Typically, the
changes needed to align law firm remuneration with a more corporate model will
mean that for the first time lawyers will have both short term (salary and annual
cash bonus) elements of their remuneration, and a much longer term component in
the form of capital appreciation and/or long term incentive plans. In theory, there is nothing wrong with this,
and as long as they can get themselves comfortable with the idea of leaving
profits within the business in order to achieve long term capital growth, then
all should be well. In my experience,
however, the reality can be very different.
It can be extremely hard for people who have been used to high levels of
regular income to adjust to much lower salaries (particularly when the
inevitable – if erroneous - comparisons are made with the widely reported
Profit-Per-Equity-Partner statistics from those firms which continue with the
income-stripping model), and there seems to be a natural tendency for people to
value the equity component of their remuneration far less highly than the short
term cash element, because of fears over the long-term robustness of share
valuations and the inherent uncertainties over achieving longer term targets. The recent market volatility that has been
experienced will have done nothing to allay such fears.
Another issue is
the knotty problem of how to set base salaries.
This is not a simple thing to do in an industry which has not typically
been salaried in the past, and therefore independent data are scarce. Private
practice lawyers generally do not readily accept comparisons with in-house
lawyer remuneration, as they see the roles as fundamentally different, and so
although it is relatively easy to benchmark salaries with in-house roles, this
is likely to prove somewhat contentious.
However, getting the base salary right is critically important. If it
is fixed too high, the net profit of the business (and therefore the share
value) will be depressed and external investors will be unhappy. A high base salary may also give lawyers too little
incentive to perform and achieve the salary related elements of the job, and
can encourage an “employee” as opposed to an “owner” mentality. If fixed too low, it can make recruitment very
difficult, and encourage an aggressive dog-eat-dog culture. It can also lead to a situation where although
bonuses may theoretically be discretionary, in practice they have to be paid in
order to retain the best talent even in a downturn. This
dynamic was experienced by many of the investment banks which began using
corporate as opposed to partnership remuneration models.
These issues are
not insoluble, but law firms who are seeking to take external investment need
to have a very transparent debate about how remuneration will be structured,
and to set expectations accordingly. If
they do not, then they are storing up inevitable problems for the future
For further
information please contact me at np@mp-csl.com
.
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