Money talks – why firms should be open about partner pay delays
For an industry so hung up on profits per equity partner (PEP), and for which information on salaries is widely available, law firms are remarkably cagey on the small matter of paying them. Given the ongoing challenges in the global financial markets over the past few years, it is unsurprising that law firms have been affected to some degree, whether in terms of seeing profits and therefore PEP fall, or having issues with cashflow.
March 14, 2013 at 08:03 PM
3 minute read
For an industry so hung up on profits per equity partner (PEP), and for which information on salaries is widely available, law firms are remarkably cagey on the small matter of paying them.
Given the ongoing challenges in the global financial markets over the past few years, it is unsurprising that law firms have been affected to some degree, whether in terms of seeing profits and therefore PEP fall, or having issues with cashflow.
In fact, when looking at the turmoil in the wider economy, it is more surprising that law firms have not been more seriously affected, as most have so far proved pretty resilient – although persistent talk of further consolidation does hint at the uncertainties some are feeling about their future.
In these circumstances then, news of quarterly partner profit distributions being withheld or delayed is becoming increasingly common. But this does not mean that there is cause for alarm, or that when we report such stories we are suggesting the firms in question are about to go the way of Dewey & LeBoeuf or Cobbetts. Far from it.
While withholding partner profit payments for a significant period of time could be indicative of underlying problems, delaying a couple of distributions to fund future investments or simply to bolster the firm's capital position could be seen as nothing more than prudent.
Such moves may irritate some of the partners affected, and may therefore leak around the market. But when news breaks, it makes far more sense for firms to be open about it than to hide.
In general, law firms have been catching up to their corporate peers and taking a more cautious approach to financial management in the years since the crash, with many taking steps to recapitalise their business. As such, holding back distributions is just more of the same.
As owners of the business, equity partners share both the risks and the rewards, and delays in being paid during tougher times is part of the deal. Within reason, it makes more sense for firms to hold back profits than to turn to bank loans or conduct large capital calls, therefore landing partners with further financial burdens.
And as the results of this week's Big Question survey show, by and large, partners are in agreement, with the majority supporting moves by firms to hold back payments in order to shore up finances. Given almost half of the survey respondents reported instances of it at their own firm within the past 12 months, it really is nothing for firms to be ashamed of.
It is worth noting that just because we write about something we are not condemning it and nor are our readers. It is our job to report what is happening in the market but – in this instance, at least – not to judge it.
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