Industry Resources

Breaking Open The Black Box Of Partner Compensation

In 2023, the news broke that Cravath, one of the famous hold-outs of the adoption of a non-equity partnership structure, was moving ahead with the two-tiered system, with rumblings that Paul Weiss might join this year. We wrote many years ago about the glut of senior associates facing an impending exit from Biglaw as the colossal baby boomer population that largely comprises the partnership ranks continued to work later and later than their predecessors. It seems to be a partial answer to this dilemma, firms are leaning more and more toward non-equity tiers of partners to retain these talented lawyers. This is evidenced by the increasing rate at which non-equity positions continue to be replenished, per Thomson Reuters’ analysis. Unsurprisingly, as a whole, the number of non-equity partners has grown from 19,289 in fiscal year 2012 to 26,888 in fiscal year 2022.

The implications of this restructuring are yet to be fully realized vis-a-vis the pay of equity partners. As salaried partners focus on servicing rather than generating work, non-equity partners are fixed costs that are baked into the firm’s overhead. As sharers of company profits, equity partners have seen their average compensation rise as net profits continue to soar. The average equity partner compensation has risen from $1,513,442.26 (adjusted for inflation) in 2012 to $2,079,240 in 2022 per ALM.

A law firm’s compensation model for partners is oftentimes as mysterious as Amelia Earhart’s disappearance. When partners look for new firms, they generally have a shortlist of expectations, such as a good culture, strong practices and platforms, stable finances without too much debt, stellar reputations, and last but certainly not least, healthy compensation. Achieving this can be difficult in practice. We track compensation structures across and beyond the Am Law 200 and hardly any firms have the same structure. Between firms, origination, and working credits vastly differ in their compensation, structure, and scaling, which means you can become severely undervalued if you choose a firm whose compensation formula is a poor fit for your book of business.

This antiquated notation that the compensation scales linearly with a book of business from firm to firm is easily dispelled by graphing originations vs PPP.

The reality is, that in the age of both shifting partnership structures with the rise of non-equity partnership ranks and mercurial and mysterious compensation formulas, approximating your business’s value on the open market is a daunting task.

Nonetheless, at every value for originations, some firms significantly outpace others in performance for equity partner compensation. For firms with a formulaic compensation model, there is not much wiggle room to influence your numbers, the positive is you will have a clear idea from the outset about your take-home compensation. For firms with closed compensation systems, like the “black box,” a partner uses peer firms with formulaic models to benchmark what he assumes is the market. Some firms are somewhere in the middle, open but subjective or semi-open and semi-formulaic. Most are closed, however. There is not much consistency, so there is no real market to peg your value on unless you create one for yourself. One of the best ways to do this is to work with a veteran legal recruiter who, using knowledge of different firm compensation structures, can negotiate the best deal for you by creating a bidding war for your services. While it sounds easy in practice, the firms that can actually absorb your bill rates, meet your personal preferences, and clear conflict checks are few and far between, and difficult to find on your own.

When a book of business crosses the two million mark (i.e., 2,000 hours at $1,000 an hour), the actual take-home return begins to diverge from the expected return as the single book of business starts to cost the firm more resources between associates, service partners, and administrative staff. We see this in the relatively uniform grouping in the graph above of compensations vs. originations for originations under the two million dollar mark. This association is approximate and varies from firm to firm, nonetheless, the general trend holds in all of Biglaw. It does, however, illustrate that it is important to find a firm that will reward your increased originations with congruous increases in your take-home compensation.

We meet with every Am Law firm to learn not only about their lateral needs but also compensation structures and their platforms to better service our partner clients. We use our insider knowledge to put together a holistic perspective of the best fit for your business. In addition, we know when the firm is willing to be opportunistic, and handsomely reward a lateral partner. The bottom line is that it is our job to maximize your options, and my colleagues and I at Lateral Link are happy to help.