• Up to 30% of partners may face annual pay reductions, despite strong overall financials.

• Competitive compensation for top-performing partners is driving more firms to adjust earnings at lower levels.

• Managing partner expectations has become routine for law firms navigating profit distribution challenges.

Amid strong financial performance and revenue peaks this year, top law firms are implementing sharper pay cuts for certain partners to maintain competitive compensation for their most profitable performers, according to a Law.com report.

• Between 10% and 30% of partners at large firms can expect year-to-year pay reductions, and some firms are some firms are producing faster moves down, helping them pay top performers.

• This is a departure from the more collegial days of partnerships, when it was unheard of to cut a partner's compensation, according to law firm management consultants.

A Routine Practice

This strategy, designed to keep top performers satisfied and avoid defections, is becoming a routine practice in Big Law. 

Law firms are more directly tying business to compensation each year. But many partners, even unproductive ones, are still benefiting from a "peanut buttering" of profitability as the value of a firm's points or shares grows.

Fairfax Associates consultant Kristin Stark said a significant number of partners moving down are retiring or phasing out their practices, so it's not unexpected for them or the firm. "Most law firms will experience substantial growth in profitability this year, and law firms are busy, so the people going down are generally people transitioning out of the practice," she said.

Point Adjustments

Even middle and lower-performing partners have benefited from the ramp-up in financial performance over the last three to four years, largely due to the points system, where the number of points they have at a firm has increased in value even if their performance hasn’t.

"If you don't reduce their points, the payout on those points is not justified by the revenue they're bringing," said Matthew Bersani, a founding partner of Cliff Group, a legal consulting firm.

According to Chicago-based recruiter Susan Mendelsohn, if partners are going down from year to year at a profitable firm, it's likely not baked into the firm's economics but related more to a sustained decline in the partner's hours, business generation, and profitability. 

"If you're going down in compensation as a partner, it's because you're not bringing in as much business as you did when you were compensated more," she said.