1. Diversity of partner pay programs

As I have described elsewhere at length,[2]  the most remarkable thing about law firm partner pay programs is their extreme diversity and idiosyncratic nature. The range runs from lock-step by generation to “eat what you kill.”  Some pay arrangements are totally transparent; others totally opaque.  Some inculcate a strong sense of shared fate with firm-wide profit growth the main engine of individual pay growth; others are highly individualistic.  And so on.  To the best of my knowledge this diversity of pay criteria and administrative arrangements is very hard to find elsewhere in the U.S. economy:

Most people receive their pay in one of a very few ways –hourly wage, piece rate, salary + bonus and perhaps a few variations on each. In the upper strata of executive pay, we also find uniformity. Most corporate pay plans for senior executives closely resemble one another (salary + cash bonus + restricted stock + stock options tied to a relatively few business unit- and firm-level reward criteria). Hedge fund managers’ performance fees are usually the simple “two and twenty” formula, sometimes with a “hurdle” to reward excess returns over a market benchmark. Thus, for most occupations from the lowest to the highest earning ones, it isn’t hard to know how your pay is going to be decided.[3]

The consequence of the diversity of partner pay programs is that there is no such thing as a market-wide wage for legal talent, even when the revenue and profit potential of a partner is perfectly well-known. Each law firm with its own often-opaque private pay arrangements is distinct and because firm cultures differ one from the other as well, pay plan differences persist.  No single plan type dominates others in encouraging productivity and improving the odds of survival.   For the individual, partner with lateral mobility, movement involves finding the best fit between the partner’s pay goals and collegial preferences and the culture and pay programs of firms.  From the standpoint of the market for senior legal talent as a whole, lateral hiring is arbitrage–reducing imbalances between the pay and perquisites of partnership offered by different firms.  Although arbitrage tends to reduce the differences among firms, differences will persist so long as firms continue to succeed under a wide variety of different pay regimes.

Large differences in law firm profitability also create a potential for lateral mobility.  A highly profitable firm can attract a new hire from a lower-profit firm, increasing her income substantially without diluting the pay of incumbent partners.

Lawyers with portable practices can and will move to better their pay.

A Prediction and an Inference

With an understanding of the economics of lateral hiring we can make a prediction:  the lateral hiring “frenzy” will be long-lived.  It will persist so long as the wide variety of differences in partner pay programs persist.  There is no reason to think that those differences are going to evaporate any time soon.

The inference: Lateral hiring is a fundamentally constructive influence on the law profession.  It has the effect of aligning the preferences of mobile partners with those firms that accept them and bringing legal talent into its “highest and best use.”

Obviously, differences among law firms in compensation are not the only cause of lateral motion by partners.  A desire to escape from internal competition or personality clashes, a wish to be with fellow specialists or a wish to be a lone specialist and many other non-wage motivations induce senior lawyers to change firms at times.  But in order to gauge the dominant reason why partners change firms, perform this thought experiment:  Imagine the law business as we find it today with one exception.  Suppose there were a prevailing, uniform formula or pay scale based upon revenue or profit contribution so that all firms would pay any lawyer neither more nor less than N % of his or her practice size, with whatever predictable complications you care to imagine.  In this hypothetical world of one market wage for practice size (or profit contribution) you can be certain that lateral mobility would be a small fraction of what it is today. In this world, recruiting discussions would be without talk of money. The uniformity assumption eliminates the pay-betterment or arbitrage motivation for changing firms.  QED.

–Richard Rapp

[1] “Perpetual Motion: The Hiring Frenzy at Large Law Firms Continued in Full Force Last Year,” The American Lawyer, February 2016, p39.

[2] “A Small Treatise on Law Firm Partner Pay Programs,” available upon request from www.veltroadvisors.com .

[3] “A Small Treatise,” p. 4.