Shearman & Sterling cuts top-earner pay, lifts lower-tier stars

April 9 Tue Apr 9, 2013 2:03pm EDT

April 9 (Reuters) - At a time when many U.S law firms are raising compensation for top-earning partners to attract stars from competitors, New York firm Shearman & Sterling has taken a different approach: It has reduced equity and pay for high earners and increased them for lower-ranking business generators, according to at least four people with direct knowledge of the matter.

The firm began phasing in compression of the pay ratio and changes to a bonus pool, comprised of 15 percent of firm profits, in 2011, sources said. Under the old model, half the pool was distributed on merit and half was rewarded at the discretion of the compensation committee for nonperformance-related reasons. For example, the pool was sometimes used to pad the salary of a first-year partner, according to a person familiar with the process.

Under the new model, the pool is being used almost exclusively to acknowledge individual performance, business generation, teamwork, or the performance of the partner's practice area, said this source. It also provides a way for some partners to earn back basic compensation that has been reduced, according to one of the sources. This is the first year they are experiencing the full consequences of the now-completed evolution of the pay system.

Shearman senior partner Creighton Condon and a Shearman spokesman both declined to explain why the changes to compensation had been introduced.

Lawyers who recently left Shearman, an 800-lawyer firm known for its long-running relationship with Citigroup as well as its mergers and acquisitions and finance practices, say the changes mark an about-face on compensation. Between 2008 and 2011, under the leadership of Rohan Weerasinghe, the firm had expanded the pay gap between top- and low-tier partners, said former partners. Weerasinghe last year left Shearman to became general counsel at Citigroup.

Weerasinghe did not respond to a request for comment.

During his tenure, junior partners had their pay cut by hundreds of thousands of dollars in order to boost the compensation of more senior partners, according to former Shearman partners. Two of them said resentment over the system came to a head at a partners meeting in 2011, when some lawyers expressed dissatisfaction about the direction of the firm and about compensation of top earners.

About that time, firm management began to rethink the top-heavy compensation model and embrace the idea of rewarding business generation and recognizing star junior partners, said the former partners.

The change came as Shearman fought to regain its footing after the recession. Although many firms have struggled to recover, Shearman has had a particularly tough time, according to numbers published in American Lawyer surveys. Between 2008 and 2012, Shearman's profits declined 16 percent, to $752 million according to AmLaw, and profits per partner fell 9 percent, to $1.52 million. For 2012, Shearman's revenues were flat compared to 2011, while profits per partner dipped 2.6 percent, according to the American Lawyer.

In comparison, a Citibank survey of 84 U.S. law firms between 2008 and 2012 showed revenue ticking up an average of 1.7 percent, while profits per partner grew 3.8 percent.

Out of 45 law firms that reported their 2012 financials in the first two months of 2013 to AmLaw, revenue rose an average of 6 percent and profits per partner increased an average of 7.4 percent. Nine of the 45 law firms reported a decline in profits per partner while five reported a decline in revenue.

A Shearman spokesman said the firm's revenue increased slightly over the past two years, adding that its lawyers advised on a number of large transactions between December and January.

In December, Shearman advised General Electric on its $4.3 billion acquisition of the aviation business of Italian manufacturer Avio. The same month, the firm represented Singapore Airlines in the sale of its share in Virgin Atlantic to Delta Air Lines Inc.

Six lawyers with the firm contacted by Reuters about the compensation changes declined to comment or did not return phone calls or emails.

Three lawyers from competing firms who have made recruiting overtures said they have received mixed feedback from Shearman partners: Some said they were unhappy their pay had been cut, while others said they felt the new model would satisfy mid-tier business generators. The sources asked to remain anonymous to preserve relationships with Shearman lawyers.

In 2012, Shearman's equity-partner ranks declined 10 percent, to 158, with 15 partners departing and eight arriving from outside the firm, according to the American Lawyer. Several of the departed partners contacted by Reuters took issue not with the compensation structure but with the size of firm salaries.

Stephan Hutter, the former European head of Shearman's capital markets practice who joined Skadden in February 2012, said Shearman in recent years could not pay partners market rates, triggering at least some of the departures. He said he left because the firm would not invest in recruiting and marketing efforts to build the capital markets practice.

A Shearman spokesman declined comment on departed partners or the firm's investment strategies.

Other major law firms including DLA Piper, Skadden Arps Meagher Slate & Flom and Hogan Lovells also have changed compensation models in recent years to adapt to a more competitive legal market. In most cases the changes have allowed the firms to pay top performers multiples of what bottom earners are paid, legal consultants said.

Shearman has taken a hybrid tack. Kent Zimmerman, a law firm consultant, said the firm was bucking the industry trend toward increasing comp ratios. Yet in adopting a bonus pool that moves toward more merit-based compensation, said Peter Zeughauser, another consultant, Shearman has aligned itself with the rest of the industry.

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