Tuesday, March 14, 2017
American Lawyer, Is Your Firm's Partner Comp Spread Too Narrow?:
It is fast becoming an imperative for elite firms to widen the range of their partner compensation. Too narrow a range allows competitors with wider ranges to lure away the most commercially successful partners. We saw this in London when the U.S. firms arrived and undid the elite London firms’ lockstep models. We are seeing this increasingly in New York where firms like Kirkland & Ellis, who reportedly moved recently to a ratio of the compensation of their highest- to lowest-compensated partners of 9-1, pose a renewed threat to old-line firms with narrow, 3-1-type ratios.
There are a number of reasons to believe that a compensation range of about 9-1 is consistent with the range in economic contribution of individual partners’ practices and is thus the range a firm’s compensation must reflect to avoid having its partners be cherry picked by others. One is that 9-1 is consistent with what I’ve seen at elite professional services firms as a consultant—the rule of thumb I had developed was that newly-promoted (and hence lowest-comped) partners earned about one-third of firm average while the most commercially productive partners receive three times firm average—from one-third to three times firm average is a 9-1 ratio of top to bottom. I should note that here, and in what follows, the ratio I refer to is that between the average compensation of the top and bottom deciles of partners by compensation, and not of the highest- and lowest-compensated individual partners.
The fundamental driver of wide compensation bans is that, even among teams of elite global professionals, there is variation in the intrinsic value of the roles they play, how well they play them, and where individuals are in their careers in terms of their bargaining power. ...
Going from a narrow to a wider compensation range is challenging at many levels. Not the least is that it creates winners (those who earn more) and losers (those who earn less). Chart 1 shows the partner compensation distributions at two model firms. Note that the distribution of partner compensation is not modeled as a symmetrical bell curve but rather as a skewed (technically a log-normal) distribution. This is consistent with the many partner compensation distributions I have seen. The curves on Chart 1 show the distributions for firms with the same average partner compensation of $2 million, but with two different ratios of high-to-low compensation—3-1 and a 9-1 ratios. What you see is that as you go from a 3-1 to the 9-1 ratio, and the compensation of partners at the high end goes up (A), the compensation of the bulk of partners has to go down (B) to offset the increases.