I’ve been speaking with a number of large law firms recently about their Partner performance criteria and changing financial business models. It seems a consistent theme, going forward, that achieving equity partnership in a profitable firm will become much harder and take a lot longer than it has historically, with the equity likely to be concentrated in the hands of fewer, consistently high performing Partners. And the pressure to maintain equity will, at times, be brutal.
Now this may, or may not, be a surprise to some. But what is important to understand is the economics of a legal career in today's market and having realistic income expectations that inform sensible career decisions and personal wealth/financial security strategies. Because chasing unrealistic, unachievable legal career goals can be destructive.
Many lawyers have had the financial carrot of equity dangled before them only to not achieve it, burning themselves out physically and emotionally in the long process and irreparably damaging familial relationships. Or, many have made ill-informed career moves (with or without a client base) expecting the path to equity to be markedly easier somewhere else.
The reality is the salary “inflection point” is about $350,000 in Brisbane. By this I mean that only about 2-5% of lawyers in private practice (and less, in-house) will earn over this amount of $350,000. This is generally where salaried partners cap out as beyond this, at around $500,000+, junior equity generally starts to kick in and the business case to achieve this in small market like Brisbane, are tough. And rightly so, because those who truly create the value deserve the rewards.
So, if you are not in the 2-5% who create such value for their firm so as to gain equity, then making important life decisions based on what you think you might earn in the future (as most of us do) perhaps just got a little easier. A positive way to look at it is this - if you can gear your lifestyle to spend less than what you earn, knowing it may never be more than say, $350,000, then anything you do then earn beyond that could be directed to further investments in real, income producing assets that create true wealth. After all, given the “naked-in-naked-out” nature of today’s law firm models and their performance based “sliding” equity structures, being a high earning equity Partner is certainly no guarantee of wealth or financial security going forward - it is after all only a temporary right to a variable income stream with no asset to sell at the end.
I make these points because I think it is critical that Partners understand the market they operate in and the reality of their own value within it so they can make good decisions about their career which ultimately impact their health, financial security and familial relationships. For too long, far too many Partners have settled into a pattern of personal and family sacrifice on the altar of illusory career progression and potential financial gain.
As one senior equity Partner of a major firm recently opined to me - younger and mid-career Partners coming through need to manage their career and their money very differently to the way he did. Things are changing.