Partner Compensation and the New "Value" Reality


Reprinted/posted with permission of The Daily Journal Corp (2009)

Second in a series of four articles.

Partner compensation and the new “value” reality

By Patrick J. Lamb, Jeffrey W. Carr, Edwin B. Reeser and Patrick J. McKenna

Imagine this: The Managing Partner of one of the largest law firms in the country is looking around the conference table at 20 of his partners. The 20 partners are the firm’s highest compensated partners, collectively earning nearly $60 million in each of the last three years. Somberly, the Managing Partner informs the group that he has concluded that the firm’s compensation system, which has been in place for the past two decades, must be scrapped. They wait for him to explain how the new system will favor them so the group can continue to receive generous compensation. “The days of paying people based on gross revenue generation are over. From now on, compensation will be based on net profitability of work.”

The likely outcome of this meeting: It would only be a matter of days before the Managing Partner is replaced, or some of your fellow partners start exploring their options at other firms.

This story only sounds apocryphal. Instead, this scene will play out as law firms are forced by the “changing economic dynamics” to restructure their business models into something that eliminates the focus on top-line revenue growth and client-insured profit. Instead, the focus on profit margins, lower cost production and results instead of hours and body count will fundamentally alter the way law firms measure, and reward, the value their lawyers deliver.

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DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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