Anna Zhang, The Asian Lawyer
Chinese law firms generally operate either under
a centralized profit-sharing corporation model or a decentralized
commission-based model. (For part one of this story, click here.) But when it comes to remuneration system, the two models become more
complicated and over intertwined.
In general, partner compensation at Chinese
firms trails that of Western firms. In prime markets such as Beijing and
Shanghai, Chinese firms partners typically make somewhere between about
$150,000 and $800,000, according to three partners from different firms, while
a small club of partners makes between $1.3 million and $1.6 million or more.
At corporation-style firms, these sources agree, partners tend to have higher
pay that is clustered in a somewhat narrower band than is seen at
commission-model firms, where the gap between the compensation of the lowest-
and highest-paid partners can be much higher.
Aiming to build Haiwen into a long-lasting
institution—a “Bai Nian Lao Dian,” or 100-year-shop in Mandarin
Chinese—managing partner Zhang Jiping and his partners adopted a pure lockstep
compensation system in 2009. The idea was to encourage cooperation and reduce
competition among partners; but it also meant that the firm, then just 100
lawyers strong, became more cautious about scaling up.
“We are very selective in adding partners,
because any addition could potentially have a dilutive effect,” says Zhang.
Since 2009, the firm has grown by about 30 lawyers and 13 partners. “We’ve
never done so much as a team acquisition. We are after consistency and good reputation,”
Zhang says.
But Zhang says the firm knows that size does
matter: “Smaller in size has certain limitations on our development. We might
be able to do more and better had we been bigger.”
Last year, to prepare for faster expansion, the
firm added a performance-based element to its remuneration system. Instead of
being based purely on seniority, a partner’s pay is divided into two parts: a
smaller part based on seniority and historical contribution and a larger part
based on billings. The firm has grown more rapidly since the reform, hiring six
new partners as well as opening a new office, Zhang says.
Other corporation-style firms such as Han Kun
and Fangda use a similar modified lockstep. The differences usually lie in the
relative size of the seniority-based portion.
At JunHe, another corporation-style firm, the
remuneration structure has moved in a different direction. Traditionally the
firm divided its profit into five pools, compensating partners on the basis of
seniority, client development, work execution, work coordination and
management. Software calculated partners’ compensation in each pool using fixed
formulas that were public to all partners.
JunHe managing partner Xiao Wei says that the
performance-emphasized system helped attract several high-profile hires, such
as Llinks cofounder David Liu, who joined in Shanghai in 2004. But Xiao says
that it also made partners become reluctant to share clients.
Last year, Xiao created a pilot program, a
modified lockstep, that partners can join on a voluntary basis. Compensation of
the pilot program partners—now more than 80 percent of the firm’s 128
partners—are determined by seniority-based points plus an evaluation based on
billable hours, client development and work execution as well as nonbillable
contributions such as participating in associates’ training and career
development.
The catch is that partners don’t know how the
evaluation process works. “It is deliberately kept confidential so that
partners can focus only on their work,” says Xiao.
Inside the pilot program, partners work as one
team. Any client brought in by a partner becomes the entire team’s client. “In
the past, a client is typically served by one particular partner; the rest of
the firm’s resources weren’t really helping,” Xiao says. “Now that we’ve broken
the wall, some client can get as many as a dozen partners working for them on
whatever they need.”
Billings now go through a centralized system,
and resources such as associates and paralegals are assigned through a
personnel coordination center. Xiao says that the system has improved
efficiency and grown business. Last year, JunHe recorded $190 million in
revenue, up 17 percent from 2014.
“With the new compensation evaluation system,
which takes work execution and billable hours into account, young lawyers can
focus their energy on delivering quality work rather than fighting with other
partners for clients,” he says.
At the other end of the spectrum from the
corporation-model firms is commission-based Yingke. Its compensation system has
also evolved. The firm formerly operated under a franchised model in which all
lawyers—partners and nonpartners—practiced independently in a shared office.
Lawyers kept their own billings after paying the firm 5-10 percent as
commission; there was no profit sharing.
In 2013, Yingke started to introduce profit
sharing within individual offices. Partners can buy into an office’s equity; an
equity partner shares in the office’s profit at the end of the year, in
addition to what she makes from her own billings.
The new system is now in place for all 508
equity partners at Yingke’s 38 Chinese offices. Global managing partner Mei
Xiangrong says the profit-sharing system has motivated equity partners to work
harder and is responsible for the firm’s growth to $210 million in revenue last
year, up 49 percent from 2014, according to China
25 data. “Our
revenue goal in 2016 is $317 million,” says Mei.
For Zhong Lun, designing a compensation system
that both motivates partners to perform and encourages them to cooperate has
long been a struggle. Since its launch in 1993, the firm has gone back and
forth between a commission-based model and a corporation model. The system now
in place borrows from both models. A partner’s income is calculated by
multiplying her total billings by the firm’s average profit margin. To budget
costs, partners estimate their annual billings at the beginning of the year,
and use 31 percent of the lower end of that range as their target for expenses.
They pay a penalty if their actual costs exceed that number.
Gary Gao, a Shanghai partner at Zhong Lun, says
the system is transparent and simple to understand. “It controls costs, it has
the motivation of a commission-based model, but unlike the commission model, we
have to cooperate; otherwise the average profit margin will drop,” he says.
Talent retention is one of the chief concerns
for firms under the corporation model. In 2015, The Asian Lawyer reported that young lawyer were leaving
leading corporation-model firms because of the dim prospects to join the
partnership. Those lucky enough to make partner often struggled to survive, as
they lacked sufficient preparation.
Zhong Lun’s flexible model has fueled the firm’s
faster expansion than its peers. It has allowed the firm to grow largely by
lateral hires, whereas many of its corporation-model counterparts rely mostly
on organic growth. Last year, the firm made 10 partner hires, compared with
four at JunHe, three at Haiwen and three at Fangda, according to Asian Lawyer data.
Similarly, Global Law Offices, which uses a
commission-based compensation system, was able to attract lawyers from
international firm such as King & Wood Mallesons, Davis Polk & Wardwell
and Morrison & Foerster. “For young and capable lawyers, growth here will
be much faster,” says Jerry Fang, who joined Global last year from Davis Polk’s
Hong Kong office, adding that new partners are encouraged to take in their own
clients.
Other international returnees have different
preferences. Guiping Lu, a former Latham & Watkins Hong Kong counsel who
opened the Shenzhen office for Haiwen in February, says that he joined his new
firm mostly because he finds Haiwen’s culture and remuneration system
consistent with his experience at international firms.
Perhaps the corporation model is best suited for
firms that are already leaders of the pack, says University of Wisconsin
professor Sida Liu. “For top firms with specialties, their brand is strong
enough to keep people; they already have the best clients, and they don’t need
to scale up,” he says. “Because once you expand, you have to tolerate other cultures.
It’s hard to carry on with your own.”
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