Big Law Is Further Tweaking Partner Pay

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The Shift: Big Law Is Further Tweaking Partner Pay

Amid a 10-year low in M&A deal value and sinking law firm demand, large law firms will struggle to grow their profits through the end of 2023 and over the next year when there's less work available. In this cut-throat atmosphere, growing market share increasingly means taking work and talent from competitors.

But in order to lure over top rainmaking partners from a rival, law firms are taking steps to make sure their pay packages and partner compensations systems are competitive. They have to overcome natural resistance from current partners and calculate a competitive, yet economical approach to lure partners who have significant, portable business and make sure their most valuable partners are also paid well.

The moves away from lockstep compensation systems by some New York firms in recent years, including Cravath Swaine & Moore and Cleary Gottlieb Steen & Hamilton, were just a preview of the change in pay systems happening now in Big Law and for years to come.

This is all being driven by the need for competitive pay for top partners. A ferocious war for “star” partners with the most client loyalty has driven up pay, Brad Karp, chairman of Paul Weiss Rifkind Wharton & Garrison, told Law.com in a recent interview, adding that the erosion of partner loyalty and “general gossip about partner compensation packages'' have put more star partners in play.

The Conversation

The total for worldwide M&A through nine months in 2023 was down 27% from last year, according to data from the London Stock Exchange's Refinitiv. It was the lowest third quarter for deal value since 2012 and most law firms have seen tanking deal count.

Unlike 2021, when a rising tide lifted all boats, the continuing deal drought in 2023 has put more uncertainty into Big Law profits.

With the stakes rising to eke out profit growth in 2023 and start off strong in 2024, law firms are tinkering with compensation payments to current and future partners who have established client relationships.

“Firms are setting out strategic goals like increasing the ratio of highest to lowest paid equity partners,” said law firm management consultant Kent Zimmermann recently told Law.com. He added that many firms have reallocated, or are considering reallocating, more bonuses to equity partners because it helps firms adjust equity partner pay without changing their base compensation of firm profits.

And while compensation guarantees that are several years long are increasingly rare, law firms are offering guarantees that often spell out minimum point levels or floor amounts aimed at insulating new laterals from the potential risks of transporting their practice on an interim basis.

While some firms won’t refer to official compensation guarantees, “it’s effectively a guaranteed amount,” noted Alisa Levin, a recruiter and principal at Greene-Levin-Snyder Legal Search Group, adding “it may not be an exact number, but it’s something that one could bring to the bank.” She said she’s seen more specific guarantees ranging from $3 million to $12 million a year.

The Significance

Overall, pay packages for top laterals are getting higher overtime. A trio of recent laterals at Paul Weiss from Kirkland & Ellis, for instance, could stand to make over $20 million in annual compensation.

As average profits per equity partner at the most elite law firms grows – Kirkland’s PEP reached $7.5 million in 2022 – the law business is becoming one of the most lucrative, competing with even the finance industry in compensation. It’s no surprise that some bank leaders have joined Big Law in 2023. For instance, Rohan Weerasinghe, a former Shearman & Sterling senior partner who became global general counsel of Citigroup, rejoined the New York-based law firm as of counsel, while Robert Kindler, Morgan Stanley global M&A chair, announced in June his move to Paul Weiss.

Of course, not all Am Law 200 firms are now paying eight-figure compensation packages to laterals. It’s a small pool of firms in the industry that are pushing the bounds of partner pay, especially in a year when profit growth may be hard to come by. But the increasingly competitive pay packages of the elite will have ripple effects throughout the industry.

Partner exits at one firm can lead to exits at others when law firms that are poached by competitors seek to find new rising star talent of their own. Meanwhile, partners start to look around for the most competitive offers, especially when news is floated in the market about top lateral pay and colleagues leave for rival firms.

Zimmermann said pressure to further modify compensation systems comes from high-performing partners inside law firms, who are wondering if they’re leaving too much on the table when a competing firm knocks on their door with a commanding offer. “Some of the high-performing partners are the biggest drivers of change,” he said.

Meanwhile, seeing moves like Paul Weiss’ partner raid on Kirkland could encourage law firms to be more active in the lateral market as well, recruiters have said, placing even more pressure to be competitive with pay.

The Information

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The Forecast

The economics of the year and low legal industry demand will force some reckoning of firmwide partner compensation. Some partners, especially those with little or no business generation of their own, will likely see their pay or jobs cut, while more profits will get funneled into satisfying the firm’s most valuable partner talent.

In this low-demand environment, law firms, no matter the size, have more license and leverage to tweak their compensation systems to allow for special bonuses, gates, levers and widening ratios in order to find and retain the highest-performing partners. Indeed, a new report this week found that 52% of surveyed firms are bringing profitability system data into the partner compensation process, showing “that firms are becoming more comfortable with linking

profitability to partner compensation.”

The legal industry is slow to adopt large changes, and several big firms still have modified lockstep compensation systems. But Big Law is increasingly exiting the realm of a one-size-fits all pay model. And the economics of 2023, as well as the demands of high-performing partners, are forcing the issue.

Christine Simmons is a senior editor for business of law news. Contact her at csimmons@alm.com. On Twitter: @chlsimmons