By Aebra Coe

Law360 (September 30, 2020, 7:27 PM EDT ) Some BigLaw firms are feeling the pinch of multiyear compensation guarantees they promised laterals before the coronavirus pandemic hit, with many taking a step back and reevaluating their use of the hiring tool, especially as some long-time partners see their pay pared back.

In recent years, offering a solid but not spectacular lateral partner candidate an attractive contractual compensation guarantee became the norm, but in 2020 that has shifted as law firms face economic uncertainty related to COVID-19, with most now offering the contracts only to crème de la crème candidates, according to legal recruiters including Daren Wein of Panorama Legal Consulting.

A compensation guarantee is a contractual agreement between a law firm and a lateral partner candidate in which the firm agrees to pay the partner a certain amount of money, or offer a certain number of shares in the firm's profits, for a set period of time as the new hire transitions his or her career and clients to the new law firm.

Firms use the guarantees as an important recruiting tactic, luring partners with the knowledge that if they take the risk of moving, there is a safety net if things don't go as well as expected at first.

The typical guarantee lasts for between 18 months and two years, recruiters said, but some have been known to stretch for as long as three or four years.

In 2020, the cost-benefit analysis firms use when thinking about compensation guarantees appears to be shifting.

"The question becomes: Who do you offer that guarantee to? During 2018, it was easier to offer a guarantee to a B-plus candidate, but now it makes more sense to only offer them to A-plus candidates. As a result, firms may close fewer deals, but at least you can justify it," Wein said.

In addition to the financial risk, there is also the risk of tensions rising in the firm as a new recruit is promised a given level of pay, even while others have seen their compensation decreased or delayed during the pandemic. Hence, the need to "justify" a guarantee, as Wein put it.

"These things come in waves where oftentimes behavior is reactionary," Wein said. "And the knee-jerk reaction is to eliminate them to the extent you can when you get burned."

But guarantees that were signed before the pandemic began and continued through 2020 have in some cases created tension within law firms as some recent laterals with guarantees have underperformed and yet have not seen pay reductions or delays alongside the rest of their firm's partners, according to Jaap Bosman, founder of TGO Consulting.

"When law firms decided to cut or postpone partner payments to improve cash flow and factor for anticipated lower revenues, a surprisingly large number of lateral hires insisted on receiving their contractually guaranteed income regardless of the situation and regardless of the pay cuts the other partners had to accept," Bosman said.

In some instances, new partners operating under a guarantee may work out a way to adjust their contracts in a crisis that does not alienate the longer-term partners, upon whom they rely for collaboration and referrals, according to Gary Miles, founder of recruiting firm Miles Partner Placement.

"If that partner has a deal that is tied to an actual number, then that can be a situation where other partners start to feel really envious," Miles said. "That can cause major tension within a partnership."

And so, in some cases, it's better for the new partner and for the firm to find a solution where the contract is adjusted so that the new hire is not treated significantly differently from the rest of the firm, and paid more even as the volume of work decreases, Miles said.

Natasha Innocenti, a partner at legal recruiting firm Macrae, says she advises candidates to do their best to integrate into a firm, which could mean not asking for a multiyear compensation guarantee, especially now, when firms are hiring during a difficult time and many laterals are integrated into their new firm virtually.

"Everyone you meet at your new firm is a potential source of business for you," Innocenti said. "The last thing you want is to start off having gotten a special deal. You need to share the risk just as you would have at your last firm."

In addition to caution around long compensation guarantees, law firms are also pulling back from the practice of offering candidates extra payments to make up for undistributed profits they leave behind at their previous firm, Innocenti added.

"In a strong market, a lot of hiring firms will either make whole that undistributed money or at least meet it part way. I have seen very few make whole payments of any kind [since the start of the pandemic]," she said.

Still, the lateral market for law firm partners with big books of business is a very competitive place even during a pandemic, and often law firms have no choice but to offer a guarantee if they want to be competitive, according to Sabina Lippman, co-founder of legal recruiting firm Lippman Jungers LLC.

"A lot of times, when a firm makes the conscious decision to hire someone during a pandemic it's because that's going to be someone who will be very successful," she said.

The attorney's high performance is likely to make the guarantee worth the investment, according to Lippman.

Lippman said she doesn't see firms offering fewer guarantees as much as being more careful about who they choose as a lateral hire in the first place, so that every candidate is very well vetted and a guarantee isn't as much of a risk.

"What we're seeing is firms are being more deliberate about where they are investing their recruiting dollars," she said.

While firms are being selective about the laterals they bring on, Frank D'Amore of Attorney Career Catalysts said he too sees compensation guarantees as an important tool that law firms cannot avoid, especially if they want to recruit the best of the best candidates.

"If there's a very attractive partner or group, that's often what you have to do to be able to get them," D'Amore said.

And securing those laterals may be even more important to law firms now than it was before the pandemic, he noted.

"In the midst of a pandemic, top-line revenue is very important. If you have a lateral or group that has done well in the past, and in the midst of a pandemic has continued to do well, they're even hotter now than they'd normally be."

--Editing by Jill Coffey and Kelly Duncan.

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