Layoffs breach the social contract between the firm and its professionals and staff, meaning they fall disproportionately on associates, business professionals, and staff and plant enduring memories not just in the minds of the targets but across the market.
Probably the most enduring one is the current shortage of senior associates and junior partners — a lost cohort — which has created a scramble among firms to fill those very necessary ranks. The moral may be obvious but bears stating in these stressful times: As best as you can, assess both the short- and long-term effects of your actions.
Now, to what we strongly recommend: Across-the-board reductions in compensation and freezing all partner draws.
Janet Stanton
Freezing partner draws should be easy: First, a draw comes from anticipated profit, and who knows what that number will look like by year-end. Second, we find it challenging to justify how a responsible manager could pay out cash on hand for what is essentially a privilege of being an equity partner. Yes, partnership agreements and other contracts may specify which partners are entitled to what share or percentage of profit, but if you can’t forecast that number with any confidence, it seems flatly imprudent to part with the cash now.
But third and most important: At least as of about six weeks ago, equity partners in law firms were doing better financially than about 99% of their fellow Americans. Asking them to line up in solidarity shouldn’t be too hard an ask.
As for the reductions in compensation across the board: Yes, across the board — meaning imposed on everyone from senior partners to associates, business professionals, and your receptionists, but not a flat percentage across the board. Make it progressive such that most senior and well-compensated people take the largest haircut and the lowest-compensated take the smallest — ideally for the latter group, make it a token amount. (That’s not where the real money is to begin with.)
So, how you characterize the haircut in compensation: As a hard and fast amount, never to be recovered, or as a deferral? Unless you have a better crystal ball than anyone else from the Council of Economic Advisers on down, do not announce it’s a deferral. Immensely preferable to repay it later, as an unforeseen bonus, when humanity emerges from this tunnel and you’re firing on all cylinders again. Meanwhile, preserve your options.
A final thought: Amid the equal-opportunity virus itself to social distancing, hand-washing, wearing masks, and all the other drastically changed routines of our daily life, it’s important to remember that we are all in this together — this is larger than the ego of any one of us.
As law firms, as families and neighbors, as cities and a nation — it’s a time of shared sacrifice. People understand that and can and do want to rise to the occasion. We all long for meaning in what we’re going through. Shared sacrifice may not be the meaning we had in mind, but it will have to do for now. It is, full stop, our reality.
The article perhaps combines two concepts into one when the author discusses “compensation” for senior partners. I’m thinking of the contrast between this sentence (“Freezing partner draws should be easy: First, a draw comes from anticipated profit, and who knows what that number will look like by year-end.”) and this one (“As for the reductions in compensation across the board: Yes, across the board — meaning imposed on everyone from senior partners to associates, business professionals, and your receptionists, but not a flat percentage across the board.”). In the good old days of one-tier partnerships with no guaranteed payments, associates and staff received compensation and partners received profits. As firms moved toward two-tier partnerships, income partners, and guaranteed salaries for partners plus (or sometimes against) a share of the profits, the line between salaries for associates and profits for partners blurred. The first sentence understands that partners get profits, not compensation; the second sentence implies that partners get compensation rather than profits. As the equity partners get all of the benefit of the profits, it’s reasonable for them to assume all of the risk of loss, and to cut their draws to zero (or to as little as necessary to buy food) until their firms can right themselves. . . . or perhaps the firms will discover that they have too many equity partners for their own good.
Your proposed approach puts me in mind of the order-of-actions for an aircraft in distress: Aviate – Navigate – Communicate (outside) .
A few observations:
1) Paycuts – no brainers. Everyone’s doing it, so everyone’s doing it. Simultaneous with receipt of such news from my firm, I received an incredibly comprehensive summary of what the entire AmLaw 100 was doing with partner compensation. No surprises there whatsoever. If you can count on one thing that will NOT change in this interlude, it’s that lawyers will continue to follow the crowd (in this case, rationally).
2) Furloughs – life preservers or just hoping/praying? A bit of both I suppose. The problem is that, unless you are talking about an employee with zero marginal productivity (do those exist in any serious law firm?), at least some work will have to be done by remaining employees. And law firms get used to that savings very quickly. Indeed, during the last recession, they came to rely on it. So these feel more permanent than many would like to admit, even when things improve.
3) Layoffs – you raise a salient point that these have concrete, adverse effects on the talent pool several years down the road. But I would point out that a few notable firms engaged in some very high profile mass layoffs last time around, and they did not miss a beat in terms of where they wanted to go as a firm. Latham for sure comes to mind. As for how layoffs are perceived in general, I do think most people employed at a AmLaw 200 law firm who are susceptible to being treated basically as an at will employee (i.e. income partners on down) are clear eyed about how modern law firms operate, and that the end can come pretty quickly when the economy turns. Equity partners are always going to be treated with more patience for obvious reasons. In all, there doesn’t seem to be much evidence that layoffs have a measurable, long-term reputational effect on recruiting itself.
I understand this was written for a general audience, but I would submit that each firm’s “social contract” varies widely. You can certainly break it down along the line of Maroons/Grays as a starting point. But even within those categories, there are distinct attitudes about firm’s obligations to its people and vice versa. And the business exigencies are just going to magnify those differences in the coming months.