| April 9
April 9 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
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
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