Welcome to the Big Law Business Section on the evolution of the legal market written by me, Roy Strom. Today we look at how an increase in profits alters the psyche of Big Law associates. Register to get this column delivered to your inbox on Thursday mornings.
Managing partners of large law firms often say that their job is to grow their partners’ profit pool. On this measure, most have done a fantastic job over the past couple of years.
Maybe too fantastic.
The profits of some large law firms have grown so rapidly that some partners are beginning to wonder about their future: how long will it take for them to continue working?
In companies where profits haven’t grown as quickly, partners are more tempted than ever to move, looking to cash in on record pay elsewhere.
“It’s a new phenomenon,” said Suzanne Krane, San Francisco partner of recruiting firm Macrae Inc. “Will we see people retiring sooner? I think we will. They say they will.
The new calculation is driven by an unexpected increase in earnings over two years. I wrote last week that the average AmLaw 100 partner could earn about $460,000 more in profits over the past two years than they would have if longer-term growth trends continued.
In the most successful companies, the numbers are more staggering. I reported earlier this year that some Kirkland & Ellis partners made $20 million last year. Although still rare, the number of eight-figure salaries in Big Law has increased over the past two years, recruiters said. Some partners don’t need to move to double their salaries, recruiters said.
Consider Latham & Watkins, whose The American Lawyer reported this week that earnings per partner rose 26% to $5.7 million last year. This is on top of earnings growth of 20% last year. Over the past two years, Latham’s average financial partner has made $10.2 million in profit, according to data from AmLaw.
The partners would have earned $8.3 million over the past two years if Latham’s earnings had instead grown at the company’s more “modest” seven-year average of 6.6%, according to AmLaw data. .
The pandemic-fueled spike in legal work and cost-cutting led to what might be called an earnings “excess” at Latham of more than $1.9 million per partner over two years. A similar calculation at Paul Weiss Wharton Rifkind & Garrison shows the partners earned about $1.4 million more than long-term growth trends would have expected. Paul Weiss’ earnings per partner reached nearly $6.2 million last year, AmLaw reported.
These companies are unlikely to be outliers.
If profits per partner increased by 20% across the board last year, there would be almost 20 law firms where the average partner would have earned $1 million more than if profits had increased by 8%. in each of the past two years. According to data from AmLaw, there were more than 4,100 associates at these firms in 2020.
Owen Burman, segment manager for Wells Fargo Private Bank Legal Specialty Group, said he knows a partner who pulled out of a Big Law partnership this year, choosing to live off his wife’s salary.
“After a big year of windfall, some partners may decide it’s just not worth it,” Burman said. He joked that the retirement would only last as long as Tom Brady is away from football. “I don’t know if it will be a 40-day retreat in this company. But it’s certainly tempting after a good year.
For every partner tempted to leave, as many might be motivated to stay for the chance to build generational wealth.
It’s like a version of Newton’s third physical law: every action has an equal and opposite reaction. As money moves to the extremes, so does the decision-making it compels.
Krane, Macrae’s scout, said she helped a Bay Area partner double his pay with a lateral move in the past two years. The partner had grown up in poverty and the first thing she did with her new pay was “trick” a Mercedes Sprinter van to travel with her family, Krane said.
The move changed his family’s trajectory of generational wealth, the partner told Krane.
David Walden, New York-based managing director of staffing firm EP Dine Inc., said increased profitability has led to more partners checking their value in the side market. And while those considering early retirement or trying to build a generational legacy remain a small subset of Big Law’s partners, it’s a growing consideration.
“It was a vocabulary and a discussion that existed over the past two decades in conversations with partners, but it was much more unique,” Walden said of early retirement or wealth building. “Now it’s increasingly becoming part of a Big Law partner’s vocabulary.”
worth your time
On litigation funding: US litigation finance firms committed $2.8 billion to new deals last year, according to an industry survey by Westfleet Advisors. That’s an 11% increase from a year ago, and much of it was due to increased interest from AmLaw 200 companies.
On Big Pharma Paydays: Top lawyers at Pfizer Inc., Abbott Laboratories and AbbVie Inc. collectively earned about $26 million in total compensation last year, reports Brian Baxter.
On major legal regulations: Morrison & Foerster has settled allegations brought by two female lawyers alleging the firm marginalized, denied advancement and abused women because of their gender, pregnancies and maternity leave, reports Patrick Dorrian.
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