Performance in the spotlight as big firm partners get more pay or de-equitised

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By Legal Futures

4 November 2011

Murphy: firms are grasping the financial reality

Large law firms are focusing more on partner performance, new research has found, with a greater share of profits for those who perform well in the current financial year, but demotion for those who do not.

The survey of 126 of the top 250 firms by accountants Smith & Williamson found that mid-tier firms in particular are allocating more profit on a discretionary basis, while the largest practices are de-equitising partners.

A third of respondents expect to increase the proportion of performance-related pay in the next few years, while 30% are de-equitising partners, and a further 20% considering it.

Though the survey, which is conducted annually, found that 70% of respondents allocate less than 25% of profits on a discretionary basis – suggesting that traditional profit sharing arrangements such as lock-step remain prevalent – the mid-tier firms appear most likely to be bucking this trend.

Seven firms of those interviewed from the top 40 allocate more than 50% on a discretionary basis and two of them expect that proportion to rise still further in the next few years.

By contrast, of the 20 top-30 firms that took part in the survey, nine are in the throes of de-equitising partners, with six more considering it – higher than the sample-wide proportions.

“While promotions are communicated widely to the marketplace as a sign of success, normally no one beyond the partners within a particular practice know whether individuals are moving from equity to salaried status, so these statistics are very revealing,” said Giles Murphy, head of professional practices at Smith & Williamson.

“Rather than seeing this trend as a sign of weakness, we should view it as an indication that firms are grasping the financial reality that some partners have either been over-promoted or gone off the boil.

“The individuals in question still have value and the firm may wish to keep them, so instead the practice may try to match the lower level of contribution from the partner with a lower level of remuneration.”

Mr Murphy predicted that this trend towards the adoption of “a more immediate, perhaps cut-throat style is likely to accelerate” – especially among the larger firms – which are likely to adopt a more corporate style approach to practice management.

The survey found that 71% of respondents are confident about the year ahead, the highest since 2007. During the last year, three respondents which took part in the survey from the top 40 have made capital calls on partners while a further three are considering it, down on last year.

Similarly, slightly fewer practices are retaining funds in the business – five of the top 40, compared to seven last year.

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