Compensation Design for Law Firms

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1 EDITED BY HELEN ROCHE PUBLISHED BY IN ASSOCIATION WITH

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3 Partner compensation: An in-depth survey by Major, Lindsey & Africa By Jeffrey A. Lowe, Global Practice Leader Law Firm Practice at Major, Lindsey & Africa GIVEN THE importance of the subject of partner compensation, we have always been surprised by the relative lack of information on the topic. Accordingly, in 2010, Major, Lindsey & Africa (MLA) launched its ground-breaking Partner Compensation Survey, which was the most comprehensive effort ever undertaken to identify: ranges of partner compensation; the criteria law firms use in determining partner compensation; and the satisfaction of law firm partners with their compensation and compensation systems. The response to the initial survey was favorably received by both partners and law firms alike, and therefore, in the spring of 2012, MLA launched its 2012 survey to more than 74,000 law firm partners across the United States. 1 The survey was sponsored and developed by MLA in association with ALM Legal Intelligence (ALI), a research arm of ALM Media, and it is the most recent, comprehensive survey of partner compensation in the US and provides useful information on compensation trends and sources of dissatisfaction that all firms should be aware of. The survey The survey consisted of 32 questions, broken down into three major categories to assess: 1. Demographic information about each respondent and the respondent s law firm; 2. Objective information about a respondent s compensation and practice metrics for 2011; and 3. Subjective information about a respondent s perception of their compensation and compensation system. The respondents A total of 2,228 responses were received from law firm partners practicing across the US and abroad. Respondents included partners from over 25 practice areas and 60 cities. Unlike the 2010 Survey, which was sent to partners without regard to firm size, the 2012 Survey was sent exclusively to partners in Am Law 200, NLJ 350 and Global 100-size firms selected from its proprietary database. Compensation and other practice metrics Highlights of the principal practice metrics (compensation, originations, working attorney receipts (WAR), billing rate, billable hours and non-billable hours) of the respondents are provided below and show trends in partner compensation data. Compensation 2,004 respondents provided their compensation data, with reported compensation ranging from less than $100,000 (two respondents) to over 1

4 Partner compensation: An in-depth survey by Major, Lindsey & Africa $7.3 million (one respondent). Average compensation for all respondents was $681,000, a 6.4 per cent increase from 2010 ($640,000). Equity partners continue to significantly outpace non-equity partners in compensation, and the gap is growing. Equity partners averaged $896,000 in compensation, versus $335,000 for non-equity partners (compared to $811,000 versus $336,000 in 2010). Among the seven practice areas highlighted (litigation, corporate, IP, labor & employment, real estate, tax/erisa and other), labor and employment partners reported the lowest average compensation ($506,000), compared to a high of $847,000 for corporate partners. IP (+19 per cent), real estate (+17 per cent) and corporate (+12 per cent) partners showed the largest percentage increases from 2010, while litigation partners were the only group to show a decline in average compensation (of 7 per cent). Among the 12 cities highlighted in the report, the disparity in compensation continues to be quite pronounced. Average compensation ranged from a low of $478,000 in Philadelphia to a high of $1.2 million in Silicon Valley. Compensation rose in virtually every city compared to 2010, with Atlanta (+48 per cent), Seattle (+45 per cent), Dallas (+28 per cent) and Boston (+25 per cent) showing the largest gains, and only Los Angeles ( 8 per cent) and Philadelphia ( 10 per cent) showing a decline. Partners in open compensation systems once again reported significantly higher average compensation ($810,000, +13 per cent) compared to partners in closed ($465,000, 6 per cent) and partially open systems ($515,000; unchanged), and the gap seems to be widening: In 2010, open system partners outpaced closed system partners by 45 per cent, a difference which has grown to a stunning 74 per cent in Male partners continue to significantly outpace females, and the gap here, too, seems to be widening. Average compensation for male partners was approximately 30 per cent higher than for female partners, $734,000 (+9 per cent) versus $497,000 ( 3 per cent). The average compensation of white partners was $682,000 (+5 per cent). Asia-Pacific and Hispanic partners reported significantly higher average compensation ($712,000, +39 per cent, and $655,000, +28 per cent, respectively), whereas black partners average compensation declined 11 per cent (from $550,000 to $489,000). Partners who categorized themselves as mixed races showed an increase of 24 per cent, from $542,000 to $670, Originations A total of 1,959 respondents provided their originations data, with reported originations ranging from less than $100,000 (213 respondents) to over $30 million (2 respondents). Average originations for all respondents was $1,893,000. Equity partners reported average originations of $2,620,000 (+5 per cent), once again more than three times the average reported by non-equity partners ($712,000, +1 per cent). Sorted by practice area, at the high end, corporate partners reported 2

5 average originations of $2.43 million (+10 per cent), and on the low end, tax/erisa partners reported $929,000 in originations ( 12 per cent). Real estate ($1.72 million, +56 per cent) and IP ($2.13 million, +44 per cent) partners reported the most significant gains from 2010, while litigation partners showed the biggest drop ($1.71 million, 28 per cent). Origination trends by city tended to follow compensation trends. Average originations ranged from a low of $1.18 million in Philadelphia ( 11 per cent from 2010) to a high of $3.72 million in Silicon Valley (not broken out separately in 2010). As with total compensation, cities with the highest jumps in total originations were Atlanta (+94 per cent), Boston (+31 per cent), Seattle (+54 per cent) and Dallas (+26 per cent). Los Angeles showed the largest decrease in originations, falling 32 per cent from $2.06 million to $1.4 million. Compensation satisfaction Several questions in the survey dealt with compensation satisfaction and the respondents perceptions of their compensation and compensation systems. 3 The highlights of the responses are included below: Compensation satisfaction A total of 2,009 respondents answered the satisfaction question. Twenty-seven per cent classified themselves as Very Satisfied, 51 per cent classified themselves as Somewhat Satisfied, 15 per cent said they were Not Very Satisfied, and 7 per cent were Not At All Satisfied. These satisfaction levels are almost exactly the same as we saw in the 2010 Survey. The two most senior groupings of lawyers once again were more likely to classify themselves as Very Satisfied with their compensation (31 per cent and 33 per cent for categories 11 to 20 years and 20+ years, respectively, versus 18 per cent and 25 per cent for categories 1 to 5 years and 6 to 10 years, respectively). Moreover, the chasm between equity partners and non-equity partners compensation satisfaction seems to be growing. Equity partners were three times more likely to classify themselves as Very Satisfied than non-equity partners (36 per cent versus 12 per cent, as compared to 28 per cent versus 15 per cent in 2010), and were also much less likely to classify themselves as Not At All Satisfied (4 per cent versus 11 per cent, as compared to 5 per cent versus 8 per cent in 2010). Tax/ERISA partners were most likely to classify themselves as Very Satisfied (31 per cent), up strongly from 2010 (20 per cent), whereas real estate partners were least likely (20 per cent), down slightly from 2010 (23 per cent). Labor and employment partners were the next highest group to show strong gains, with 23 per cent classifying themselves as Very Satisfied in 2012 versus 15 per cent in The practice area with the largest number of partners classifying themselves as Not At All Satisfied was IP, at 9 per cent, followed closely by real estate at 8 per cent, and the practice areas with the largest number of partners classifying themselves as either Not At All Satisfied or Not Very Satisfied were litigation, at 24 per cent, followed by real estate at 23 per cent and corporate and IP both at 22 per cent, whereas labor and 3

6 Partner compensation: An in-depth survey by Major, Lindsey & Africa employment partners had the lowest percentage, at 17 per cent. Cities with high satisfaction (33 per cent or more Very Satisfied) included Seattle, Dallas, San Francisco and Silicon Valley, followed closely by Houston and New York at 32 per cent and Atlanta at 31 per cent. At the other end of the spectrum, only 16 per cent of Philadelphia-based partners reported that they were Very Satisfied with their compensation, a figure that had dropped about 12 percentage points since Boston had the highest percentage of partners classifying themselves as Not At All Satisfied (13 per cent, up from 6 per cent in 2010), and the following cities had 25 per cent or more of their partners classifying themselves as either Not At All Satisfied or Not Very Satisfied: Philadelphia and Los Angeles (28 per cent), San Francisco (27 per cent), Boston (26 per cent), and New York (25 per cent). Texas had the lowest levels of dissatisfaction, as only 8 and 9 per cent of partners in Houston and Dallas, respectively, classified themselves as either Not At All Satisfied or Not Very Satisfied. Partners in open compensation systems were much more likely to classify themselves as Very Satisfied (34 per cent) than partners in partially open (21 per cent) or closed (13 per cent) compensation systems, and the gap seems to be growing. In 2010, 29 per cent of partners in open systems classified themselves as Very Satisfied compared to 16 per cent in closed systems. Partners in pure lockstep systems showed large gains in compensation satisfaction, with 55 per cent of pure lockstep partners classifying themselves as Very Satisfied (compared to 23 per cent in 2010). In 2010, an equal percentage (24 per cent) of males and females reported that they were Very Satisfied with their compensation. The 2012 results now show a slight gap, with 28 per cent of males reporting they are Very Satisfied compared to 22 per cent of females. Conversely, in 2010, 16 per cent of males and 19 per cent of females reported that they were Not At All Satisfied with their compensation, both of which had fallen considerably, to 6 per cent and 9 per cent, respectively, in Overall, however, the changes seem less dramatic. Eighty per cent of males classified themselves as Very Satisfied or Somewhat Satisfied in 2012, compared to 78 per cent in 2010, and 72 per cent of females classified themselves as such in 2012, compared to 71 per cent in Compensation satisfaction and perceived bias Respondents who answered Not Very Satisfied or Not At All Satisfied to the satisfaction question were then asked if their lack of satisfaction was attributable to any biases on the part of their firms, such as cronyism, gender bias, racial bias, sexual orientation bias, and bias against laterals. A total of 367 respondents answered this question, with the results listed below: More than one-third (35 per cent) of the respondents attributed their lack of compensation satisfaction to cronyism, with that factor once again (40 per cent in 2010) outpacing all of the other enumerated reasons combined (although 29 per cent answered Not Sure and 21 per cent answered Other Reason). 4

7 Eleven per cent of respondents cited gender bias (up from 5 per cent in 2010), followed by sexual orientation bias (2 per cent, down from 3 per cent in 2010), bias against laterals (1 per cent, down from 7 per cent in 2010), and racial bias (1 per cent, down from 2 per cent in 2010). Desire for higher compensation A total of 1,995 respondents answered this question: Fifty-eight per cent of all respondents believed their compensation should be higher (61 per cent in 2010), while 43 per cent felt that their current compensation was about right (39 per cent in 2010). Of those who felt that their compensation should be higher, 10 per cent believed their compensation should be between 0 10 per cent higher, 47 per cent believed it should be between per cent higher, 27 per cent believed it should be between per cent higher, 7 per cent believed it should be between per cent higher and 4 per cent believed it should be between per cent higher. The remaining 5 per cent of respondents believed their compensation should be between 51 per cent to greater than 100 per cent higher. These numbers are virtually identical to the 2010 results. Perceived relative importance of factors Respondents were asked to rank the importance of the following nine factors as Very Important, Somewhat Important, Not Very Important or Not Important at All in determining compensation: 1. Originations; 2. WAR; 3. Billable hours; 4. Realization rate; 5. Management responsibilities; 6. Seniority; 7. Cross selling; 8. Good citizenship; and 9. Non-billable hours. Approximately 1,961 respondents answered these questions. Below is an overview of the main points which emerged from these questions: Of the nine enumerated factors, originations had the highest percentage (74 per cent) of Very Important ratings, followed by WAR (59 per cent) and billable hours (40 per cent). The next highest factor was realization rate at only 26 per cent. Not surprisingly, non-billable hours once again received the lowest number of Very Important ratings, at just 1 per cent. This was the same general pattern of responses seen in the 2010 survey. However, while the originations and WAR numbers remained fairly constant (76 per cent and 58 per cent, respectively, in 2010 versus 74 per cent and 59 per cent, respectively, in 2012), the percentages for billable hours and realization rate both fell sharply (57 per cent and 32 per cent in 2010, versus 40 per cent and 26 per cent, respectively, in 2012). Perceived most important factor versus preferred most important factor Originations was, once again, the most frequently cited perceived most important factor, receiving 65 per cent of all responses. Trailing far behind originations were WAR and billable 5

8 Partner compensation: An in-depth survey by Major, Lindsey & Africa hours, at 21 per cent and 8 per cent, respectively. No other factor received more than 2 per cent. These responses are virtually identical to the percentage breakdown seen in the 2010 survey. Originations and WAR also received the highest percentage of should be most important responses, with 58 per cent and 25 per cent, respectively. Cross-selling once again came in third with 5 per cent of the responses, just edging out billable hours (4 per cent), good citizenship (3 per cent) and realization rate (2 per cent). Perceived change in importance of factors Respondents were asked whether there has been a change in the importance of various factors in determining compensation: Of the 1,951 respondents to this question, 44 per cent believed that there had been a change, 37 per cent felt that there had not been a change, and 19 per cent were not certain. These results are generally consistent with the 2010 survey (41 per cent, 41 per cent and 18 per cent, respectively). When asked to name those factors which had become more important, 55 per cent cited originations, up significantly from 24 per cent in WAR, billable hours and realization rate also all increased dramatically, climbing to 32 per cent, 31 per cent and 27 per cent, respectively, up from 14 per cent, 21 per cent and 7 per cent, respectively, in The results should also give senior partners more reasons for concern, as 52 per cent of all respondents said seniority was becoming less important, up from 32 per cent in And, in a telling blow for law firm culture, 45 per cent and 36 per cent of respondents, respectively, cited good citizenship and non-billable hours as factors that were also becoming less important, up from 11 per cent and 7 per cent, respectively, in Desire for change in compensation methods Out of the respondents, 67 per cent said they would like to see a change in compensation methods, 20 per cent did not desire any changes and 14 per cent could not say. These results generally track the 2010 survey. Of the 1,332 respondents who were in favor of change, their suggested (and sometimes contradictory) changes once again included: Increased transparency; More recognition for good citizenship and team work; More appreciation for cross-selling; A change in the emphasis on originations; Less emphasis on billable hours/working attorney receipts; A change in the value placed on firm management; A change in the emphasis on seniority; More consideration for non-billable hours; Less cronyism; and Reducing compensation of non-performing lawyers faster. Predictions for the 2014 partner compensation survey We believe that many of the trends evidenced in our 2012 Partner Compensation Survey will continue in 2014, and that many of the disparities in compensation and compensation 6

9 satisfaction will also continue, if not widen, in 2014, especially among equity partners and non-equity partners. References 1. Available from: media/files/allegis/mlaglobal/partner%20 Compensation%20Survey/2012/thereport.pdf. Note: MLA will be launching its 2014 survey in the spring of It is important to note, however, that the averages described in this section to some degree hide the effects of outliers in various segments. For example, while the disparity in average compensation between open and closed system partners is quite pronounced, when adjusted for relative originations the differences in compensation are smaller than the averages would suggest. 3. This data is included in Appendices IX XI of the complete report. 7