Tuesday, January 17, 2006

Of Law Firm Culture and Compensation Schemes

There's always talk about law firm salaries for associates. Are they too high? Too low? What's the price associates pay for an increase in salary? (Partial answer: Working harder and less mentoring.) There are suggestions out there that modest salary increases are taking place in some parts of the country right now, while other reports suggest continued wage stability (as opposed to the end of the 1990s, when one year saw 50% raises at big firms).

It's useful to approach this topic from a different angle, however. Specifically, how are associate compensation schemes and law firm culture related? Average salaries are only the tip of the informational iceberg, and compensation schemes vary widely. Credit goes to Professor Eric Goldman of Marquette University Law School for inspiring this post. He has done some very good thinking and blogging on the topic. Check out his July 26, 2005 post in his Goldman's Observations Blog. Goldman tells his students that "if you want to understand a firm's culture, start by understanding the firm's compensation procedures."

Now that's superb advice for any student or lawyer.

Goldman discusses and links to articles in NY Lawyer on the subject. These articles focus on objective factors such as the disparity between a firm's highest and lowest lawyer wages, as well as profits-per-partner. Objective measures are all well and good, but what about the average Jane or Joe in the trenches? Aren't there some rules of thumb or subjective factors than can be used to compare firm cultures without resorting to formulae? Indeed there are. Here's my partial list.

One big factor is, "Are associate annual raises lock-step or merit-based?" Lock-step compensation is good in the sense that it discourages (somewhat, at least) nasty competitiveness between associates. Everyone makes the same amount (although bonuses may vary). But it doesn't reward superlative efforts very well. Did you bring in 3 new fortune 500 clients yourself and oversee several difficult projects that were above your level of seniority? If so, why shouldn't you get a big fat raise for it? Or is it that superlative performance is expected, and those who are merely very good should be concerned for their job future?

At the end of the day, you have to make your own judgment call: lock step's (possible) greater egalitarianism versus the greater glory and pay (and favoritism and ill will) that merit raises may bring.

Another factor is simply the number of partners versus the number of associates, regardless of compensation schemes. Is the firm a pyramid, with a few at the top? Or is the ratio closer to 1:1? A pyramid structure suggests that it is harder to make partner. (One caveat: specialty firms and practice groups tend to have a more 1:1 ratio, since fewer people practice in the area. There are a zillion litigators out there, but not so many lawyers practicing in, say, the area of export control law.)

A third factor is whether the firm has a one-tier or two-tier partnership structure. For those who don't know, a lot of firms--especially in the big markets--have equity partners (AKA "real partners" who have an ownership stake in the firm) and non-equity partners (AKA "fake partners" who are partners in name only). Sneaky, but true. And just like a lawyer.

Non-equity partners are typically not at will employees--they have contracts for a specific term--but definitionally speaking are not really partners. They are employees. A two-tier partnership structure suggests pretty strongly that it is harder to make full partner at the firm. And certainly it takes longer, since you have two hoops to jump through.

A fourth factor is how associates and non-equity "partners" are treated in terms of promotions. Does the firm have an "up or out" culture? Are the firm's non-equity partners second-class citizens? This is a very important factor to consider. It is a lot harder to make full partner at many firms than it was even 1 or 2 years ago (yes, I am being serious), and many excellent attorneys have opted not to go for it. At many firms non-equity partners are in essence highly valued, long-term contract attorneys. But at others they are not. How a two-tier firm treats its non-equity "partners" says a lot about how nasty or nice the firm's culture is.

Yet another factor is the dollar amount of its annual raises. In economic terms, what is the slope of the salary curve? Most firms pay market rates for starting attorneys straight out of law school. But some have really flat salary curves--meaning that after a few years, you are making far less than your peers at other firms. Ask that question when interviewing--and ask about bonuses too.

A sixth--and absolutely key--factor is HOW (as opposed to how much) partners are paid. Is compensation based on how many shares of the firm the partner owns? Is annual compensation largely subjective and based on the will of a compensation committee? It is pay-per-project? Or is it an "eat what you kill" scheme--meaning the more you bill (and the more others bill your clients), the more you get paid?

The choice has an enormous effect on firm culture, and I have experienced both personally in practice. Compensation set by committee means that there are insiders and outsiders--and try as you might, someone gets shafted. And the process becomes enormously political. The "Eat What you Kill" approach lowers the infighting factor, but it leads some partners to hoard work if they can get paid more for doing work themselves instead of handing it off. That, of course, is bad for the associates. These categories are oversimplifications, of course. But still, ask the question. The answer will cast a huge spotlight on the firm's culture.

Finally, when you interview at a firm, how do you feel about the place? Do you get a good feeling, or a bad one? Trust your instincts. Always, always, always. (Read Malcolm Gladwell's book Blink if you haven't already; this is exactly what he is talking about.) Run from the "great" firm that makes you feel creepy; go with the firm that you like, even if it does not have all the objectively measurable qualities you want. It is a leap of faith, I know. But every time I followed my instincts in such matters (not rashly, mind you) I made the right decision, and every time I ignored them I made the wrong decision even though it looked great on paper.

There are a lot of other factors that could be listed, but space and time are short. This is supposed to be a blog post, not a book unto itself. Any comments on these or other factors are welcome.


Michael McCann said...

I think your point about equity versus non-equity partners is very important. I know firms like to celebrate how some of their attorneys "make partner" when, as you note, they aren't making partner in the sense how most people assume the phrase to mean (i.e., obtaining an equity stake in the firm).

I suspect the non-equity partner title is still helpful for retention (since associates, er, I mean "partners," can call refer to themselves as "partners" and that offers an increase in both internal and external status), and it is probably heplful for recruiting attorneys ("hey look, our senior associates make partner -- unlike at big firm XYZ etc.").

But the non-equity partner title still seems disengenuous and I wonder how those in that position feel about it (especially after being a non-equity partner for a while). Do they really feel like "partners" or is it more of an illusory status-symbol?

Anonymous said...

In larger firms, the difference between equity partner and non-equity partner is very small, except in terms of compensation. The fact that an equity partner may own a very very small fraction of the firm's assets and is one out of over 100 votes on a particular firm issue (most of which are handled by a management committee) is meaningless. I have been both non-equity and equity, and I can tell you that except for the level of compensation, I preferred being non-equity because your pay check did not depend on the performance of others.