Wednesday, July 15th, 2020
By Gideon Grunfeld
When you’re ready to elevate a junior lawyer to the partnership level, you’ll likely have to handle the delicate process of sharing financial information that this employee was not previously aware of. This is happening more often as more small and mid-sized firms are going through the succession planning process. Equity partners will increasingly need to educate an associate or Of Counsel being promoted to partner, for instance, on the organization’s revenues and expenses. This can turn into a sticky situation partly because those expenses include details on payroll and other forms of compensation.
The legal issues are fairly straightforward. If partners are worried about compensation and related data getting out, they should reconsider why they are elevating this person to the partnership. In any event, they can require that the prospective partner sign a non-disclosure agreement.
Many associates have little experience reading financial documents and may need some assistance parsing out the numbers. Law firms therefore need to set aside more time than they initially estimate to get young partners up to speed. This too is largely an issue of planning.
The emotional factors involved in sharing financial information, however, can be trickier. This process often marks the first time the junior lawyer finds out just how little they’ve been paid relative to what the partners have taken in. It also may make clear to them that they’ve been receiving less than some of their peers.
Most of the time, since they’re in the process of moving up the ranks toward higher levels of compensation, the associate overcomes the surprise that may accompany financial disclosures. But this shock can also be avoided in a way that fosters more good will between that employee and the firm.
The best practice is to communicate this kind of information more gradually, starting the transition earlier to allow time for these details to be discussed bit by bit. Verbally letting an associate know roughly how much partners make can give them time to adjust before seeing it on paper. Sharing this kind of information, even in general terms, signals to the more junior lawyer that they are being treating as a future equal. This level of transparency can also prevent valued senior associates and Of Counsel from leaving the firm prematurely.
Sometimes, succession planning forces firms to address issues related to sharing financial information on short notice. This happens, for example, when a partner decides to leave suddenly, announces that they won’t sign the existing lease when it comes up for renewal, or encounters unexpected health issues. In this case, it’s key to remember the importance of educating the person looking to take on a leadership role or equity stake. Establishing an understanding that goes beyond the financial figures is critical if the firm wants to educate more junior lawyers about a shared future that includes transferring equity interests and putting into place new firm leaders.