Tag Archives: Partners

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.

Who is Better Compensated: Elite Biglaw Partners or Top General Counsel? (2023 Update)

It’s no secret that it pays to be a Biglaw equity partner. A 2022 survey of partners in “NLJ 350- and Global 100-size firms” found average compensation of $1.12 million, a 15% increase over the average in the prior survey conducted in 2020.

Seven-figure compensation is nothing to sneeze at, but as with professional sports teams, the real stars of Biglaw make significantly more than the average. Firms vary widely in their compensation ranges. At the most traditional end of the spectrum, a firm’s highest-paid partner might take home 4x the pay of the lowest-paid partner. In contrast, at a firm with a strong eat-what-you-kill culture, that ratio may be 10x or higher. Bloomberg reports that the top earners at Kirkland & Ellis earn more than $20 million annually. Eight-figure pay packages remain uncommon in Biglaw, but with competition for partners with the strongest books of business as intense as ever, rainmakers at an increasing number of firms are breaching the $10 million mark.

So the top tier of law firm partners are doing very nicely, indeed. But what about the leading in-house lawyers? In this article, we take a look at the pay packages of the top 100 highest-paid General Counsels, in comparison to partners of top Biglaw firms (as measured by profits per equity partner). We find that on a cash compensation basis, equity partnership is more lucrative than being a General Counsel. But the story is more complicated when taking stock options into account.

A quick note on sources. For general counsel compensation data, we look at the top 100 highest-paid GCs as listed in the 2022 ALM Intelligence GC Compensation Survey. This data set is not comprehensive. For one thing, ALM compiles its data from proxy statements filed with the SEC, so only public companies are included. Our source for Biglaw partner compensation is the 2022 edition of the Am Law 200 ranking.

It’s hard to outearn a top Biglaw partner (in cash)

The General Counsel Compensation Survey ranks General Counsels based on total cash compensation. The top 100 highest-paid GCs earned total cash compensation of $2.7 million on average. We don’t know how much the 100 best-paid Biglaw partners earned in the comparable period, but as one benchmark, the 91 equity partners at Wachtell enjoyed profits per partner of $8.4 million.

Just one General Counsel took home cash compensation higher than $8.4 million: Alan Braverman of Disney ($8.8 million). Meanwhile, 42 Am Law firms had profits per equity partner in excess of the $2.7 million average General Counsel cash compensation.

What about cash compensation growth over the recent past? From a growth perspective, who did better in the two-year period from 2020 until 2022: the top 100 General Counsels or the partnership of the top Am Law firms? The table below shows the results, ranked by growth rate. The law firms in the table were the top 10 firms by profits per equity partner in the 2020 Am Law 200. We see that all 10 Biglaw partnerships outpaced the General Counsels, some by a substantial margin.

Group (equity partnership or GCs)Compensation growth from 2020 to 2022
Davis Polk55%
Kirkland & Ellis42%
Sullivan & Cromwell37%
Simpson Thacher35%
Wachtell33%
Cravath31%
Paul Weiss31%
Skadden30%
Weil Gotshal29%
Quinn Emanuel26%
Top 100 GCs25%

But stock options can make a big difference

It’s critical to note that the very highest-earning General Counsels receive a substantial portion of their compensation in the form of equity. Taking stock options into account, some General Counsel roles start to look considerably more attractive. For example, revisiting the 2022 surveys, when considering total compensation, the number of General Counsels topping Wachtell’s profits per partner rises from one to 16. Kathryn Ruemmler (Goldman Sachs) and Kate Adams (Apple) top the list, each earning total compensation just shy of $27 million. David Sorkin (KKR) also cracked the $20 million threshold. These examples illustrate the importance of equity: Ruemmler, Adams, and Sorkin earned total cash compensation of $7.9 million, $5 million, and $5.75 million, respectively.

Conclusion
There are a lot of reasons why an attorney might prefer to be a General Counsel than a law firm partner. But viewed strictly through the lens of compensation, high-performing lawyers are typically better off staying on the law firm track. Of course, that doesn’t necessarily mean they should stick with their current firm. With Biglaw partnerships increasingly diverging in their approaches to compensation, it’s a mistake to assume that a partner with a given book of business will be paid similarly at any comparably prestigious firm. Productive partners have a variety of options—and it pays to know about them.

Testing the Market as a Law Firm Partner

If you are a law firm partner, there are many reasons why you might consider switching firms.  A competitor may offer a better platform and stronger bench, enabling you to serve your clients more effectively and ultimately generate more business.  Another firm may feature a different geographic footprint that could better align with your practice or business development goals.  Perhaps you’re looking to reduce the frequency of conflicts after having to turn away too many potential matters.  Or maybe you are interested in taking on a leadership role, but your current firm has been slow to open up opportunities.

Although each of these factors is distinct, they have something in common: all ultimately bear on your compensation. At Lateral Link, this is our peak season for compensation questions from partners.  The issue is front of mind for many, as they prepare their compensation memos and learn what they will take home this year.  Some partners are ruminating on their desire for promotion to equity.  Others have a nagging sense that their current compensation package does not fairly value their contributions.  And some may have broader concerns about the stability of their firm’s finances in an uncertain economy and the attendant risks to their compensation trajectory.  Might somewhere else offer a better package?

Reasons to consider testing the market

There are myriad ways in which firms can disappoint their partners financially.  Here are just a few examples:

  • Partner expected to receive more ownership units (i.e., a raise) but was disappointed to receive a smaller increase than anticipated.  Management asserts that this is one of the largest raises in the firm this year and that they cannot go higher.
  • Partner has finally originated enough business for a promotion to equity, only to learn that the target required to become an equity partner has increased.  The new, higher originations requirement keeps equity out of reach.
  • Partner is dismayed at the amount of his or her net worth tied up as a capital contribution and wonders if other firms might have different, more forgiving requirements.  (The answer is yes!  There are firms without capital contributions or with low capital contribution requirements.)
  • Partner turns away business regularly due to legal conflicts with the firm’s other clients, materially compromising his or her practice-building efforts and sometimes leading the partner to refer millions in business to other firms.  Inability to take on this work lowers originations, and as such compensation.

If you find yourself in a situation similar to the above, it could be an ideal time to test the market.  Whether you can secure a higher offer will depend on various factors, including level of demand for your practice area, your reputation in the broader legal community, and your current volume of originations.  But however it turns out, the process should be informative.  At worst, you’ll have peace of mind that you are in fact being compensated fairly.

How to test the market

The most effective way to test the market is to work with a trusted recruiter.  An experienced recruiter who understands your practice area and region will know exactly which firms are open to making lateral hires and which are offering the strongest compensation packages.  As a first step, the recruiter will have you assemble a business profile and pitch, highlighting the value you could bring to a potential new firm.  Even if you don’t end up moving, you may find this to be a valuable exercise that enables you to negotiate more confidently within your current firm’s compensation structure.

Of course, you can also attempt to test the market yourself, but you will lose the benefit of having a trusted advisor who knows your market and has secured offers at a range of firms.  That unique and valuable insight can only help you. 

Consider the broader opportunity

When testing the market, candidates sometimes have a tendency to focus excessively on the compensation guarantee that a firm is offering.  It’s important to bear in mind that there are many elements to a compensation system beyond the guaranteed paycheck.  For example, is the capital contribution unusually onerous?  Also be sure to consider the likely extent of conflicts, as this could have an important bearing on your ability to expand your book.

Always place the guaranteed dollar amount in the context of the broader opportunity.  For instance, if you have been turning away class actions work, joining a firm with a robust class actions practice is likely to accelerate your compensation materially.  Even seemingly minor factors like having an office in a geography relevant to your practice can make a real difference.

Be a smart negotiator

One of the curiosities of being a legal recruiter is seeing partners who are excellent negotiators for their clients make serious mistakes when negotiating for themselves.

Sometimes an attorney will get a call directly from another firm, gauging their interest in a move.  (Incidentally, this type of call raises unique issues for high-level government officials, where any answer other than “no” may lead to demands for recusal.)  Flattered, the attorney only considers the firm that called.  If you receive such a call, do not let the firm that reached out hold you back from exploring other options so that you understand your true market value.  If the firm that called does not want you to test the market, it may be because they want to avoid a compensation bidding war.  Failing to protect your interests in this scenario could cost you millions of dollars over the course of your career.  

Another frequent error is quickly accepting a counteroffer from the current firm after tendering your resignation.  Is the firm’s attempt to keep you too little, too late?  Ask yourself if that one-time bonus is a band-aid on larger systemic issues, including the issues that motivated you to explore other opportunities in the first place.

The decision to move is a complicated one, requiring careful consideration.  But it never hurts to check your market value, especially if you suspect your current firm isn’t treating you as well as it should.  If you feel you could benefit from a confidential discussion about your individual situation, please contact me.