Top Kirkland partners see cuts to equity shares

Kirkland-EllisIn a compensation shakeup, Kirkland & Ellis has changed its framework for allocating equity partner profits, while cutting the shares of its top partners and others.

Kirkland’s litigation partners were particularly hard hit, with some senior partners seeing their shares slashed significantly, according to three sources familiar with the firm’s move.

“There’s been a reallocation of equity from litigation to corporate and maybe bankruptcy,” said one former partner who has spoken with current Kirkland partners. “For the litigators, I heard it was a bloodbath.”

The partner added: “The general sense is that this is the most recent manifestation of the corporate people taking over the firm.” (Another source also used the term “bloodbath” to describe the impact on the litigation ranks.)

Kirkland chairman Jeffrey Hammes is a corporate lawyer who had a strong private equity practice before he took the top leadership post in 2009. The firm’s private equity, M&A and bankruptcy practices have been extremely profitable, playing a major role in boosting Kirkland’s profits per partner to $3.6m (£2.9m) last year, the fifth highest on the Am Law 100.

Kirkland reallocates its equity every two years, and management informed partners of the latest changes to their individual allocations earlier this month. Before this change, a Kirkland equity partner would receive an allotment of shares ranging from 10 to 80. Under the new system, the top level has been lowered to 75 shares and the bottom tier has dropped to 8.5 shares. The changes go into effect on 1 February, when Kirkland’s financial year begins.

The firm did not respond to requests for comment.

One possible reason for the shift downward is the soaring value of a Kirkland share. This year the value is roughly $148,000 (£119,000), according to one source, which means partners with 80 shares will earn $11.8m (£9.5m). If the share value stayed flat next year, top partners would see their cut slip to a still-enviable $11.1m (£8.9m) under the new allocation.

One former partner called the lowering of the top share allocation “politically sensible”, given the large sums that top partners are making.

Another former partner said he wasn’t surprised that litigators weren’t faring well under the new allocations. Kirkland litigators increasingly feel that their corporate partners view them as service partners, the partner said.

But the firm still appears to value star litigators. Kirkland this year made a big investment by bringing in Supreme Court advocate Paul Clement and his entire 17-lawyer firm in Washington DC. It’s not clear if the addition of Clement and his group was a factor in management’s decision to trim shares from other litigation partners.

One of the firm’s top litigators, Mark Filip, who is credited with engineering the Clement deal, is considered a possible successor to Hammes when his term expires in two years. Another leading candidate for that spot is private equity partner Jon Ballis.

The firm’s decision to rejig partner shares further expands Kirkland’s already wide 8:1 compensation ratio for equity partners. Under the new system, the ratio will approach 9:1. This structure has given Kirkland an edge in recruiting lateral partners from other firms, where compensation ratios are more compressed and the top partners may make much less.

Some elite New York firms, for example, are not so stratified and use a compensation ratio that is closer to 3:1. Earlier this month, Kirkland lured promising young M&A partner Jonathan Davis, from Cravath Swaine & Moore.