Now in Legal Rebels:
Posted Mar 26, 2005 03:42 am CST
Irwin M. Alterman is a star in his 35-lawyer firm. He’s been practicing law for 40 years and still works long hours and weekends, both bringing in business and grinding out work.
And no small part of his reason for staying around after 15 years with Kemp, Klein, Umphrey, Endelman & May in the Detroit suburb of Troy, Mich., is how the firm pays him and recognizes his efforts. “There is zero subjectivity,” says Alterman, who almost certainly would have no problem moving his practice to another firm if he wanted.
Among the 21 partners, known as “A” shareholders, monthly report cards reveal down to the third decimal point what each added to the firm’s profitability. Points are based on two factors: getting the business and doing the work, with the latter accounting for slightly more.
Alterman likes the system. “The only subjective element would be if you were sick for half the year, and we make allowances for that.”
Whatever the universe and solar system, from the megafirms down to minishops, there is a common problem in this age of free agency: How do you keep the stars without ticking off or demoralizing everyone else?
The easy answer is to say that you throw money at the stars and hope the others understand why. Money is important, though recognition and advancement, particularly in larger firms, also loom large. In a smaller firm like Alterman’s, it’s easier to blend the three.
As many law firm partnerships have become temporary, rather than career long commitments among like minded lawyers, the stars have shone brighter. Some with lots of smarts and books of business are like today’s professional athletes, moving along to the next team for the next big contract.
As a result, pay systems have changed. In the past, little was done to reward the superstars.
Compensation systems were “very democratic and spread the wealth equitably,” says James W. Jones, who was managing partner of Washington, D.C.’s Arnold & Porter from 1986 to 1995 and now is a consultant to law firms with Hildebrandt International. “That meant having people at the top who could command more in the market, and there was no way to pay them.” At the same time, other lawyers were locked into compensation levels that were set too high during periods when firms were immensely profitable. That has driven most large law firms to two tier partnerships as well as to more subjective compensation systems with committees looking behind the numbers to determine where credit is due.
Implicit in such an arrangement is some emphasis on eat what you kill. Though not abandoning that entirely, the recent trend is toward collaboration, with some stars getting more when they work their magic in areas the firm deems strategic, which would be part of the behind the numbers subjectivity.
Pillsbury Winthrop, the San Francisco based firm with about 700 lawyers, had been developing a kind of star system with rainmakers getting the biggest rewards when the money was divvied up. Then, about six years ago the firm adopted a credit system for partner profit shares that emphasizes strategic growth areas and cross business development. The team based system tends to institutionalize clients rather than have them identified with one lawyer.
“We had to get the biggest rainmakers to buy into this because it flattens out the peaks and valleys,” says Mary B. Cranston, the firm’s chair.
“The distribution is shared more broadly among partners. Maybe it’s because we’re an old firm, and most rainmakers are homegrown, that they were willing to go along.” With strategic goals and broad acceptance, Cranston says, “You can compensate and promote star lawyers in a context in which everyone knows what’s happening and on a gut level everyone is OK with it.”
That kind of system helps keep a firm from becoming hostage to a star who demands, for example, a firm leadership position for which he or she is not suited, or some other such perk, and threatens to leave with a $5 million book of business.
“We’ll bring somebody up short around here if they refer to a particular client as ‘my client,’ ” says John B. Frisch, chair of Baltimore’s 180 lawyer Miles & Stockbridge. “Someone will say, ‘Whose client?’ ”
Like Pillsbury, Frisch’s firm emphasizes a team approach and has client relations managers. The goal is to institutionalize client contacts within the firm and not focus on stars.
“We’ve really tried to move away from the notion that a rainmaker or a book of business gets a leadership position,” says Frisch. “We say we do best as a firm if everyone does what they do best.”
Stars are duly compensated and otherwise rewarded, but they can’t expect a leadership position if they aren’t suited for it. Even Baltimore native Babe Ruth, to his chagrin, was rebuffed when he wanted to manage a major league baseball team.
As law firms have recognized more and more that they are businesses, they still know that culture and value systems are unique and determinative. And for that reason, stars sometimes feel that they have no choice but to move on.
In January 2000, New York’s Rogers & Wells merged with London’s Clifford Chance, a first of its kind blending of major firms from different countries. They used a temporary patch to smooth over the difference between Clifford Chance’s lockstep pay system and the emphasis on rainmakers at Rogers & Wells. The stars in this country would be paid above lockstep for a while.
But a long term fix geared to the more competitive U.S. market never came about. More than 30 partners in New York and Washington, D.C., have left, many of them because of the compensation system.
“In my case, I was fairly paid–going off the lockstep,” says James N. Benedict, a 55 year old litigator and acknowledged star who had been on Rogers & Wells’ executive committee and was a booster for the merger. “But there wasn’t a system that would allow us to attract and retain others.”
Last October, Benedict left the firm to join Milbank, Tweed, Hadley & McCloy. Though he is a star, he also knows he became one in part by building a litigation shop of many people over many years.
“Without that, you can’t compete in the more competitive U.S. market,” he says.