2 What Compensation Really Is

 

Within every law firm there are two categories of people working: the employees and the owners. Employees are on a salary and may or may not receive a bonus at the end of the year. The owners are not on a salary, they are each entitled to a percentage of the profit. The equity partners are jointly the owners of the firm. Sometimes they call themselves shareholders, but that’s a technicality which is not relevant here. The vast majority of law firms do not keep any reserves and all profit is distributed among its equity partners. The topic of partner compensation deals with exactly how the profit is distributed. Theoretically one could opt for equal sharing by just dividing the profit by the number of partners, each receiving an equal slice. In practice it is never as simple as that. So what are the considerations when designing a compensation system?

A law firm keeps no reserves, all profit is distributed in full every year. This is unusual enough to deserve an explanation before looking at the compensation systems themselves. There are two main reasons behind this practice. One being the fear of a claim against the firm in which case it would be favourable if there is as little assets as possible. This is a characteristic lawyer approach of eliminating risks. The more important consideration for distributing profit in full every year has to do with the nature of a partnership. Unlike other businesses, the owners are also the means of production. There are no machines and no stock to sell. This combination of owner and producer makes that the value of the firm will fluctuate depending on who are its partners at a given moment in time. Having a stake in the firm and being a means of revenue and profit generation for a law firm always coincide. There are at the time of writing only a handful of law firms that have outsider shareholders and these are not performing too well.

There are in most jurisdictions bar regulations preventing non-lawyers from having a stake in a law firm. For the vast majority of law firms it is not only about being a registered lawyer, but the lawyer also has to actively contribute to the revenue. Retired partners can no longer be shareholders. Not having the ability to bank on future success of the firm, partners also are reluctant to invest in the firm if the benefits of the investment will only emerge after they have left. Having a cash reserve would also complicate things for new partners, who would have to ‘buy’ part of the cash reserve. And it would complicate for departing partners who would be entitled to their share of the cash plus a reasonable interest. Interest payment is something a firm would want to avoid in order not to let partners use the firm for their bank savings. It is thus common practice in law firms that dividends are distributed in full, starting ‘from zero’ every new year.

The practice of distributing all profit annually has a consequence that is rarely discussed directly: it makes genuine ownership behaviour structurally difficult. An owner invests, absorbs short-term loss for long-term gain, and cares about the institution beyond their own tenure. A law firm partner who knows that every pound of retained profit is a pound not in their pocket this year has a powerful incentive to think and behave like a senior employee rather than an owner. The three-hat model — partner as owner, manager, and producer — is the standard description of what equity partnership requires. In practice the owner hat is rarely worn. It is the producer hat that dominates, because the compensation system rewards production and distributes nothing to ownership. Some firms have experimented with ring-fencing a modest portion of profit as a genuine equity reserve not linked to current performance, distributed only over time or on exit, precisely to give partners a financial stake in the institution’s long-term health rather than just its current-year output. The idea is not widely adopted. It runs directly against the short-term logic that the annual distribution model instils. But it addresses something real: if partners behave like employees, part of the reason is that the economics of partnership have been designed to make that rational.

 

Splitting the profit between partners

Generating revenue and profit is one thing, dividing the profit is opening a can of worms. Why is this? For starters in the vast majority of law firms partners are not in the same practice and revenue and profit can vary widely between practices. Using the same example over and over again: M&A will invariably generate a substantially higher revenue than employment. So does this automatically mean that the M&A partners are entitled to a bigger cut of the money? Some firms argue yes, other argue no because the M&A partners need the support of the Employment team in their transactions.

Costs can also become a contentious aspect. If you would drill down and analyse the profitability of each individual partner one needs to look at the costs. To what level is this to be taken into account? Does it matter if one partner has two senior PA’s while two other partners perhaps share one junior PA. If a partner wants to organise a client event, should this come at the cost of the personal P&L? Some firms at the extreme EWYK end of the spectrum would say yes, most firms would not look at cost and profitability on an individual partner level and would opt to socialise the costs equally. The profit pool will be calculated on a firm level and not on an individual partner level.

 

The associate pay arms race

Among the costs that are socialised across the partnership, associate salaries have historically been the most predictable. They grew steadily, tracked market conventions that most firms followed in roughly similar measure, and could be planned for with reasonable accuracy. That is no longer the case. In the most competitive legal markets, associate compensation has become the fastest-moving cost in the profit pool calculation, and it is being driven by a deliberate strategic choice made by a small number of firms.

The mechanism is straightforward. A handful of elite firms in New York concluded, some years ago, that winning the war for talent at the associate level was worth the cost. If the most capable law school graduates were the raw material from which future exceptional partners would be developed, then paying well above market to attract the top of the graduating class was a rational investment, not a cost to be minimised. Cravath, Sullivan and Cromwell, Milbank and a small group of peers established a salary scale that the market came to treat as the benchmark. When any firm in that group reset the scale upward, others faced a choice: match it and preserve their recruiting position, or hold the line and accept that their incoming associate class would consist of candidates who had been passed over by the firms that paid more. Most matched. The cycle repeated.

The escalation spread geographically with a lag. London followed New York, with the Magic Circle firms and the leading US firms operating in the City competing in parallel. By 2025 and into 2026, first-year salaries and bonuses at the top end of the London market had reached levels that would have seemed implausible a decade earlier. Germany followed, more slowly and with less uniformity, but the leading firms in Frankfurt and Munich felt the same competitive pull. In each market the dynamic was the same: a small number of firms with the conviction and the financial strength to pay more set a new level, and everyone competing for the same talent pool had to respond.

The direct consequence for the profit pool is material and often underappreciated in internal compensation discussions. Associates are the largest cost line in a law firm's cost structure. When that cost line rises substantially, and when it does so across an entire cohort of incoming and existing associates simultaneously, the effect on the margin available for partner distribution is significant. Freshfields, to take one well-documented example, saw its profits fall to GBP 656.8 million in a year when revenue grew by six percent. The increase in associate compensation was a primary driver of that compression. Partners were, in effect, earning less from a larger revenue base because the cost of the talent producing that revenue had risen faster than the revenue itself.

The underlying logic driving this escalation connects directly to arguments developed later in this book, in the chapters on AI and the future of the pyramid model. The firms that have been most aggressive in raising associate salaries are not doing so carelessly. They are acting on a specific belief: that as AI commoditises execution and makes legal knowledge more readily available, the competitive differentiator in the legal market will be the quality of human judgement at every level of the firm. Exceptional associates become exceptional partners. Exceptional partners produce the Creation, in the terms of the framework established in this chapter, that clients pay premiums for. The cost of bidding aggressively for the best talent entering the profession is justified by the value that talent will generate over a career. On this logic, the arms race is not irrational. It is a rational bet by the firms that believe human quality is the scarce resource that will determine who wins the next decade.

Whether the bet pays off depends on execution and on the pace of AI adoption. If AI does compress the value of execution as deeply and as quickly as the most optimistic projections suggest, some of the talent being competed for so expensively will find itself in a market that values it less than the price paid for it. Firms that have built their cost structures around premium associate salaries will face a particular form of pressure: high fixed costs from a cohort that was hired on the assumption of a certain revenue model, combined with a client base that is increasingly unwilling to pay hourly rates for work that AI can produce at a fraction of the cost. The arms race, in other words, is a bet with a specific expiry date. For the partners who must fund it from the profit pool while it runs, the question is not whether the logic is sound but whether the firm has the financial and cultural resilience to hold its position until the bet pays out.

 

Costs get socialised, revenue not

It is interesting to observe that, whereas the costs are widely shared, revenue is still very much tied to the individual. Why is this? It is interesting and deeply psychological. It is hardly about the money as such. The majority of big-law partners makes more money than a CEO of a mid-size company. Partners can afford a second home, a nice car, expensive holidays. It would be unlikely that more money would make their lives better in any significant way. Sure, there is the example of a successful lawyer whose clients typically own a private jet, and even super successful lawyers are unlikely to become billionaires, and owning a private jet will probably remain out of reach. But other than that, most partners make more money than they reasonably will spend. For partners it is not like ordinary workers where a raise in salary will make things easier and open new possibilities.

If it is not about needing the money, it must be about what money stands for. Money stands for success. A partner who makes more money must be a better lawyer. The more successful lawyer will be more respected, both within the firm as well as by his peers in the market. This can easily be observed when partners of firms like Wachtell, Kirkland, Cravath or Slaughter and May are present. Other lawyers will carefully listen to what they have to say, their opinions will matter. Sure, what they are saying are probably wise words, but the financial performance of the firm and the PEP will undeniably contribute in a big way. Money talks the language of success.

Partners always compare their compensation with what they consider their peers in the market. If a firm’s PEP slides below the PEP of a rival firm, there will be upheaval and discontent. This will even be the case when as such the PEP of the firm has grown, but the PEP of the rival seem to have grown more. Again, it is not about the actual money, it is about something else. Money is a yardstick by which success is measured.

 

The Creation-Production Divide© concept

Before turning to how the profit pool is divided, it is worth being precise about what partners actually produce. This sounds like an obvious question but it has a less obvious answer, and the answer matters a great deal for how compensation should be designed.

If you observe what a lawyer does across the full arc of handling a matter, two distinct processes emerge. We call them Creation and Production, and they are as different in their nature as they are in their commercial significance.

Creation

Creation is everything that is uniquely bound to the personal capabilities of the individual lawyer. It is the element of the work that could not be replicated by substituting a different practitioner of equivalent technical qualification. It includes the ability to identify the real problem behind the legal question a client has presented. The judgement to see which of several legally permissible paths is the right one for this client in this situation. The creativity to construct a solution that others in the same position would not have found. The negotiating instinct that reads the dynamics on the other side of the table and knows precisely when to push and when to yield. The presence that gives a client confidence at the moment of greatest pressure. The ability to say no to a client who is about to make a costly mistake, and to make that no heard.

Creation is rarely time-consuming. It may occur in a single conversation, a brief exchange over a draft term sheet, an insight during a due diligence call, a reframing of the deal structure in the closing minutes of a negotiation. A partner who has been building a practice for twenty years carries within their accumulated experience a reservoir of judgement that can be deployed in moments. Those moments are what clients remember, what they pay for when they return, and what they describe when they recommend a lawyer to a colleague. They are not well described by hours billed.

Consider two M&A partners of equivalent seniority and technical knowledge working on comparable transactions. The first understands the client's business deeply, has navigated a dozen similar processes, reads the counterparty's position with precision and engineers an outcome that the client could not have reached alone. The second executes the same transaction competently, reliably and on time, without those additional dimensions. Both will bill similar hours. The client's experience of their value, and their willingness to call the first partner next time rather than going to market, will be entirely different. That difference is Creation.

Production

Production is everything required to materialise the fruits of Creation. It encompasses document review, drafting, redlining, coordinating sign-offs, managing execution logistics, producing ancillary documents and getting agreements signed and distributed. It is necessary, demanding and often complex. It is also, in commercial terms, largely interchangeable between lawyers of comparable competence in the relevant field.

This is a claim that practising lawyers sometimes resist but that the market consistently confirms. A tier-one Real Estate partner with a very large high-end transaction practice was once asked directly: could you deliver the same product and revenue if you had to work with the team of a solid mid-tier firm that also has regular experience in real estate transactions? After some hesitation, the answer was yes. It is not the associates who make the decisive difference, as long as they are competent and experienced in the field. What the client is paying the premium for is not the Production. It is the partner at the top.

Production is also where the vast majority of time is spent and therefore where the vast majority of fees are generated under a time-based billing model. A transaction that involves fifty hours of partner time may involve five hundred hours of associate time. The partner's hourly rate is higher, but the volume is lower. The ratio of time billed to value delivered is inverted between the two phases: Creation is brief and commercially decisive; Production is extended and commercially substitutable.

 

The subsidy at the heart of the billing model

The consequence of the Creation/Production Divide© for the billing model has been significant and largely invisible for decades. Under hourly billing, every increment of time carries the same price. A partner charges the same rate for the hour in which they outline the strategic direction of a transaction as for the hour they spend listening to a routine status update call. An associate charges the same rate for a sophisticated analytical judgement as for a mechanical document review task. Time is treated as a uniform commodity when the value embedded in it varies enormously.

What this means in practice is that Production revenue has been subsidising Creation. Clients pay for hundreds of hours of document work at rates set by reference to the value of the partners overseeing it. That revenue funds the firm's capacity to deliver the brief, expensive moments of genuine judgement that the client actually came for. The model works because the client, in aggregate, is paying roughly the right amount for the overall outcome even if the pricing within the matter is misaligned with the value delivered at each stage.

This subsidy structure has three important implications for compensation. First, it means that partners who generate high billable hours through large transaction teams are not necessarily generating more value than partners whose work is more concentrated at the Creation end of the spectrum. They are generating more revenue, which is not the same thing. Second, it means that the associates and junior partners who do the majority of Production work are contributors to the revenue that funds the firm's entire compensation structure, including the compensation of partners whose Creation they are materialising. Their contribution is real and their reward should reflect it. Third, and most importantly for the chapters that follow, it means that any shift in the cost or availability of Production work will destabilise the subsidy and force a reckoning with how Creation is priced and how partners who deliver it are compensated. That shift is now underway, and it is the subject of Chapter 14.

 

Money as a measure of standing

As stated before, the obsession with compensation in elite law firms is not really about money. Most top partners earn far more than they could spend. A second home, private schooling, premium holidays, business class travel: these are achievable on a fraction of a senior partner’s draw at any serious firm. The accumulating millions beyond that serve a different purpose entirely. They are a score. They are proof, updated annually, that the partner is still winning.

This matters for how compensation systems behave in practice. A partner who is treated unfairly in the absolute sense, that is to say who is genuinely paid below the value of their contribution, is a partner with a legitimate grievance. But most partner compensation anxiety does not arise from that situation. It arises from comparison. A partner who was perfectly content at five million on Monday is miserable on Tuesday having discovered that a classmate at a comparable firm cleared five point two. The extra two hundred thousand would not meaningfully change their life. What it changes is their sense of standing within the profession.

Leon Festinger’s social comparison theory, which observes that people determine their worth relative to those around them, is a good description of how this works. But the legal profession takes it further: the reference group is not only internal colleagues but the entire visible market. AmLaw rankings, league tables, the whisper networks of lateral recruiters, chance conversations at the IBA Annual Meeting. Every data point is processed through the same question: where do I stand? The answer is never final, never satisfying, and always subject to revision.

The Janis Joplin song “Mercedes Benz” captures this precisely. The narrator’s complaint is not about poverty. It is about the fact that her friends drive Porsches. The car is irrelevant; the comparison is everything. For a law firm partner, the Mercedes is whatever compensation tier the most recently announced competitor has reached. Hitting a new milestone produces a brief sense of vindication before the target moves again. For some partners, that cycle never ends.

Continuing on the theme of songs, ABBA’s “Money, Money, Money” captures a related but different dynamic. The song is not about poverty either. It is about proximity to a world that remains just out of reach. That is the trap many elite law firm partners fall into. A partner earning five million dollars a year lives a life of extraordinary comfort by any objective measure. But their working hours are spent alongside private equity principals and investment bankers whose returns dwarf even the most generous profit per equity partner. The lawyer writes the contracts; the client owns the assets. Over months of shared conference rooms and 80-hour deal sprints, that distinction starts to feel unbearable. The private jet stops being a client’s tool and becomes a daily reminder of the gap. When compensation is measured against a billionaire’s lifestyle rather than against a peer group of lawyers, no number will ever be enough.

These dynamics have direct consequences for compensation design. A firm whose partners experience compensation primarily as a signal of status and relative standing will find itself in an endless arms race. Adjusting the formula does not address the underlying psychology. What actually moderates the anxiety is a combination of two things: a culture in which partners have genuine sources of professional identity and satisfaction that do not depend on the annual number, and a compensation system that is experienced as fair even if not maximally generous. The second is easier to build than the first. Fairness of process, consistency of application, and genuine respect in how the conversation is conducted matter enormously. A partner who feels they were treated with honesty and respect will often accept an outcome they would otherwise contest.

Compensation is glue or a gravitational force

Compensation is the glue that keeps a firm together. If compensation is lacklustre or decreasing the partnership will get nervous, the mood will darken and the most successful partners might start looking for opportunities at the competition. A solid and competitive compensation is necessary for the firm to survive. Depending on the market this can easily become a strategic driver in its own right.

As of 2024 in the most competitive legal markets, which are most notably the US and London in the UK, there is a high amount of aggressive lateral hiring across the law firms that make up the top of the legal market. Even high-earning, high-reputation firms like Wachtell and Cravath are not immune to this phenomenon. Star partners are lured away with increasingly excessive compensation packages. In order to remain competitive and not suffer a potential drain of top-talent, the elite law firms are scrambling to find ways to boost compensation packages. What if a firm’s geographical presence is holding back profits? Downsizing or reducing offices in jurisdictions that cannot generate enough profitability is definitely on the table (which are in the end most markets outside the US and the UK). We have seen this happen. Even Germany, Europe’s biggest economy, is losing its appeal. Early 2025 UK-based Pinsent Masons announced it would cut 14 equity partners in the country. It is not hard to imagine a future in which the most profitable firms no longer maintain extensive international networks.

The logic behind this is again not the actual amount of money that partners receive. It is compensation as a competitive tool and a crucial instrument to keep the firm together. As we have seen in Chapter 5, Managing the size of the partnership, once a small number of rainmakers decides to leave the firm, the firm might well collapse. Competitive compensation is the super glue that can keep a firm together.

Perhaps gravitational force would be a better way to describe the power of compensation. Like glue, a gravitational force helps in keeping partners where they are but unlike glue the gravitational force also has a pulling power to attract things that are in its orbit and pull them towards its surface. A competitive pay package is the most important prerequisite for attracting top-talent from other firms. If a firm does not have the money they will not be able to persuade star partners to leave their firm and join them instead. Increasingly the discussion around compensation has become an existential discussion for those firms that operate in the highest segment of the market where talent is scarce and partner mobility is high. As outlined earlier, star-performer partner mobility is only an issue in a limited number of high profitability markets. Realistically in most other markets competitors buying away your top-performers is mainly a theoretical threat. Partners leaving a firm as a consequence of a firm-wide drop in profitability, however, can pose a serious risk for any firm anywhere in the world. The departing partners are not primarily looking for higher compensation, they just want a platform with a solid strategy for growth. This could also include starting their own firm from scratch. A competitive and market conform compensation is existential for any law firm.

 

The TGO Value Matrix©: what clients are actually paying for

To answer the question of whether different practice areas justify different compensation, we first need to answer a more fundamental question: what determines the value of legal services to the client in the first place? This is not as obvious as it sounds. The legal profession has for decades operated on the assumption that value is a function of time: more hours of more experienced lawyers equals more value. The client's experience of legal services suggests otherwise. In research conducted for our earlier book Data & Dialogue, published in 2019, we found through analysis of client data and extensive interviews with in-house teams, law firms and academics that there is no meaningful relationship between time spent and value perceived. What there is, however, is a strong and consistent relationship between value perception and two specific factors that have nothing to do with hours billed. Understanding these two factors is essential to any serious discussion of how partners should be compensated relative to one another.

 

The two axes of value

The first factor is return on investment. When a client spends money on a lawyer, the question they are implicitly asking is whether that expenditure generates a return. For some matters the answer is direct and large: a partner advising on a transformative acquisition or defending against a regulatory action that could result in a nine-figure fine is helping the client make money or prevent a loss of substantial magnitude. The legal fee, however large it appears in absolute terms, is a small fraction of the value at stake. The client does not experience it as an expense. It is an investment with a clearly positive expected return. For other matters the calculation is different. Employment advice, routine compliance work, standard contract reviews: these are necessary but they do not generate a return. They are a cost of doing business, and clients treat them accordingly. They will seek efficiency, look for competitive pricing and, increasingly, explore whether technology can reduce their dependence on external counsel entirely.

The second factor is commoditisation. This has nothing to do with the complexity of the work and everything to do with how many lawyers can do it equally well. In London or New York, a highly complex piece of structured finance may be competently handled by a significant number of experienced practitioners across many firms. The client has genuine choice. That choice compresses the price they are willing to pay regardless of the technical difficulty of the matter. In contrast, a relatively straightforward matter in a specialist niche where only a handful of practitioners in a given jurisdiction have the requisite experience commands a price premium that reflects scarcity, not complexity. The same matter in a smaller or less developed legal market may sit in a completely different position on this axis, commanding a premium simply because qualified counsel is rare. Commoditisation is always relative to the market, never absolute.

It is important to be clear about what commoditisation does not mean. Almost all legal advice is bespoke in the sense that it is tailored to a specific client and a specific situation. Bespoke and commoditised are not opposites. A matter can be bespoke in its particulars and commoditised in its market: there are simply too many equally qualified lawyers available for the client to experience the work as rare or irreplaceable. The confusion between bespoke and non-commodity is one of the more persistent sources of misjudgement in how law firms price their services and assess their own strategic position.

 

 

 

How the matrix works

The TGO Value Matrix© places these two factors on perpendicular axes. Return on investment runs vertically, from low at the bottom to high at the top. Commoditisation runs horizontally, from scarce specialist expertise on the left to widely available expertise on the right. Value, the price a client perceives as fair and reasonable, runs diagonally from the top left to the bottom right. All positions on the same diagonal represent equivalent value to the client, regardless of how different the practice areas or the absolute fees might be. A top-left position, high ROI and scarce expertise, is where the most valuable and highest-priced legal work sits: landmark M&A, complex cross-border litigation, bespoke financial regulation work for major institutions. A bottom-right position, low ROI and widely available expertise, is where clients experience legal services as a commodity cost and will consistently push for the lowest price. This is also where alternative legal service providers and AI tools are having and will continue to have their greatest impact, because clients at this position are actively seeking to reduce their dependence on expensive human expertise.

Two further factors modify these positions. Relationship adds a correction of between minus ten and plus ten percent to the value a client places on a specific lawyer or firm relative to the market rate. A client who has worked with a particular partner through a difficult matter, who has experienced their judgement under pressure and trusts their advice, will pay a premium for continuity. A lawyer with no prior relationship with that client will need to price accordingly until the relationship is established. Reputation operates similarly, allowing firms with a demonstrably strong market standing to command a premium of up to ten percent above peers of equivalent technical quality. The two factors are not cumulative. A strong relationship and a strong brand together still yield only a ten percent premium, not twenty. The market corrects for overpricing even where trust and reputation are high.

 

The compensation implication

For partner compensation, the Value Matrix© has a consequence that is important and often politically difficult to state directly. Partners in different practice areas are not operating in the same value environment. This is not a reflection of their talent, their effort, their commitment or their contribution to the firm. It is a reflection of the market position of their practice. An employment partner and a landmark M&A partner at the same firm, of equivalent seniority and equivalent quality, are generating systematically different revenue not because one is better than the other but because their practice areas occupy different positions on the matrix. The big-ticket M&A partner serves clients for whom the ROI on legal fees is large and the expertise is scarce. The employment partner serves clients for whom legal fees are primarily a cost and qualified counsel is readily available.

This creates a genuine dilemma for compensation design that no formula resolves cleanly. Paying strictly according to revenue generated rewards the market position of the practice rather than the contribution of the partner. Ignoring revenue differences and paying on some other basis requires the firm to explain to its highest earners why their market performance is not fully reflected in their compensation. Neither approach is without cost. What the Value Matrix© provides is a language for having this conversation honestly. The difference in revenue between practice areas is structural and market-driven, not a measure of individual merit. Acknowledging this explicitly, and designing the compensation model around it rather than pretending the difference does not exist or can be explained by relative effort, is the starting point for a system that partners across all practice areas can accept as fair. Whether equal contribution justifies equal compensation when the market assigns unequal value to that contribution is a question each partnership must answer for itself. But it can only be answered well by first understanding why the revenue difference exists in the first place.

 

The geography of earning potential

The market position of a practice area is not the only structural variable that determines the revenue a partner can generate. The market they practise in matters at least as much, and in many cases more. A partner running an M&A practice in Warsaw and a partner running an M&A practice in London may be equivalent in quality, equivalent in effort, and equivalent in their commitment to their firm. They are not equivalent in what they can charge. The difference is not personal. It is geographic and economic, and it is large.

Hourly rates in legal markets track the development of the economy and the sophistication of the client base. In mature, high-income markets with deep pools of institutional clients, major banks, listed corporations and private equity funds, rates at the top of the market are high and the volume of complex work sustains them. In London, New York, Hong Kong and a handful of other financial centres, the leading partners at the leading firms charge rates that are multiples of what would be accepted in most other markets. In the developed but smaller economies of Western Europe, Amsterdam, Frankfurt, Paris, Stockholm, rates are substantial but lower. In the fast-growing economies of Central and Eastern Europe, Warsaw, Prague, Budapest, they are lower still. In the emerging markets of Africa, Southeast Asia and much of Latin America outside the primary financial centres, the ceiling on what even the best-positioned firm can charge is set by what local and regional clients can absorb.

Cost of living follows a roughly similar but not identical pattern. London is one of the most expensive cities in the world. Warsaw is not. A partner earning what would be considered a modest income in the City of London can live very well in the Polish capital. This creates a perceptual distortion when partners in international firms compare their earnings across borders. A Warsaw partner on a materially lower PEP than their London colleague is not necessarily worse off in real terms. The comparison that creates friction is the nominal one, because nominal comparisons are the ones that reach partners through league tables, industry publications and lateral market conversations.

The national champion dynamic compounds this further. In most countries, the leading domestic firms operate at rates below what the international firms charge in the same city, but at rates that are at or near the ceiling of what the local market will bear. Their PEP reflects that ceiling. A senior partner at the leading firm in Lagos, Bogota, Kuala Lumpur or Warsaw may have a PEP that looks modest by the standards of the Am Law 100, but which represents an exceptional income by the standards of the market they operate in. The prestige, the market position and the professional opportunity those firms offer are real and substantial. Comparing them directly to London or New York on a nominal basis produces a distorted picture of relative success.

For firms operating across multiple markets, these structural differences create a genuine and recurring compensation design challenge. A unified global compensation system, applying the same formula in every office, will overpay in low-rate markets and underpay in high-rate ones. It will make the firm uncompetitive in its highest-revenue markets, where partners know what they could earn locally and will act on that knowledge, and it will create a cost structure in lower-rate markets that the revenue from those offices cannot sustainably support. A purely local system, by contrast, preserves commercial logic but fragments the institution: partners in different offices are measured against different standards, and the sense of belonging to a single firm is harder to maintain when the economics of the partnership are visibly and substantially different across the network.

The most common resolution is a hybrid: a common framework with market adjustments. The framework preserves the institutional logic, the same criteria for evaluation, the same principles for what is rewarded, the same culture of what the firm values. The adjustments reflect the economic reality that equivalent contribution in different markets produces materially different revenue, and that cost of living differences affect what a given compensation level means in practice. This approach is not without tension. Partners in high-rate markets may feel the framework constrains them. Partners in lower-rate markets may feel the adjustments undervalue their standing within the institution. Neither feeling is entirely without foundation. But a compensation system that acknowledges the geographic dimension honestly, and designs around it rather than pretending all markets are equivalent, is more likely to hold the institution together than one that imposes nominal equality on an economically unequal reality.

 

Perceived unfairness can be like a slow-killing poison.

In Chapter 1 we describe the study where two capuchin monkeys were placed in adjacent cages and given the task to exchange a rock for a food reward.[1] Initially both monkeys received a cucumber and both were perfectly happy. Later one monkey received a grape, which is a highly preferred treat, while the other monkey received the cucumber, which is less desirable. The monkey who received the cucumber reacted with frustration and anger. The cucumber-receiving monkey refused to participate further, threw the cucumber back at the experimenter, and even threw the rock.

This shows how deeply the concept of fairness is rooted in the primate’s DNA. The monkeys never had a prior learning experience nor had they any conceptual understanding of the concept. The response was purely intuitive. For humans things are more complicated and layered. Fairness to us is very much contextual. Without additional information it is impossible to say if a certain situation is fair or not. When it comes to partner compensation we will typically take several aspects into account, such as performance, experience, seniority, responsibilities and more. This is what forms the set of compensation criteria. The problem is that it is impossible to objectively rate such criteria and this is why the waters turn murky.

Another study done by Jerald Greenberg "Equity and Workplace Status: A Field Experiment (1988)," is a cornerstone of organisational psychology because it demonstrated that fairness is a comparative psychological state rather than a simple financial calculation.[2] While many studies on fairness rely on surveys or artificial lab settings, Greenberg utilised a "natural experiment" occurring within a large insurance company that was undergoing office renovations.

The study took advantage of a temporary relocation process. Because of the construction, employees were moved into offices that did not necessarily match their pay grade or hierarchical rank. This created three distinct groups:

• The Overpayment Group: Lower-ranking employees moved into high-status, spacious offices normally reserved for managers.

• The Underpayment Group: Higher-ranking employees moved into smaller, lower-status cubicles.

• The Control Group: Employees moved into offices that were equal in status to their previous ones.

 

Greenberg found that status symbols such as office size, desk quality, and privacy, functioned exactly like a pay cheque in the minds of the employees. According to Equity Theory[3], when people feel "overpaid" (in this case, given too much status for their rank), they experience a sense of guilt or a psychological need to justify the surplus. To resolve this, the employees in the high-status offices markedly increased their work performance to "earn" the nice office.

Conversely, those moved to lower-status offices experienced "underpayment inequity." Even though their actual salary remained identical, the loss of the corner office or the window view felt like a pay cut. Their reaction was a measurable drop in performance; they subconsciously lowered their "inputs" to match the diminished "outcomes" of their environment.

The Greenberg study is particularly salient because law firms are notorious for using physical and symbolic markers like corner offices, mahogany furniture, or even the order of names on a letterhead, to signal a partner’s value. Greenberg’s research suggests that a law firm management team cannot "solve" a fairness issue solely by balancing the books at the end of the year. If a high-billing partner feels their physical environment or their "prestige markers" are inferior to a peer’s, they will perceive a state of unfairness that no amount of discretionary bonus can fully bridge.

Interestingly, Greenberg noted that once the employees were moved back to their original, rank-appropriate offices, their performance levels returned to normal. This proves that the perception of fairness is highly elastic and reactive to immediate environmental changes. It also suggests that fairness is a "moving target"; as soon as the external symbols of success change, the internal calculation of what is "fair" resets.

In a 1986 study, "Fairness as a Constraint on Profit Seeking: Entitlements in the Market," Daniel Kahneman, Jack Knetsch, and Richard Thaler introduced the Principle of Dual Entitlement.[4] This principle suggests that in any economic transaction, there is a "reference transaction" that establishes a sense of what is fair. Both the "firm" (in this case, the law firm partnership) and the "transactor" (the individual partner) are seen as each having an entitlement to a certain baseline. The firm is entitled to its reference profit, and the partner is entitled to their reference compensation. This creates a moral boundary that limits how a firm can adjust pay, even when market conditions might suggest a change is economically rational.

The study emphasises that fairness is not an absolute calculation but is determined by a reference point, which is often the status quo or a historical precedent. For a law firm partner, the reference point is typically their previous year’s compensation or the "standard" share they have come to expect based on their seniority. Kahneman and his colleagues found that people view it as acceptable for a business to protect its bottom line by passing on costs to employees, but the fairness line is crossed when a company cuts pay just because they can. Applied to a law firm it would be viewed as unfair for a firm to capture a partner's expected entitlement just because the firm has the market power to do so. If a firm has a banner year, partners will feel entitled to a share of that surplus. However, if the firm tries to change the compensation formula to increase the firm’s retained earnings at the expense of the partners' expected shares, it is often perceived as a violation of this dual entitlement, leading to significant internal friction.

Kahneman’s broader work on Prospect Theory and the Endowment Effect, the tendency for people to value what they already own more than what they do not, applies directly to the "points" or "percentage" systems in law firms. Once a partner is "endowed" with a certain number of points or a specific equity stake, that allocation becomes their psychological baseline. The pain of losing a single point (a loss) is mathematically and psychologically much greater than the joy of gaining a new one. This explains why law firms find it notoriously difficult to "downwardly adjust" a senior partner’s compensation, even if their productivity has waned. To the partner, that percentage is not just a fluctuating financial asset; it is a possession they are entitled to defend.

A particularly nuanced finding in the Kahneman study is the distinction between nominal and real changes. The researchers discovered that people are much more likely to accept a "real" pay cut (such as a 5% raise during a period of 10% inflation) than a "nominal" pay cut (a 5% reduction in salary when there is no inflation). For law firm management, this suggests that fairness is often viewed through a nominal lens. Partners might grumble about a year where their draw stays flat while the firm’s costs rise, but they will often revolt if their actual dollar-amount draw is reduced. The "unfairness" is triggered by the act of taking something away from the reference point, rather than the erosion of purchasing power or relative market value.

The study argues that fairness acts as a constraint on profit seeking. Firms that ignore these community standards of fairness face "retaliation" from their transactors. In a law firm, this retaliation doesn't just look like lower morale; it manifests as lateral movement, where partners take their book of business to a competitor. Kahneman’s work suggests that a law firm’s compensation committee is not just solving an optimisation problem; they are navigating a moral landscape where the "reference transaction" dictates the limits of what they can change without destroying the partnership's social fabric.

A third study defining the so-called Integrative Model, by Jason Colquitt and his colleagues[5], bridges the findings of Greenberg and Kahneman by asking a harder question: not just whether partners feel they received enough, or whether they trust the process, but how these different types of fairness interact and which ones drive which behaviours. Colquitt identified four distinct dimensions of justice, and the model’s value lies in what it predicts.

The first dimension is Distributive Justice, which draws on the legacy of Adams and Kahneman by focusing on the ends. It asks whether the distribution of rewards such as a law firm partner's share of profits is consistent with an established rule, such as equity, equality, or need. The second dimension, Procedural Justice, shifts the focus to the means. It evaluates the rules that lead to those outcomes, emphasising consistency, bias suppression, accuracy, and the "voice" of the participants. Colquitt proved that if the process is perceived as rigorous and unbiased, individuals are considerably more likely to accept a "low" distributive outcome.

The third and fourth dimensions, often grouped as Interactional Justice, address the human element of the exchange. Interpersonal Justice reflects the degree to which people are treated with politeness, dignity, and respect by authorities. Informational Justice focuses on the explanations provided to people regarding why certain procedures were used or why specific outcomes were reached. The essence of the model is that these two "social" dimensions can be just as influential as the financial ones; a partner who receives a large check but is treated dismissively or kept in the dark about the firm's strategy may still perceive the system as structurally unfair.

Colquitt’s model earns its place here because of its predictive utility. It suggests that different types of justice lead to different organisational behaviours. For instance, high Distributive Justice is a strong predictor of individual task performance, while high Procedural Justice is a stronger predictor of institutional loyalty and "organisational citizenship", the willingness of a partner to go above and beyond their billable requirements for the good of the firm.

In a professional services context, the essence of the model is that fairness is a "multi-hit" theory. A failure in one dimension can often be mitigated by excellence in another, but a systemic failure across all four, for example, a low bonus reached through a secret process and delivered with a lack of respect, creates a psychological breach that is almost impossible to repair through financial means alone.

When we shift our focus from the superstar rainmakers to the cohort of "very good partners" the definition of fairness undergoes a significant transformation. The very good partners are the average partners described in Chapter 8. They are not average by any means, which makes it the wrong way to label them, but in the typical spread of performance in a law firm they form the average roughly 80% of the partnership. They are highly skilled, reliable practitioners who manage significant caseloads but perhaps lack a massive personal book of business. They form the engine room of the firm. For these partners, fairness is less about the absolute dollar amount of the surplus and more about the recognition of their institutional contribution and the preservation of their professional autonomy.

Applying the principles of Colquitt’s Integrative Model, the very good partners often find a "fair" outcome through Informational Justice, specifically, the degree to which the firm acknowledges the non-billing labour required to keep the firm functioning. This includes the hidden work of associate mentorship, quality control, and the maintenance of long-term client relationships originated by others. When a compensation system only measures raw origination, it effectively devalues this cognitive labour. For the non-superstar, fairness is achieved when the firm’s "narrative" of success includes their role as the "engine room" of the practice, validating their status as an essential pillar rather than a secondary cost centre.

Beyond fairness, there is a web of factors that keep an employee attached in their current position. The Job Embeddedness Theory, which looks at the set of invisible anchors keeping someone from leaving their job, shows that it’s not just about job satisfaction but also about how hard it would be to pull yourself out of your current life.[6] The theory suggests that for high-level professionals, the ability to control one's own work, autonomy is a primary non-monetary reward. In a law firm, this manifests as the "right" to choose which associates to work with, the ability to influence practice group strategy, and the freedom to manage their own schedule. For a very good partner, a system that dictates every aspect of their practice can feel "unfair" even if the pay is high. They perceive fairness when they are treated as "owners of their craft" rather than "employees of the superstars." This sense of self-authorship, as explored in contract and autonomy literature, acts as a psychological weight that balances out a lower distributive share of the profits.

Returning to Kahneman’s concept of reference points, the "very good" partner does not necessarily compare their pay cheque to the top-tier rainmaker; they compare their lifestyle and status to their peers in similar roles. Fairness is often perceived through the lens of Interpersonal Justice, specifically, the level of respect and social capital they hold within the partnership. If a service partner is consistently passed over for prestigious committee roles or is excluded from high-level strategic retreats, they experience a breach of interactional fairness. To them, the "firm" is a community, and a fair community is one where reliable, high-quality contribution earns a "seat at the table," regardless of whether they brought in the latest $10 million client.

For many non-superstar partners, especially those in the nonequity or fixed-share tiers, fairness is deeply tied to the transparency of the path forward. As Greenberg’s office study suggested, status symbols like the Equity title carry immense psychological weight. A firm that provides clear, qualitative metrics for how a service partner can move from "very good" to "equity" is perceived as fairer than a firm where that transition is a black box controlled by a few powerful individuals. When the path to the next level of status is obscured, the service partner perceives a violation of Procedural Justice, leading to the "lateral exodus" of talent who feel their ceiling has been unfairly and arbitrarily set.

The shrinking or expanding gap between the highest-paid rainmakers and the engine room partners, the compression problem in law firm compensation serves as a primary stress test for the academic theories of fairness we have discussed. When the ratio between the top and bottom of the equity partnership moves from a traditional 3:1 to a modern 10:1 or higher, the very good partners begin to reassess their value through the lens of Relative Deprivation Theory. This sociological concept suggests that people feel unfairly treated not because of their absolute wealth, but because of the widening gulf between them and a visible reference group. For the engine room partner, this widening gap signals a shift in the firm’s values from a "collegiate partnership" to a "star-system corporation," which alters their perception of Distributive Justice.

From the perspective of Equity Theory, as mentioned above being about the perceived fairness rather than a dollar value, the compression problem forces a recalibration of inputs. The ratio calculation of the Equity Theory means that if an employer takes away a "status" outcome (like a private desk), the employee will likely take away an "input" (their effort) to keep the equation balanced. If a superstar partner receives ten times the compensation of a service partner, the service partner must psychologically justify why their own input, often consisting of more billed hours and direct client maintenance, is valued so much lower than the superstar’s input of origination. If the service partner cannot find a rational or "fair" justification for this disparity, they experience "equity distress." This often leads to a withdrawal of discretionary effort, where the partner stops contributing to the firm’s long-term health, such as recruiting or internal training, and focuses strictly on their own survival. They move from being an "owner" to a "renter" of their practice space.

The impact of compression is also felt heavily in the realm of Procedural Justice. In many modern firms, the decision to widen the pay gap to attract or retain lateral superstars is often made by a small management executive committee. For the very good partners, the unfairness is not just in the dollar amount, but in the lack of Voice, the procedural element Colquitt identified as essential for legitimacy. If the rank-and-file partners feel they have no say in a compensation philosophy that devalues their steady contribution in favour of high-risk stars, the fair process effect collapses. The resulting resentment is rarely about the money itself; it is about the feeling that the rules of the game were changed mid-match without their consent.

The compression problem often creates a "status squeeze" that mirrors the environmental findings of Greenberg. As a firm allocates more capital and prestige to the top 5% of earners, the middle-tier partners often lose access to non-monetary rewards such as premium office space, high-level administrative support, or a say in firm governance. This loss of Interactional Justice, being treated as a second-class citizen within one's own firm, can be more damaging to morale than a stagnant draw. When a partner who has billed 2,000 hours a year for a decade feels like a "utility player" rather than a "franchise player," the psychological contract is broken.

The compression problem tests the Dual Entitlement principle of Kahneman. The firm feels entitled to pay whatever is necessary to keep a superstar from leaving for a competitor, while the service partner feels entitled to a "fair share" of the firm’s success that honours their historical loyalty. When these two entitlements clash, the engine room partner often views the superstar’s massive payout as a "theft" from the collective pool. This shift transforms the firm from a cooperative venture into a zero-sum game, where the perceived unfairness of the distribution leads to a breakdown in the very "trust and confidence" that defines a legal partnership.

Unlike our capuchin monkey cousins, we are able to control our emotions. Just like our cousins we have a very individual concept of what is fair or not anchored in our DNA. It is unlikely for a partner who feels unfairly treated to start throwing stones, but perceived unfairness will come at the cost of motivation and loyalty. Few partners that feel unfairly treated when it comes to their compensation will put up a fight. The ones that do are mostly the ones that are already on or near the top of the ‘food chain’. Their feeling of unfairness is typically fuelled by other partners that in their opinion do not carry their own weight. Most partners do not become vocal if subjectively treated unfair. They switch off and some of their drive and loyalty gets lost along the way. Unfairness is a very bad motivator. In the corporate world there is the phenomenon of ‘quiet quitting’ which refers to the practice of employees doing the bare minimum required for their job, without putting in extra effort, time or enthusiasm. Essentially, they fulfil their primary responsibilities but avoid going above and beyond, such as staying late, attending non-mandatory meetings or taking on additional tasks. Do you recognise a pattern here? Have you ever considered that your compensation system is actually not helping the firm reaching its full potential because the ones that feel treated unfairly are, contrary to popular belief, not extra motivated but somewhat demotivated instead?

 

Objective Criteria

Law firms have criteria that are applied to calculate what will be the profit share of each partner. These criteria are put in place to overcome the anxiety that there is a high degree of subjective judgement at the base of the decisions. Subjective equals unfair. The problem with these assumed objective criteria is that they are subjective by nature simply because the selection of which criteria to take into consideration is subjective in itself. One could for instance take ‘years of experience’ as one of the criteria. The immediate question would be why and if so to what extent experience is relevant for the perceived fairness of compensation? Years of experience as such might be objective, its weight and impact is highly subjective.

For partner compensation, performance is generally the factor that carries most weight. Performance is measured as the revenue that a partner has administered in their name. Makes sense and sounds objective at first sight. But is it? Revenue does not automatically equal profitability. What about partners that collaborate and have a valuable contribution in files that are under the name of someone else? What about the partner who ‘inherited’ his practice from his predecessor, and is just ‘cashing in’ on that book of business built by someone else? What about the differences between practice areas that we mentioned before?

I am sorry to disappoint you, but there is no such thing as objective compensation criteria. Knowing this, we might ask ourselves if maintaining the fiction that the criteria are in fact fair and unbiased, might not be harmful in itself. Would it not be preferable to stop pretending compensation is simply the outcome of a fair assessment followed by a transparent calculation? Would it perhaps be better to acknowledge compensation is subjective and part of a strategic political game? Perhaps this is why firms like Kirkland & Ellis have recently started experimenting with a black box compensation system?

The compensation committee, or whoever decides on a partner’s compensation is definitely another aspect that can be perceived as introducing unfairness in the process. When picturing the figure of Justitia, she is always blindfolded. This is to signal that in the eyes of the court everyone is treated equally. The compensation committee is not blindfolded. These are very much fellow partners who have their friends and preferences within the firm. Generally in the committee the “ruling class” is over-represented. This means that their values and interests are over-represented. It would undermine the trust in the legal system if one of the judges would be a personal friend of one of the parties. Generally one can ask for such judge to be dismissed from the case. The compensation committee is what it is. It is human nature to be more sympathetic to the one as to the other. No member of the compensation committee will be totally objective and unbiased. That is why the compensation system will always be imperfect: subjective criteria and a subjective committee operating under the veil of objectivity.

 

The Ruling Class

On paper, all equity partners in a law firm are equal. Just like in George Orwell’s novel Animal Farm, in practice some partners are ‘more equal than others’. This inequality is rooted in the master-apprentice system that law firms use to train and educate their talent. As a young lawyer you work in the team of an experienced partner who is your trainer and boss. If a decade later the young lawyer him/herself becomes a partner, this relationship does not immediately change. The young lawyer will perhaps always feel the junior as long as the senior is present. The other day I had a conversation with a good friend who is today a public prosecutor at the Serious Fraud Office. In the past he has been a high earning partner in a law firm. He shared with me a recent experience with one of his former trainees who is now himself a partner at that same law firm from many years and had come to his office to discuss a case on behalf of a client who was being investigated for bribery. Much to his surprise, my friend told me, the former apprentice now partner, took the ‘submissive’ role just like in the old days when he worked in his team. Perhaps a bit like the relationship between parents and their children, it takes a long time for the child to become an adult on equal footing.

It is not just the master-apprentice relationship that breeds inequality. It is also personality, as in introvert versus extrovert, and performance that feed inequality in a partnership. The introverts are easily intimidated by the extrovert who shows little reserve in sharing their opinions and emotions. Some partners dominate discussions while others prefer to remain quiet. Being vocal and dominant is easily confused with being better or more important.

Performance is also a powerful driver behind inequality. Rainmakers are generally admired as the other partners know from experience how hard it is to bring in great revenue. Top-performers also wield great power because if they become unhappy they might perhaps leave for another firm, taking their book of business. On Monday 24 February 2025 the Financial Times published a news article on NYSE listed FTI Consulting, a global business advisory firm, that read: “FTI Consulting, one of America’s largest publicly traded business advisory groups, is bracing for a wave of staff defections after one of its rainmakers launched a rival firm, taking top lieutenants and potentially tens of millions of dollars of business with him.” FTI shares fell 14 per cent, cutting its market capitalisation to $5.9bn[7]. Similar situations have happened at law firms, we describe the law firm version of a run on the bank in Chapter 5. Intuitively partners are aware of this and that is why they will go through great length to keep the rainmakers happy.

The assumption that higher earnings equate to superior intelligence is one of the most pervasive psychological drivers in professional services. This creates a halo effect where a partner’s financial success is retroactively used to validate their judgement on matters entirely unrelated to their legal expertise, such as IT infrastructure, long-term brand strategy or human resources. Because the firm’s accounting software confirms their value every month, the individual often develops a sense of intellectual infallibility. This cognitive bias doesn't just live in the mind of the high-earner; it is reinforced by peers and associates who defer to the rainmaker under the assumption that their revenue generation is a proxy for general wisdom.

When wealth is used as a surrogate for intelligence, it creates a dangerous imbalance in firm governance. A partner who is exceptionally gifted at landing high-value litigation may not actually possess the temperament or the strategic foresight to manage a global organisation, yet their income buys them the "intellectual right" to dominate the conversation. This leads to a culture where the loudest voice in the room is determined by the size of their year-end bonus rather than the quality of their logic. In a culture governed by that logic, dissenting opinions from lower-earning partners, even if those partners are brilliant legal scholars or master technicians, are often dismissed as the grumblings of the less successful.

The correlation between money and influence is further cemented by the firm's own reward structures. As a partner earns more, they are often invited onto more influential committees, which provides them with more proprietary information, which in turn makes them appear even smarter to their colleagues. This is rarely about raw IQ and almost always about access and the confidence that comes with financial security. The psychological weight of being a "top point holder" allows a partner to speak with an authority that others find difficult to challenge, effectively turning their compensation package into a shield against scrutiny.

The danger for the firm occurs when this perceived intelligence leads to strategic blindness. If a partner believes their high billings make them a natural expert in all fields, they may ignore the warnings of specialists or administrative professionals who actually possess the relevant data. This creates a fragile power structure built on the ego of a few individuals rather than the collective intelligence of the partnership. When a high-earner's "smart" decisions eventually fail, the firm often realises too late that they confused a talent for business development with a talent for institutional leadership.

Within a partnership equality is largely a fiction. Compensation systems are drafted by or with strong involvement of ‘the ruling class’. It will therefore come as no surprise that many compensation systems favour the ruling class and are designed to maintain the status quo. It is more common that young partners get a bit less in order to handout more to the top-performers, than it is for top-performers to accept a lower share in order to redistribute to the young partners. These days young partners in general are the ones to watch as it takes increasingly longer to reach equity partnership and once equity partner, progress on the compensation ladder is slow.

The ruling class dynamic is not inevitable. It can be consciously overridden, but doing so requires the rarest combination in a law partnership: leaders who are powerful enough to change the system and principled enough to change it against their own short-term interest. Two men in the Latin American market have achieved something close to legendary status for doing exactly that. Manuel Galicia, founder and long-serving managing partner of Galicia, built the leading law firm in Mexico into a genuinely institutional partnership rather than a founder’s vehicle, making the deliberate choice to subordinate his own franchise to a structure designed to outlast any individual. Roberto Quiroga did the same at Mattos Filho, one of Brazil’s pre-eminent firms, where his transformation of the firm’s compensation and governance model was sufficiently remarkable that it became a case study at Harvard Law School. The case documents Quiroga’s task as the firm’s first formal managing partner: persuading the most powerful rainmakers to relinquish origination fees that formed the core of their income, on the argument that the firm’s long-term strength depended on it. He succeeded. That both men are spoken of with genuine admiration across the region is not merely a tribute to their capability. It is a measure of how rarely the ruling class chooses to constrain itself.

When we work with our clients, we often use a TGO Power Curve© analysis. This analysis uses a proprietary calculation for each of the partners based on the size of the practice and the reputation in the market. The result is plotted on a base line, representing the age distribution of the partner group (see picture in Chapter 8).

 

Sometimes money is not a goal

You might be surprised by the number of conversations I have had over the years where partners privately confess that for them more money is not that important. They are perfectly happy where they are and value a good balance between work and private life. For them the objective of earning more is not a driver. This is not only partners in smaller boutique law firms, but they can also be found in big-law business law firms.

Looking at the younger generations and especially generation-Z, this attitude towards money might well become a trend to be reckoned with. Today law firm compensation systems are based on the assumption that all partners have shared values when it comes to profitability and compensation being the most important thing. The moment partners no longer rally around the pot of gold, this paradigm will not hold and law firms might end up in trouble.

The principle of fairness is complicated enough as it is. It is based on the assumption that each and every partner values money and profitability more than lifestyle or personal life. Already today we can see some cracks appear as there appear young partners who are not prepared to sacrifice everything, who perhaps would like to work for four days instead of seven. Such partners could be super talented and be highly valued by clients. It will not be hard to imagine the tension between the baby boomer used to being available 24/7 and the young talent setting clear boundaries. Different values will lead to different perceptions if it comes to fairness. The concept of fairness is the unspoken foundation of every partner compensation model.

When a partner confesses to me that they are making enough money as it is, I do not necessarily sympathise. Sure a partner likely earns more than the CEO of a midsize company and definitely more than the prime minister or the president. So yes, objectively there is no need to earn more. The problem is this: a law firm is a commercial business and commercial businesses need to be profitable and they need to compete in the market. In a law firm there is the exceptional situation that all profit is distributed among the partners. This leads to the misguided idea that personal income and profitability are perhaps two separate things. They are not. So if a partner states, they see no need to earn more, what they are actually saying is their company does not need to make more profit. This thinking doesn’t work. Law firms are sizeable operations renting expensive office space and employing perhaps hundreds of people who depend on them, often with a pie that needs to increase each year to keep up with the growing points of the young partners. The legal market is also a highly competitive market and clients can quite easily switch from one law firm to the next. Law firms have to develop, retain and attract the best talent to stay in business. Profitability which is on par or on top of its peers is an important factor to make this succeed. The Value Matrix© and the Creation-Production Divide© are tools for seeing this clearly. They make visible what the billable hour obscures: that the value a firm creates is not uniformly distributed across its work, and that a compensation model which treats all revenue as equivalent will systematically reward the wrong things. Compensation is not a way of dividing what the firm earns. It is a way of defining what the firm is.

Chapter 3 examines the main systems through which firms attempt to put these principles into practice.

 

[1] See footnote 3. Brosnan & de Waal (2003).

[2] Greenberg, Jerald. (1988). Equity and Workplace Status: A Field Experiment. Journal of Applied Psychology. 73. 606-613. 10.1037/0021-9010.73.4.606.

[3] While Greenberg did not invent Equity Theory -that credit goes to J. Stacy Adams in 1963 -he used this specific paper to test and explain how it functions in a workplace.

[4] Knetsch, Jack & Thaler, Richard. (1986). Fairness As a Constraint on Profit Seeking: Entitlements In the Market. American Economic Review. 76. 728-41.

[5] Colquitt, Jason & Scott, Brent & Judge, Timothy & Shaw, John. (2006). Justice and personality: Using integrative theories to derive moderators of justice effects. Organizational Behaviour and Human Decision Processes. 100. 110-127. 10.1016/j.obhdp.2005.09.001.

[6] Mitchell, Terence & Holtom, Brooks & Lee, Thomas & Sablynski, Chris & Erez, Miriam. (2001). Why People Stay: Using Job Embeddedness to Predict Voluntary Turnover. Academy of Management Journal. 44. 1102-1121. 10.2307/3069391.

[7] Financial Times, "FTI Consulting shares fall after star analyst departs," 24 February 2025. FTI Consulting, Inc. is listed on the New York Stock Exchange (ticker: FCN).