Compensation Contradictions

[Editor's Note: Our July edition featured a roundtable discussion on financial problems some law firms are facing in connection with the forthcoming retirement of baby boomers. That discussion focused on unfunded obligations. Anthony Lin here explores numerous other important dimensions of this important issue. While putting faces on some of the issues, he also delineates the structural tensions that put easy resolutions beyond reach.]

For decades, law firms have depended on the orderly retirement or slowing down of senior partners to make room in the hierarchy for rising stars.

The mandatory retirement and similar policies that firms have wielded to effect such transitions are now under threat. The U.S. Equal Employment Opportunity Commission presented a clear legal challenge earlier this year when it sued Sidley Austin Brown & Wood, alleging age discrimination in the firm's dismissal and demotion of older partners.

But an even greater challenge to firm retirement policies may be posed by the growing number of older partners who feel they have remained highly productive and insist on holding onto privileged positions, either by negotiating special arrangements or by decamping to other firms.

An ongoing suit by a top partner in the New York office of Chicago-based Winston & Strawn offers a rare glimpse of the challenges facing firms struggling to accommodate both aging rainmakers and the younger partners eager to take their places at the top of the compensation scale.

Still a partner at Winston & Strawn, Anthony F. LoFrisco, 73, sued the firm in 2003 in Manhattan Supreme Court for allegedly breaching a special agreement that he says would have allowed him to avoid “decompression,” the process at the firm by which most partners' compensation was reduced every year after reaching age 65.

Through decompression, LoFrisco claims his compensation decreased dramatically even as the billings for which he was responsible rose equally dramatically. In 2002, he claims he originated around $10 million and received $2.3 million in compensation. The following year, he says his billings rose to almost $13 million, but his pay dropped to $1.3 million.

In 2004, LoFrisco claims he had billings of almost $19 million, a total for which he says he should have received about $4.8 million in compensation. Instead, the executive committee awarded him $350,000.

LoFrisco is now seeking to recover the amounts he says he is due.

Neither LoFrisco nor his lawyer, Michael Carlinksy of Quinn Emanuel Urquhart & Hedges, would comment on the case. Winston & Strawn and its lawyer, Philip Forlenza of Patterson Belknap Webb & Tyler, also declined comment.

Older Rainmakers Recruited as Laterals

Leslie D. Corwin, a partner at Greenberg Traurig specializing in law firm disputes but not involved in LoFrisco's case, says decompression provisions are a common feature of firm partnership agreements. But he says firms are increasingly willing to cut special deals with their older rainmakers, who have also become prized targets for lateral recruitment.

“People are living longer, staying active longer. It's having an effect.”

Indeed, older partners have been among the highest-profile lateral hires by firms in recent months.

Barry Bryer, 58, recently left Wachtell, Lipton, Rosen & Katz, the most profitable firm in the nation, to join the New York office of Latham & Watkins. He cited Wachtell's mandatory retirement age as the reason for his departure.

Older partners are in demand in part because older clients are sticking around as well. Citigroup Chairman Sanford Weill, 72, recently sought to step down from his position, not to enjoy retirement but to launch a new financial enterprise. And media mogul Sumner Redstone, 82, only just announced he would step down as chief executive officer of Viacom Inc., though he would remain as chairman.

Partners who are contemporaries of such business titans have recently been highly sought after, a trend that Jonathan Lindsey, a legal recruiter with Major, Lindsey & Africa, noted was the reverse of the Internet boom of the late 1990s.

“Back then, everyone wanted 35-year-old partners who could talk to 25-year-old CEOs,” he says.

Though firms in the past had a strong preference for partners in their 40s and early 50s, says Lindsey, few now seem to have qualms about hiring partners past traditional retirement age — provided the partners can still lay claim to decent books of business.

$100 Million in Billings

For many years, LoFrisco's book of business was more than decent. He claims he has been responsible for over $100 million in billings since he joined Winston & Strawn laterally in 1991 from the now-defunct Olwine, Connelly, Chase, O'Donnell & Weyher, giving him the second-highest total for any partner in that period.

General Electric Co. was the most important of LoFrisco's client relationships, and he claimed a close personal relationship with former GE Chairman Jack Welch.

LoFrisco says Winston & Strawn's special agreement with him, drafted in 1994, contained a formula meant to guarantee he received compensation at least equal to 13% of the business he originated, a proportion meant to rise as the firm's profitability increased.

The agreement was intended to expire in 2001, when LoFrisco turned 67, but he claims it was amended that year because he continued to originate a large amount of business. The amendment allegedly required the firm to continue to calculate his pay by the same formula and pay him a bonus designed to offset his losses through decompression.

Such an agreement would not be that unusual for major rainmakers.

Stephen Fraidin, a top mergers and acquisitions partner who left Fried, Frank, Harris, Shriver & Jacobson in 2003 to join the New York office of Kirkland & Ellis, was 64 when he made the move, prompting speculation that he had faced mandatory retirement at Fried Frank.

But a source familiar with the situation at Fried Frank says impending retirement was not an issue in Fraidin's decision because he, as well as another senior partner, Arthur Fleischer, had negotiated special arrangements with Fried Frank that would let them maintain their high level of compensation well into their 70s. The source says the arrangements had caused some resentment among other partners.

The resentment often centers on the belief that older partners are unfairly maintaining a stranglehold on client relationships and business origination credit that could just as easily go to other partners. Corwin notes that firm partnership agreements frequently obliged senior partners to gradually hand over client relationships to younger partners.

LoFrisco's suit states that Winston & Strawn's aim in reaching an agreement with him was to induce him to stay at the firm and “institutionalize” his clients there by introducing them to other partners.

Winston & Strawn managing partner James Neis and compensation committee chairman Thomas Reynolds allegedly cited complaints from younger partners with large billings as well as high billable hours when they told LoFrisco in May 2002 the firm would no longer continue to compute his compensation in the same manner.

The suit states that this discussion followed by a few months the retirement of Welch at GE, implying that the retirement affected the firm's perception of LoFrisco's value.

In his suit, LoFrisco acknowledges that his value to the firm does not lie in the number of hours of work he is billing. LoFrisco claims he protested the firm's alleged repudiation of the 2001 amendment but also offered to bill 1,500 hours a year that he would otherwise have spent on non-billable client development. Reynolds allegedly replied that that would not be a good idea for “a man of [LoFrisco's] age.”

Client Relationships

Employment lawyer Pearl Zuchlewski of Goodman & Zuchlewski says transitioning client relationships among partners is a frequent source of conflict within firms, exacerbated by frequent turnover on the client side. “In-house counsel used to be a sinecure,” she says. “Now in-house people change so rapidly.”

She notes that partners also had a harder time maintaining client relationships as corporations insisted on strict policies for retaining counsel.

Indeed, LoFrisco's chief client, GE, has been a leader in implementing bidding processes for legal service providers and otherwise forcing firms to compete with one another on price and other factors.

An older partner at a top firm who asked to remain unnamed says such disputes are the firms' fault. He says most tried to placate younger partners by dangling a carrot of higher compensation as they aged. But firms then tried to lower older partners' compensation as quickly as possible.

In that regard, he said, older partners are seeking to vindicate their rights in a manner no different than their younger counterparts. Moreover, he notes that the increased number of active and productive older partners still left a large number who did decline in productivity with age.

It is partners like these, unable to negotiate special exemptions, who are at issue in the EEOC's suit against Sidley Austin.

The EEOC began investigating Sidley Austin in 2000, shortly after the firm demoted to counsel status more than 32 partners. The agency contends that virtually all of those lawyers, most of who were in their late 50s and early 60s, were involuntarily downgraded because of their age. The EEOC says its suit, filed in federal court in Chicago, is on behalf of other partners forced to retire, or demoted or expelled under similar circumstances.

At issue in the closely watched case is whether partners at large firms run completely by centralized, unelected executive committees should be considered employers exempt from federal anti-discrimination laws or employees protected by such laws.

The suit could result in millions of dollars in back pay to former Sidley Austin partners. And it could force most large law firms to adopt radically different management structures and practices if law firm partners are found to be “employees” under federal law.

But even if a firm's partners are found to be employers for the purposes of EEOC scrutiny, firms' increased willingness to accommodate older rainmakers portends more disputes.

“Anytime you make exceptions, you open yourself to challenges,” says Zuchlewski.

[Editor's Note: Our July edition featured a roundtable discussion on financial problems some law firms are facing in connection with the forthcoming retirement of baby boomers. That discussion focused on unfunded obligations. Anthony Lin here explores numerous other important dimensions of this important issue. While putting faces on some of the issues, he also delineates the structural tensions that put easy resolutions beyond reach.]

For decades, law firms have depended on the orderly retirement or slowing down of senior partners to make room in the hierarchy for rising stars.

The mandatory retirement and similar policies that firms have wielded to effect such transitions are now under threat. The U.S. Equal Employment Opportunity Commission presented a clear legal challenge earlier this year when it sued Sidley Austin Brown & Wood, alleging age discrimination in the firm's dismissal and demotion of older partners.

But an even greater challenge to firm retirement policies may be posed by the growing number of older partners who feel they have remained highly productive and insist on holding onto privileged positions, either by negotiating special arrangements or by decamping to other firms.

An ongoing suit by a top partner in the New York office of Chicago-based Winston & Strawn offers a rare glimpse of the challenges facing firms struggling to accommodate both aging rainmakers and the younger partners eager to take their places at the top of the compensation scale.

Still a partner at Winston & Strawn, Anthony F. LoFrisco, 73, sued the firm in 2003 in Manhattan Supreme Court for allegedly breaching a special agreement that he says would have allowed him to avoid “decompression,” the process at the firm by which most partners' compensation was reduced every year after reaching age 65.

Through decompression, LoFrisco claims his compensation decreased dramatically even as the billings for which he was responsible rose equally dramatically. In 2002, he claims he originated around $10 million and received $2.3 million in compensation. The following year, he says his billings rose to almost $13 million, but his pay dropped to $1.3 million.

In 2004, LoFrisco claims he had billings of almost $19 million, a total for which he says he should have received about $4.8 million in compensation. Instead, the executive committee awarded him $350,000.

LoFrisco is now seeking to recover the amounts he says he is due.

Neither LoFrisco nor his lawyer, Michael Carlinksy of Quinn Emanuel Urquhart & Hedges, would comment on the case. Winston & Strawn and its lawyer, Philip Forlenza of Patterson Belknap Webb & Tyler, also declined comment.

Older Rainmakers Recruited as Laterals

Leslie D. Corwin, a partner at Greenberg Traurig specializing in law firm disputes but not involved in LoFrisco's case, says decompression provisions are a common feature of firm partnership agreements. But he says firms are increasingly willing to cut special deals with their older rainmakers, who have also become prized targets for lateral recruitment.

“People are living longer, staying active longer. It's having an effect.”

Indeed, older partners have been among the highest-profile lateral hires by firms in recent months.

Barry Bryer, 58, recently left Wachtell, Lipton, Rosen & Katz, the most profitable firm in the nation, to join the New York office of Latham & Watkins. He cited Wachtell's mandatory retirement age as the reason for his departure.

Older partners are in demand in part because older clients are sticking around as well. Citigroup Chairman Sanford Weill, 72, recently sought to step down from his position, not to enjoy retirement but to launch a new financial enterprise. And media mogul Sumner Redstone, 82, only just announced he would step down as chief executive officer of Viacom Inc., though he would remain as chairman.

Partners who are contemporaries of such business titans have recently been highly sought after, a trend that Jonathan Lindsey, a legal recruiter with Major, Lindsey & Africa, noted was the reverse of the Internet boom of the late 1990s.

“Back then, everyone wanted 35-year-old partners who could talk to 25-year-old CEOs,” he says.

Though firms in the past had a strong preference for partners in their 40s and early 50s, says Lindsey, few now seem to have qualms about hiring partners past traditional retirement age — provided the partners can still lay claim to decent books of business.

$100 Million in Billings

For many years, LoFrisco's book of business was more than decent. He claims he has been responsible for over $100 million in billings since he joined Winston & Strawn laterally in 1991 from the now-defunct Olwine, Connelly, Chase, O'Donnell & Weyher, giving him the second-highest total for any partner in that period.

General Electric Co. was the most important of LoFrisco's client relationships, and he claimed a close personal relationship with former GE Chairman Jack Welch.

LoFrisco says Winston & Strawn's special agreement with him, drafted in 1994, contained a formula meant to guarantee he received compensation at least equal to 13% of the business he originated, a proportion meant to rise as the firm's profitability increased.

The agreement was intended to expire in 2001, when LoFrisco turned 67, but he claims it was amended that year because he continued to originate a large amount of business. The amendment allegedly required the firm to continue to calculate his pay by the same formula and pay him a bonus designed to offset his losses through decompression.

Such an agreement would not be that unusual for major rainmakers.

Stephen Fraidin, a top mergers and acquisitions partner who left Fried, Frank, Harris, Shriver & Jacobson in 2003 to join the New York office of Kirkland & Ellis, was 64 when he made the move, prompting speculation that he had faced mandatory retirement at Fried Frank.

But a source familiar with the situation at Fried Frank says impending retirement was not an issue in Fraidin's decision because he, as well as another senior partner, Arthur Fleischer, had negotiated special arrangements with Fried Frank that would let them maintain their high level of compensation well into their 70s. The source says the arrangements had caused some resentment among other partners.

The resentment often centers on the belief that older partners are unfairly maintaining a stranglehold on client relationships and business origination credit that could just as easily go to other partners. Corwin notes that firm partnership agreements frequently obliged senior partners to gradually hand over client relationships to younger partners.

LoFrisco's suit states that Winston & Strawn's aim in reaching an agreement with him was to induce him to stay at the firm and “institutionalize” his clients there by introducing them to other partners.

Winston & Strawn managing partner James Neis and compensation committee chairman Thomas Reynolds allegedly cited complaints from younger partners with large billings as well as high billable hours when they told LoFrisco in May 2002 the firm would no longer continue to compute his compensation in the same manner.

The suit states that this discussion followed by a few months the retirement of Welch at GE, implying that the retirement affected the firm's perception of LoFrisco's value.

In his suit, LoFrisco acknowledges that his value to the firm does not lie in the number of hours of work he is billing. LoFrisco claims he protested the firm's alleged repudiation of the 2001 amendment but also offered to bill 1,500 hours a year that he would otherwise have spent on non-billable client development. Reynolds allegedly replied that that would not be a good idea for “a man of [LoFrisco's] age.”

Client Relationships

Employment lawyer Pearl Zuchlewski of Goodman & Zuchlewski says transitioning client relationships among partners is a frequent source of conflict within firms, exacerbated by frequent turnover on the client side. “In-house counsel used to be a sinecure,” she says. “Now in-house people change so rapidly.”

She notes that partners also had a harder time maintaining client relationships as corporations insisted on strict policies for retaining counsel.

Indeed, LoFrisco's chief client, GE, has been a leader in implementing bidding processes for legal service providers and otherwise forcing firms to compete with one another on price and other factors.

An older partner at a top firm who asked to remain unnamed says such disputes are the firms' fault. He says most tried to placate younger partners by dangling a carrot of higher compensation as they aged. But firms then tried to lower older partners' compensation as quickly as possible.

In that regard, he said, older partners are seeking to vindicate their rights in a manner no different than their younger counterparts. Moreover, he notes that the increased number of active and productive older partners still left a large number who did decline in productivity with age.

It is partners like these, unable to negotiate special exemptions, who are at issue in the EEOC's suit against Sidley Austin.

The EEOC began investigating Sidley Austin in 2000, shortly after the firm demoted to counsel status more than 32 partners. The agency contends that virtually all of those lawyers, most of who were in their late 50s and early 60s, were involuntarily downgraded because of their age. The EEOC says its suit, filed in federal court in Chicago, is on behalf of other partners forced to retire, or demoted or expelled under similar circumstances.

At issue in the closely watched case is whether partners at large firms run completely by centralized, unelected executive committees should be considered employers exempt from federal anti-discrimination laws or employees protected by such laws.

The suit could result in millions of dollars in back pay to former Sidley Austin partners. And it could force most large law firms to adopt radically different management structures and practices if law firm partners are found to be “employees” under federal law.

But even if a firm's partners are found to be employers for the purposes of EEOC scrutiny, firms' increased willingness to accommodate older rainmakers portends more disputes.

“Anytime you make exceptions, you open yourself to challenges,” says Zuchlewski.