Hogan Lovells spat puts the spotlight on remuneration for law firm management teams

Law firm remuneration is always a controversial topic. 

For the firms which have stuck with pure lock-step arrangements there are often complaints that the system does not reward high performers well enough, or penalise those who rest on their laurels at the top of the lock-step. 

For firms which have introduced performance related pay, there are often fierce arguments regarding what type of contributions should be most highly rewarded (Is personal billing more important than nurturing a good pyramid of associates?  Is winning a new client for another part of the business more important than one’s own fee earning performance?  How do you deal with a star biller who won’t collaborate?).  But always up there amongst the hottest topics tends to be how to remunerate non-fee-earning roles, and particularly the senior management positions.

Most of the wrangling, though, tends to stay behind closed doors; lawyers are notoriously tight-lipped about money and don’t like to air their dirty laundry in public.  That is why it is somewhat surprising to have seen a relatively public spat within Hogan Lovells, whose new bonus system has provoked some quite public criticism from partners that the process is not sufficiently independent, that it over-rewards the international management committee (IMC) members, and that it has led to fee earners “hogging” client relationships and a consequent diminishing of the collegiate atmosphere within the firm. 

A number of partners (and ex-partners) have expressed dissatisfaction about bonuses complaining that only a small number of fee earning partners have been well remunerated.  This is hotly denied by the firm, who say that there is already an independent three-member compensation committee led by the Chairman, that IMC members are not involved in deciding their own bonuses, and that the allegation that it is IMC members who have received the largest bonuses are simply incorrect.   Whoever is right and wrong, this is not good publicity for the firm.

In boom times, of course, such unedifying squabbling is less common.  When there is plenty of largesse to distribute and most partners are seeing their total remuneration rise, then rebellion tends to be somewhat muted.  But Hogan Lovells, like many other firms in tough times, is facing decline in global revenues for 2012 of 1.9% and a 6% drop in average profits per equity partner.  That means of course that as a simple mathematical consequence the majority of partners are likely to see their total remuneration package decline, unless there is a cull in their numbers.   So when the spoils are more meagre, the jostling for position becomes much more noticeable, and in particular the contribution made by “the management” is (rightly) subject to more scrutiny.

Until relatively recently, law firms tended to have a very flat structure, and the managing partners were also expected to be fee earners. It was quite common to see them maintaining a significant client role, even in large firms, as the role of management was not seen as one which was particularly onerous.  Furthermore, those elected to senior roles were often drawn from the ranks of the star billing performers, and so their overall contribution to the success of the firm tended not to be questioned, despite the fact that the management role itself was not necessarily very highly valued.   As law firms have grown, often into multi-national businesses, then the management roles have in most cases become full time tasks, meaning that fee earning roles usually have to be relinquished.  But the esteem with which law firm management is held is still patchy.  Whilst those occupying have a tendency to view their roles as meriting higher remuneration that fee earners, as they are superior in the hierarchy, there are others who still see them as little more than glorified administrators.  Those who are pulling in the big fees in the here and now will often argue that it is they who are the life blood of firms, and they should be the most richly rewarded. 

So who is right and who is wrong?  There is no one simple answer to this, as no firm is exactly the same as another.  But I am always wary of remuneration systems which continue to reward management teams very richly when profits are falling.  A good management team can make a huge difference to the financial performance of a firm, even in a recession, by trimming resources to fit, or by ensuring that leverage is at its optimum, for example; whereas individual fee earners can make less impact.   To my mind, this means that the senior managers should be amongst the most highly rewarded when times are good, but should take the pain if profits are falling.  Fee earners, on the other hand, I would argue, should see less volatility in their total remuneration.

Having structurally high remuneration for senior management roles regardless of the overall profit performance of the firm leads to an unhealthy situation where star fee earners may be driven towards those roles in order to maximise personal reward.  Quite apart from the fact that there is little proven correlation between the ability to earn fees and the ability to undertake a complex management role, this remuneration situation is likely to lead to a draining of a firm’s best talent away from the vital task of fee earning.  Having a high degree of variability in management remuneration, on the other hand, will ensure that only those with a genuine talent for the role are likely to want to put themselves forward.