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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. See, “Changing Compensation Strategies Put Partners Under Pressure,” The American Lawyer (Feb. 27, 2017). 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. See, http://bit.ly/2mnQtlu.
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 the firm average, while the most commercially productive partners receive three times the firm average — from one-third to three times the firm average is a 9-1 ratio of top to bottom. I should note that here, and in what follows, that 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. See, “Partner Compensation By the Numbers,” The American Lawyer (March 1, 2017).
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. See, “Podcast: What Firm Comp Systems Are Really Rewarding,” Law.com. This variation in value is reflected in the compensation of the professionals. There are few professional markets that are unconstrained and transparent. One is that of British premier league soccer players (U.S. sports markets are distorted by league minima, restricted free agency, etc.). The table above shows the compensation ratios of the teams with the highest total wages. What you see is a broad range, but none has a ratio below 12-1.
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