Partner Remuneration: To guarantee or not to guarantee
17 January 2013
7 July 2014
30 June 2014
M&A Weekly Update: when is there a duty of good faith between contracting parties; prospectuses: acceptable languages; and more
9 April 2014
22 August 2014
30 October 2013
By Sloane Poulton, partner, SR Search
In light of recent events do firms still provide financial guarantees to lateral partners? First what is a financial guarantee? A guarantee written into an offer letter can take a number of forms, but essentially a partner with a guarantee has the benefits and rights of an equity partner whilst enjoying the comfort of a minimum level of annual compensation. From the law firm’s perspective a guarantee is an investment and a return will be expected in the future.
Traditionally, firms have tended to guarantee a partner’s income when attempting to establish a new area of practice in a competitive market and their brand is as yet weak or unknown brand. Guarantees are have often been considered an appropriate means of sealing a ‘transformational’ hire or of recruiting a leader for a role requiring a considerable amount of management time. Other objectives include the strengthening or even securing of specific client relationship or a future panel appointment. Whatever the ultimate goal, when a firm approaches a partner a guarantee will make a financial package more palatable to the target.
Are there down sides to offering a guarantee? Well, yes. Expensive fixed term deals can lead to a mismatch between effort and reward, which is particularly problematic in uncertain markets where partners may not perform financially and/or key clients may not follow. Different remuneration levels or deals have the potential to distort a partnership. It should also be remembered that guarantees constitute a ‘first call’ on firm profits, thereby reducing profits available for distribution to the other partners. Looking at the issue from a more long-term perspective, guarantees may also lead to unsustainable cultures wherein it is perceived that the only way to substantially increase remuneration is to move firms.
It should be borne in mind, however, that not all partners want a guarantee. One partner we recently dealt with refused to join a firm that offered him a guarantee, and before accepting any offer wanted a signed assurance that no other partner in the firm enjoyed such an arrangement. This partner told us that they wanted to join a firm of fee earners. Most partners wish to join a true ‘partnership’ and believe that if an individual has a guarantee then their interests may not be aligned with the wider firm’s.
Whether or not a guarantee is binding all depends on the precise wording. Despite their training, some partners don’t always read the small print. In some cases a guarantee may not be a guarantee at all; the ‘guaranteed’ remuneration may be conditional upon on a partner’s generating a minimum revenue. Our advice is always to pay close attention to the language, particularly if a guarantee purportedly covers more than one complete financial period.
So should law firm offer guarantees? Guarantees have the potential to be more than a gentleman’s agreement. Indeed, they can often be a useful tool when hiring partners and in certain cases make commercial sense, but there does need to be a sharing of risk, and the level is just as important as the time frame. There also need to be clearly agreed expectations which are understood by both sides at the outset. It should not be assumed that every partner moving firms should have - or indeed requires - a guarantee.