Parsley
Sage Rosemary & Ginsburg llp
“Always a reasonable result for a
reasonable fee, always”
MEMORANDUM
To:
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Management
Committee
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From:
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Mike
Marget
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Date:
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September
21, 2012
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Re:
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No
4th Quarter Lateral Hiring! (Subject to Exceptions)
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There
is never a bad time to add a lateral partner; especially someone with a big book
of business, whose practice fits the firm’s culture, and who will be accretive
to the financial bottom line. However,
certain times are better than others – early (in the fiscal year) is much, much
better than later.
At
a prior firm, we had a rule – no lateral
hiring in the 4th quarter.
Being a law firm, there were many exceptions to this rule. One permitted filling vacancies when
short-handed or when special expertise was needed for an active matter. Another was crafted for the proverbial “lateral
too good to” turndown; somebody certain to be snatched up by another firm if we
don’t act immediately; the “let’s thank our lucky stars and ignore the calendar”
candidate (“L2G2” for too good to…).
The
rationale for the 4th quarter lateral hiring freeze is simple arithmetic. Assume the following:
a)
L2G2
joins New Law Firm (“NLF”) effective October 1, 2012, agreeing to the same 2012
compensation package as at Old Law Firm (“OLF”) – $300,000 annually: monthly
draws of $15,000, plus deferred comp of $120,000 payable as a year-end
distribution.
b)
L2G2’s
October production at NLF is subpar due to transition issues – delays in transferring
files, obtaining conflict waivers and the like.[i]
c)
The
headhunter’s invoice (15%-to-20% of one year’s compensation) is paid before
year-end.
d)
Invoices
for October time are issued by mid-November, and then scheduled for payment on
a 45-to-60-day cycle by L2G2’s clients. November
time is billed in December. Little or no
revenue is received in 2012 from L2G2’s clients or L2G2’s work on other firm
clients.
e)
In
addition to making three monthly draw payments of $15,000, NLF must foot-the-bill for the entire $120,000 deferred comp for 2012 even though L2G2worked only three months at NLF.[ii]
cost to NLF
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paid by OLF
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L2G2 total 2012 comp
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NLF revenue from L2G2
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$
--0--
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|
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3 monthly draws
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$
45,000
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$
45,000
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9 months draws
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$ 135,000
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135,000
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year-end distribution
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120,000
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120,000
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recruitment fee (15%)
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45,000
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||
L2G2 2013 Compensation
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$
300,000
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||
total expenses
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$ 210,000
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$ 135,000
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NLF Net Income (Loss)
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$ (210,000)
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Note: The financial loss is greater if L2G2 joins
NLF with a supporting cast (staff and/or other timekeepers) or if NLF incurs
other incremental costs (e.g., higher insurance premiums).[iv]
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With
any lateral partner candidate – but especially those who must join the firm in
the 4th quarter – there are two questions to be answered after due
diligence is completed and financial terms and projections made:
1.
Are
the partners willing to relinquish current year compensation in exchange for projections
of higher earnings in future periods?
2.
If
the answer to the first question is “yes”, then how much current year
compensation for what magnitude of return?
These
two questions will be explored in future Management Committee Memos focused on:
-
Creative
accounting[v] for lateral partner
investments, and
- Financial due diligence/financial projections for potential lateral partners.
[i]
Lateral partners
invariably assure me they will “hit the ground running;” their initial month’s
billable hours will be exceptionally high; all client files will be transferred
on Day 1. It never happens that way.
[ii]
L2G2 worked 9
months of 2012 (January through September) at OLF, but forfeited the
accumulated deferred comp by joining NLF.
In order to make up the difference to L2G2, NLF is on the hook for the
entire $120,000. The subject of Making
a Lateral Partner “Whole” is discussed at length in a previous Management
Committee Memo.
[iii]
In an effort to
reduce the 2012 “loss,” some law firms might structure L2G2’s compensation so
the $120,000 make-whole payment is paid in 2013 against the 2013 budget, rather
than as a 2012 payment. L2G2 might be
amenable to this structure – deferring taxable income on $120,000 for a year
has some merit assuming tax rates are unlikely to increase. However, I don’t think this is the best
approach. How to “cover” compensation
“hit” to legacy partners will be covered in the promised future “creative
accounting for investment in lateral partners” memo.
[v]
Creative lawyering
is a good thing. Creative accounting is
a bad thing. I sometimes find this
troubling.
Maybe those dental recruitment agency specialists should also consider this memo. Yes, they're from a different industry, but think of the cost reduction they can also have.
ReplyDeleteThey should cut down the recruitment fee. Eliminating things that contributes to the negative impact will help them do their job easier.
ReplyDelete-Rose Shand
Why is it that the recruitment fee is too high? BTW, why are they placing a fee to their recruitment?
ReplyDeleteDerrick Reyes