Beating a Dead Dewey Horse

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Although more than enough has been written about the impending demise of Dewey and the relative causes, I decided to go ahead and add my 2 cents to the dialog. 

A recent blog post on the subject caught my eye. It made the assertion that, “Whether it’s Davis’s earlier “10-to-1″ spread, the more recently reported “20-to-1,” or something in between, the income gap within equity partnerships has exploded throughout big law. That’s destabilizing.” The author goes on to say, “The gap results from and reinforces a failing a business model.”

I disagree with the assertion that a big partner comp spread is bad and argue the exact opposite. A gap is healthy, but only when properly spread. From the stories I have heard about Dewey, it did go overboard in lateral comp deals, essentially paying new partners more than they were worth. Or at a minimum, lateral partner comp was not tied to performance and value in a meaningful way, some times for 4 or 5 years.

This is not a spread problem, it’s a comp-to-value problem. 

Having some partners paid “as little as $300,000 a year, [while] other partners were pulling down $6 million or $7 million …” makes sense when partners are paid at their value level. Much like the AFA dialog going on, this is really a price-to-value problem. In a rational market, high value resolves to high price.

In my experience, a bigger problem for firms is having too narrow of a compensation spread. In these circumstances, you have partners paid at $1m who are more likely worth $500k. This scenario presents real problems for firms. Here the current $3m partner may actually be worth $5m. A firm has much more risk in losing the high-comp lawyer and her book of business, than they do losing 8 service partners being paid above their value.

Law firms need to reward their partners based in large part on their contributions to the bottom line. Partners who generate high levels of profit need to be paid at high levels of comp. Otherwise the Managing Partner’s nightmare of a partner exodus begins. And the first ones to leave are the ones you most want to keep. The last ones are the 8 noted above. 

IMHO – the Dewey lesson centers on over compensating laterals, divorcing comp from value. And it appears they did this on a significant scale, over investing in laterals as a growth strategy.

Is aligning comp-to-value a lesson the market will learn from this experience? Or will all the firms scrambling for Dewey laterals be destine to repeat history?

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Steven J. Harper said...

It's a bit more complicated. The two problems are related. Aggressive lateral hiring (the problem you identify) has contributed mightily to the enormous equity partner spreads within most big law firms (the problem you don't acknowledge). Both relate to the larger issue: a myopic focus on short-term metrics. When tackling "comp - to - value", be careful what you count as "value." Here's a link to a fuller discussion: http://thebellyofthebeast.wordpress.com/2012/02/15/the-lateral-bubble/

Toby Brown said...

Steven - Thank you for the comment. Beyond the disagreement on the 'spread' issue, I concur with you on the short-term focus challenge. Although I will take issue with the term "metrics." If only law firms had those to focus on. And that truly compounds the comp-to-value challenge.

Jim Hannigan said...

The most important "short-term metric" that firms like Dewey and Howrey ignored is cash flow and matching assets to liabilities. They're not metrics technically just basic financial management concepts that these firms clearly did not take into account.


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