The Foster Group Featured in The American Lawyer on how "Lengthy Pay Guarantees Were Already the Exception, And Could Be Getting Rarer"
/Lengthy Pay Guarantees Were Already the Exception, And Could Be Getting Rarer
Lengthy, multiyear guarantees could be becoming a thing of the past.
Compensation guarantees aren’t unusual for partners making lateral moves. But lengthy, multiyear guarantees are, and they might be getting rarer, according to some legal industry recruiters.
Only a little more than one in 10 lateral partners in a survey published this year said they’d received pay guarantees for more than two full years. And, industry observers say, while such agreements can offer some certainty and help each party get acclimated to the other, they can also signal a lack of buy-in, or in a worst-case scenario, foster resentment from other partners.
Some guarantees are more ironclad than others. While there are those that do set specified amounts - one recruiter this week said she’s seen guarantees for as low as $3 million and as high as $12 million - often they’ll spell out minimum point levels or floor amounts aimed at insulating new laterals from the potentials risks of transporting their practice on an interim basis.
Firms from the most profitable to the more middle-of-the-road Am Law 200 firms will offer guarantees. Paul, Weiss, Rifkind, Wharton & Garrison has reportedly made “handshake” deals and “non-guarantee guarantees” for how much incoming partners can make, for instance, factoring in certain productivity targets and the firm’s profitability. A trio of recent laterals there from Kirkland & Ellis could stand to make over $20 million in annual compensation.
The type and amount can also depend on the practice area and how compelling a partner is, recruiters said.
But “it’s rarely just a hard-and-fast guaranteed number. We tend to see a lot more arrangements structured as a floor, for instance. It’s not setting a ceiling on what someone can make. It’s really kind of meant to give a partner who is lateraling some kind of comfort in making a move to a new firm and kind of building their business,” said Scott Yaccarino, co-founder and partner of Empire Search Partners in New York, in an interview this week.
Yaccarino added that informal agreements at the high end of the market can also amount to firms just being transparent about their system and expectations, saying there are those “that might say, ‘Hey, based on how we operate, the odds of anyone going down (significantly) are exceedingly low, so we don’t have to give you a guarantee because it’s just baked into the DNA of our firm.’”
Alisa Levin, principal at Greene-Levin-Snyder Legal Search Group, agreed that while some firms won’t refer to compensation guarantees as such, “it’s effectively a guaranteed amount. It may not be an exact number, but it’s something that one could bring to the bank.”
She said she’s seen more specific guarantees ranging from $3 million to $12 million a year. Other firms, meanwhile, refuse to offer them, she said, “because they say, ‘we’re taking a risk, you have to share in the risk,” Levin added.
Such stipulations are, of course, subject to the ebbs and flows of the market. Michelle Foster, of The Foster Group Legal Search, said she “commonly” sees guarantees for specific amounts of money - but they depend on a partner’s level of originations, plus things like their billing rates, projections and track record.
She said someone who has a $3 million practice might get offered somewhere around $1 million total, but how that’s structured varies from firm to firm. A firm might offer a base of $950,000, for instance, plus a discretionary bonus, or a $600,000 base with step-ups for hitting certain targets.
“Typically, in this market, you tend to see firms want at a minimum kind of $2 million in originations. But then you have smaller firms or middle-market firms who maybe are happy with a million or a million and a half,” Foster said. “And then you see other firms for whom $2 million doesn’t do it at all. But for a $4 million offer (in compensation), you’re probably talking about a practice of probably $12 to $16 million, something like that.”
Regardless of the numbers, those kind of lengthy, multi-year agreements aren’t as common, recruiters said.
That was one of the conclusions in the latest Lateral Partner Satisfaction Survey from recruiting firm Major, Lindsey & Africa, which found that guarantees, “while routine, continue to be of limited duration.”
The data showed a slight uptick in the percentage of partners who received pay guarantees, from 74% in 2020 to 78% now. Most of those partners (43%) had their compensation guaranteed for the remainder of the year plus the following year, while 23% had some kind of assurance only for the remainder of the year. Nine percent said their guarantees were for the remainder or “stub” year plus the next two years; only 2% said the remainder, plus more than two years after.
Those figures for multi-year guarantees are in line with results from the 2020 version of the same survey. And while those numbers were up slightly from where they were in 2014 (when 7.4% of laterals partners said they received a guarantee for the balance of the rest of the year plus the next two years), that version also concluded that “with very rare (and well-publicized) exceptions, the era of the five-year guarantee has largely ended.”
Yaccarino agreed he’s not seeing as many of those stipulations.
“What the market has been recently - we haven’t seen as much of that happening,” he said.
Foster said she has worked with a partner who negotiated a three-year deal, and then assuming they hit certain metrics, another three years after that. She also had a candidate who wanted a 5-year guarantee “and would not move” unless they got it.
“But the standard is two years and typically it’s a little less than that,” she said.
Guarantees can cut both ways, too. While they can be a stabilizing force and a draw for potential laterals, law firms may not want new partners to think their platform is unstable, or want to create arrangements that “go against the grain” of what it means to be an equity partner, rising and falling with the rest of the firm.
“My main concern from the point-of-view of the person that’s getting the guarantee is, you want to blend into the firm,” Levin said, adding, “you’re moving there because you have confidence in the firm.”
For partners, too, a guarantee beyond one or two years can “signal to the firm that you don’t have the confidence they might want you to have in being able to bring over your practice or build up a significant one on the platform,” said Jeff Lowe, founder of the consulting firm Jeffrey Lowe Partners.
He also noted that if a guarantee for a new partner contains a specific dollar figure, that partner could miss out on extra pay if the firm performs better-than-expected and beats its budget.
“So, guarantees aren’t always thought of as a great thing for the person that’s getting it, because of those things,” Lowe said. “Particularly the sense that - what is the concern that you need three or four years guaranteed?”
The MLA lateral partner satisfaction survey further concluded that there was no strong correlation between the presence or duration of a compensation guarantee and laterals’ overall satisfaction with the firm.