbor, and get that much closer to funding their retirement/kid’s college/new sports car/next golf vacation. The basic problem of setting annual comp isn’t something that can be solved with money.

For firm management, the way out of this mess is to find a way to broaden our attorneys’ definition of success to something more than just dollars. There will almost always be an irrational bidder out in the market willing to lure our partners away with more money than we can offer. The firms that will navigate the coming months best are the ones that have long been actively developing their internal culture and sense of camaraderie. By making our current situation a great one, a place we can call home, we both make the day-to-day of firm life better and ensure our teams stay together.

Developing culture doesn’t happen overnight. It requires valuing the contributions of everyone in the firm, from the practice group leaders to the night custodians. It takes knowing who we are and what we’re doing, communicating that mission, and getting everyone bought in.

If we don’t teach our people to value one another, all they have left to value is their paychecks. That’s a losing proposition for any management team.

Care for your people first. The rest will follow.

James Goodnow is the CEO and managing partner of NLJ 250 firm Fennemore Craig. At age 36, he became the youngest known chief executive of a large law firm in the U.S. He holds his JD from Harvard Law School and dual business management certificates from MIT. He’s currently attending the Cambridge University Judge Business School (U.K.), where he’s working toward a master’s degree in entrepreneurship. James is the co-author of Motivating Millennials, which hit number one on Amazon in the business management new release category. You can connect with James on Twitter (@JamesGoodnow) or by emailing him at James@JamesGoodnow.com.

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