The ability of a law firm to retain and recruit partners successfully hinges not only on having high average profit per equity partner (PEP) but also on establishing an effective compensation system. This system should provide adequate flexibility to match the compensation of individual partners with the economic contributions of their practices. Failure to do so risks underpaying stronger performers and making them more susceptible to competitors’ offers, even those from firms with lower PEP but more variegated systems.
Recent shifts in London’s esteemed Magic Circle firms illustrate this dynamic. Historically, their lockstep compensation system – which had a larger top-to-bottom range than many counterparts – culminated in an undercompensation of the highest performers, thus opening opportunities for U.S. firms to lure away top talent by offering better compensation packages.
The introduction of country-specific lockstep ladders and the removal of upper caps in various forms haven’t countered this migration effect. Another strategic misstep by the Magic Circle firms (excluding Slaughter and May) was a hasty expansion into lower-profit markets in continental Europe and Asia, which further reduced firmwide PEP. From ranking within the global top 10 by PEP in the 1990s, these firms are now situated around the 40th place.
These scenarios underline the crucial importance of creating an effective and flexible compensation system in a highly competitive industry. While changing these systems can be challenging, neglecting to do so can provoke a steady loss of talented partners and a subsequent decline in a firm’s standing in the legal world.