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Growth is dead, part 3: do partners have unrealistic expectations about pay?

Author: Bruce MacEwen |

19 Oct 2012 | 15:31

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Our third installment in this series addresses partner expectations. Here's the problem: There's about to be a collision with reality.

Let's start with some data.

In the quarter century since the The American Lawyer first published the Am Law 100, growth has been impressive:

• Total gross revenue for the 100 firms has gone up more than tenfold, from $7bn (£4.4bn) to $71bn (£44bn), a compound annual growth rate (CAGR) of 9.71%.
• Average PPP has more than quadrupled, from $324,500 (£200,000) to about $1.4m (£870m) - 6.02% CAGR.
• And the average Am Law 100 partner's earnings have gone from 11.3 times the average American employee's compensation to 23.4 times that benchmark in 2010 (the last year for which data is available).

Yes, the first two figures, for revenue and PPP, are in nominal (non-inflation-adjusted) terms, but the third most assuredly is not. With exceptions hardly worth mentioning, over the past two decades PPP in the Am Law 100 has outpaced inflation (graphic courtesy Jomati Consultants):

GRAPH: Average PEP growth vs US inflation, Am Law 100 firms

This is not just a statistically impressive run of the first order: it has real human implications.

Simply put, many (most?) of your partners have never experienced a seriously down year - or even a year when their compensation growth didn't trounce the inflation rate.

It gets worse.

These are averages, of course, which don't reflect the trajectory of any of the thousands and thousands of individual partners. I recently met with the managing partner of an Am Law 100 firm who had done the analysis, and he said that the vast majority of people who were partners in 2007, before the Great Reset, and were still partners, had done very nicely indeed, simply by virtue of moving up the compensation ladder.

Other industry observers (not managing partners - they're far too diplomatic to say this, even if they might be thinking it) have told me in private that there are far too many people earning way more than they're worth; their success owes to being in the right place at the right time.

Now, before the email protests start coming in: (a) yes, they have worked really hard for many years to get where they are and stay there; (b) without exception, they're very smart and articulate; and with rare exceptions, they're also astute; and (c) it's a highly competitive market.

But going from 11.3 times the average nationwide compensation to more than double that? Name another industry where that's occurred to tens of thousands of people.

Investment banking? Guess again: Attrition is spectacular, as are bare-bones lean years even if you survive more than half a dozen years.

Medicine? While figures are hard to come by, Yale Medical School reports that the median physician's income in 1998 was 4.8 times that of the median full-time worker. Today, the median household income in the US is just over $50,000 (US Census Bureau) while the average physician income is about $155,000, so the multiple is probably less than 4.8 today. I grant you that the conceptually correct comparison is between the 'median physician' and the 'median law firm partner', and then between the 'Am Med 100' physician and the Am Law 100 partner, but since the Am Med 100 doesn't exist, use your imagination. Do you really think there are thirty to forty thousand doctors earning nearly 25 times median US personal income?

By contrast, what do Am Law 100 partners expect? More of the same; why wouldn't they? It's unlikely they'll admit this, of course: It's uncouth to complain that earning $1.4m/year isn't enough. Except they think it, because:

• They compare themselves to corporate CEOs, the aforesaid i-bankers, and of course partners at That Other Firm whose PPP is 115% of ours;
• Like Parkinson's Law of work (which expands to fill the time available), household expectations, AKA 'lifestyle', grow to absorb the income available. Have you heard, "I owe it to my family to take what the market is offering"? I have; it's unbecoming. You have no obligation whatsoever to have a luxurious second home (or a second home at all), multiple new BMWs or Audis, annual vacations all over the globe, and the list goes on.
• Did I mention that they've never experienced more than the odd year, by happenstance, when their compensation didn't handily outpace inflation?

There's a deeper problem, and it goes to the heart of what it means to be a one-firm firm, or a partnership in the first place.

It better not be all about the money.

This has two sides to it: First, why partners are too often tempted to leave for a bump in income, and second, the challenges managing partners face in keeping firms pulling together in straitened times.

I have long believed that if someone leaves for (say) a 15% raise, they'll leave again for another 15%. They don't, in short, see themselves as a partner, but as captain of their own ship, master of their own destiny. I don't use these grandiose phrases lightly; people can too readily succumb to the temptation to think they've accomplished everything on their own.

I have news for you: The platform you're on - be it a big US firm or small UK firm - has far more to do with your success than you care to admit. You may think you're scoring all the goals, but you belong to a team. Try hanging out your own shingle and see how long your bountiful paydays last.

And from the management side: Keeping all the oars pulling together is enough of a challenge in the best of times. Explaining why ever-rising expectations cannot realistically be met without melting down the firm (cf. Howrey, Dewey) is doubly hard.

Add to that, that most lawyers don't understand business, including their own firm's business, and aren't honestly curious about it. Yes, they'll politely pretend they are, but 95% aren't really. This makes the managing partner's challenge of explaining why this tree has stopped growing to the sky almost insurmountable.

In short, you have implacable economic reality on one side and deeply ingrained learning, strongly reinforced by a bedrock belief that precedent is the surest guide, on the other.

This is not a recipe for stability.

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Update, 19 Sept

This morning The Am Law Daily published Report Shows Pay Gaps Widening Among Partners, which reports on the results of a survey by the recruiting firm Major Lindsey and Africa that drew 2,228 responses from partners at major law firms in the US and elsewhere. The headline findings are:

• Equity partners, AKA rainmakers (relatively speaking, at least) make more than non-equity partners. (We really needed a survey to tell us this?)
• Men make more than women - to the shocking tune of 47% more ($734,000 vs $497,000). What decade are we in, people? If this isn't reprehensible on its face, please explain in 25 words or less why not. Comments are available immediately below.
• And partners in firms with open compensation systems earn 74% more than those in closed systems ($810,000 vs $465,000). I find this odd in the extreme, and have no handy-dandy explanation for it. Major Lindsey offers up that it's due to different response rates, with open-system partners "reporting significantly larger books of business than their closed system peers," but I don't think that gets you to a 74% delta. Any ideas here?

But that's not why I'm publishing this update.

Lest you doubt my assertion in the original column that partners harbor the belief that "earning $1.4m/year isn't enough," the article concludes thus:

"Partners of all classes and genders were united on one front: They all think they should be making more money. Fifty-eight percent of all partners said they should be better paid, and among that group, an overwhelming majority wants something more than a token raise. Ninety percent of the survey's respondents thought that their compensation should be increased by more than 10%, while 1% thought their pay should be doubled."

Q.E.D.

Bruce MacEwen is the founder of Adam Smith, Esq., which looks at the economics of law firms.

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