Georgina Dent Reporter

Georgina reports on the legal profession, management, marketing, diversity, retail and emerging businesses. Before joining BRW, she worked as a lawyer in a commercial firm.

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Law partners locked out of equity

Published 31 May 2012 03:46, Updated 04 June 2012 00:46

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Law partners locked out of equity

Nothing is more contentious in law firms than partners’ pay packets. In the highly competitive legal world, the top lawyers vie to make the most money. Twenty years ago the actual amount used to be a tightly guarded secret but now, thanks to increasing corporatisation of the profession, firms have become more open about their pay structures.

This has enabled professional services consultants The Edge International to release a survey of the compensation systems used by 263 law firms from the United States, Canada, Europe, the United Kingdom and Australia.

Co-author of the report Sean Larkan says the way partners are compensated around the world is becoming more uniform and that it’s getting harder to get into the full equity partnership as the number of true equity partners as a proportion of the partnership is falling.

“Globalisation means different systems are being moved from jurisdiction to jurisdiction,” Larkan says. “As models are being tweaked, they are becoming more homogenous around the world.”

There are two main ways that firms calculate their partners’ earnings. One is the traditional lockstep system that pays partners according to seniority, while the other is based on performance over a range of factors. Between these two extremes lie a swathe of systems that combine elements from both.

Whichever model a firm employs Larkan says it’s critical that it’s perceived to be fair by the partners. “Remuneration is probably the biggest cause of angst in professional service firms,” Larkan says. “That’s why it’s important to get it right.”

Because of the way law firms are structured, the system that determines how the business owners are paid dictates more than whether each partner can upgrade to a better holiday home.

“The criteria which are used to reward people have a huge impact on the firm’s culture because they encourage certain types of behaviour,” Larkan says. “If you just measure fee production, that’s what partners will be focused on so they won’t worry about marketing or their staff or their contribution to management.”

More firms in the UK, Australia and Europe are also adopting corporate style remuneration where partners receive a salary and a bonus based on performance as well as dividends based on the firm’s profitability.

“The different systems reflect what appears to be a fundamental difference in partnership culture,” Larkan says. “US and Canadian partners seem more willing to place their compensation in the judgment of others while UK, European and Australian partners prefer a pre-established set of criteria for at least part of their package.”

For partnerships that use performance-based remuneration, another pattern of cultural differences emerges. Australian and British lawyers are rewarded handsomely for astute business development and client management, while the personal performance of their American peers is the deciding factor when it comes to their stipend.

The proliferation of global law firms makes these cultural differences pertinent. Larkan says setting compensation methods in multi-jurisdictional firms can be problematic.

“Firms use alternative partnership structures to separate profit pools between jurisdictions,” he says. “However, we found the overwhelming preference was for all partners to share in a single firm-wide profit pool.”

Americans were the most vehement supporters with 99 per cent voting in favour of a uniform system, closely followed by 97 per cent of British partners and 92 per cent of Australians surveyed. If those figures are right, there will be no shortage of motivation come 2014 when the Ashurt partnership votes to combine their global profits into a single pool.

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