By Brian Burlant

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The top tier of American law firms are experiencing a tectonic market shift as the competition for elite talent faces unprecedented levels.  A century of stable partnerships and long-term client relationships has been shaken by an increasingly fluid transition of partners who can control client billings from the tens of millions to over one hundred million dollars or more and earn compensation guarantees of up to $20 million annually.  In this quest to retain and attract the most productive partners and protect and enhance core business relationships, firms face questions of identity.  In this new reality, firms are asking “Who are we?”, and in the process redefining themselves and their culture. 

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Culture is important, it is the glue that holds things together. Culture provides a north star as to what a firm stands for and aspires to be; how it treats and values its employees; how and where it pursues and conducts its business; and how it rewards and compensates its partners, associates and other employees. Culture cannot be avoided. Doing nothing to maintain a particular culture in itself results in a culture, if one of chaos and partiality. 

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We foster culture in how we talk to it and how we act. Of the two, our actions are far more important.  Practice dictates behavior. Of a law firm’s actions, often nothing is more important than how a firm slices the pie – how it compensates its lawyers, and, most significantly, its most productive partners. (A firm’s compensation and other practices towards its associates warrants a separate article unto itself.) How a firm compensates its partners reflects its truly held values and largely determines how hard their partners work; how they collaborate; how they share business credit; how they pitch; how they treat and mentor associates; and, ultimately, whether they stay. Though the goal of a firm is to expand the pie, there are always constraints where what we give you means giving less to others.  It is a delicate balance. 

Firms are striking this balance in different ways to adapt to this new compensation environment and to provide greater flexibility in rewarding their most productive partners, including:

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·   Eliminating lockstep (seniority based) compensation systems;

·   Creating non-equity tiers of partners;

·   Rebalancing fixed formulas between objective and subjective measures

·   Creating large discretionary bonus pools;

·   Making forgivable loans; and

·   Migrating from open to closed compensation systems.

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Each of these steps can have profound effects on the culture and identity of a firm. Eliminating a legacy lockstep system is perhaps most disruptive. Accordingly, we have seen how firms have tried to do this in incremental fashion; for example, maintaining a lockstep for most partners while allowing outliers to break out from it, or maintaining a lockstep for the initial years of a partnership while providing one or more gates for business generators to enter a larger sharing paradigm. 

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Non-equity tiers have traditionally been used in several ways: as a bridge to expected equity as a young partner matures, as an up-or-out competition for associates to access the equity tier, or as a means to keep on productive partners who bring great technical legal expertise and institutional knowledge but perhaps don’t have the aptitude or drive to business generate.  Increasingly, we have seen non-equity tiers also used to transition less productive equity partners, allowing firms the flexibility either to keep them on in a role productive for both or, in some cases, to facilitate a longer-term transition out of the partnership. 

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By rebalancing formulas firms can lean either more objective or more subjective in allocating compensation, taking either path to reward those deemed producers. When objective, firms spend great care in defining and weighing the metrics used, which becomes most fraught in defining and weighting origination credit and whether it is shared and how much so. We also see firms increasingly relying on more subjective tools like discretionary bonus pools and forgivable loans, that have the advantage of being more flexible and also less transparent. Application of bonus pools have the additional advantage of rewarding partners for exceptional years without locking them into sticky compensation bands. In the same vein, we see more firms considering closed compensation systems (where each partner’s compensation is known only to firm leadership and was historically the domain of only a handful of firms) as they widen the spread from the lowest to the highest paid partners and seek to avoid the distractions of internecine compensation competition.

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One can see that there are winners and losers in all of these strategies.  Further, these strategies impact how work is done and how clients are serviced by the firm. There is no single correct path. Most important is how the changes are justified and implemented by firm leadership so that there is a clear understanding and substantial buy-in by the partnership, especially those partners deemed critical to the Firm’s future. Accordingly, firm leaders need to build consensus around a principled foundation for their choices. Making these choices requires a nuanced understanding of the firm’s assets, existing culture and business opportunities. Leadership needs to identify its current and next generation of business generators as well as its essential servicing partners, counsel and associates; its practice strengths, opportunities, reputation and depth; and, ultimately, who its most important clients are (which increasingly are more loyal to individual partners than to a legacy firm), these clients’ rate sensitivity and their fit with the future direction of the firm. As importantly, firm leadership needs to have a realistic grasp of what the firm’s culture has been and the type of culture it needs to move forward, and how heavy is the resulting lift.

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Ultimately, a Firm’s culture arises from the choices made. It is tantamount to firm leadership saying, “This is who we are, these are the clients we want to attract and the work we want to do and how we plan to do it.” It takes a clear eye and strong constitution to articulate and live this, to see and redefine who you are, to make the difficult choices and build a team and culture to compete in today’s environment.

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