Comp Deferrals and Salary Cuts among AmLaw 200 Firms in North Carolina

Amid the initial shock of quarantine and sharp economic decline, several firms have sought to shore up financial positions in two ways: 1) deferring payments to equity partners; and 2) cutting salaries of attorneys and staff.  Of the 45 AmLaw 200 firms with a presence in N.C., only 15 have deferred payments to equity partners; and only 16 have cut salaries, according to legal industry blog AbovetheLaw. 

Hugh Simons, former CFO of an AmLaw 25 firm, argues for more of both measures, in recent articles published in the American Lawyer.  Simons argues that both deferred comp and salary cuts are necessary to prevent successive waves of partner departures, which ultimately are the cause of firm collapse.  

Deferring Comp Payments

Simons argues that deferring payments to equity partners is the biggest available lever to maintain financial stability in a down-turn.   For example, in a firm with a profit margin around 50%, each month of deferred equity partner comp covers a full month of expenses. Deferring equity partner comp sends the signal that the firm is serious about preventing collapse and thus protecting partners' capital contributions. 

Simons further argues that deferring comp early in a crisis is preferable to a capital call later in a crisis, since capital calls are tax inefficient and a future capital call may signal that firm leaders have become privy to new information that the firm is in peril (vs. taking a precautionary measure early in the crisis to avoid peril).  And maintaining partner confidence is critical to prevent successive waves of departures.

Cutting Salaries

The prevailing estimate is that the AmLaw 200 will face a revenue shortfall of 15% to 20% in 2020.  According to Simon’s calculations, with no cost cutting, 126 AmLaw 200 Firms would face declines in profit of approximately half or more; and 81 of these firms had not cut costs as of late April.  Simons draws the conclusion that partners at these firms have resolved to take the hit to profits this year and ride out the storm.  But he observes that solidarity wanes, as partners see the relatively stronger positions of their peers at firms who have cut costs; and one group of departures at a firm leads to another and to another and then snowballs.  Simons estimates that could happen at 10-15 of the 81 firms, if they do not cut costs.