As the media has reported extensively, Dewey & LeBoeuf made several serious management mistakes in recent years. The firm then made its situation worse by borrowing large sums, effectively (if not deliberately) concealing the results of those mistakes. It also kept most of its non-management lawyers and virtually all its staff uninformed about the risks being taken. All lawyers and staff will end up paying dearly for the actions of a few.
Law firms have one essential asset, their lawyers. Like any asset, lawyers need to be carefully valued. A major factor in Dewey’s now inevitable demise is that often lateral partner guaranties were based on neither individual nor firm collections. To make matters worse, the firm borrowed heavily to pay skewed, and not necessarily deserved, multi-year guaranteed partner compensation. (See e.g., ”Dewey’s Fall Underscores Law Firms’ New Reality” James Stewart for the New York times May 4, 2012; “As Dewey Collapses, Partners and Retirees Face Big Financial Losses” Tara Siegel Bernard for the New York Times May 11, 2012; “Assigning Blame in Dewey’s Collapse” Peter Lattman for the New York Times)
Wooing attractive lateral partners with multiple-year financial guarantees has long been a tool used by law firms to lure rainmaking partners. However, even when such lateral partners produce as expected, the results can cause strife within the ranks. The service partners and associates resent being blatantly undervalued so that someone can be king. When rainmakers with long-term compensation guaranties collect less than expected, the overall situation is worse. It can become, as it seems to have done in Dewey’s case, lethal.
Law partnerships are certainly about money, but they are also about common values and common styles of practice. I am not a purist, but I do believe that lawyers with major books of business should take some personal risk of having a less productive year than expected. To attract star partners there does need to be a likelihood of favorable compensation, but that can be accomplished with a floor and an upside. Lateral partners often get a first year guaranty above the fair floor, giving them enough time to integrate their practices. At firms with a work ethic that includes camaraderie and collegiality, risk is taken by even the best rainmakers.
Oversized compensation guaranties reward the greedy, not a character trait that makes for good partners. If the rainmaker produces, lawyers at lower levels will still feel undervalued. If the rain doesn’t fall as expected, only the guaranties are honored and the suffering is pushed down the chain. In the end, when the going gets tough, the greedy leave.