Investing in the Future

From The Practice September/October 2018
Partner compensation at a growing law firm

In Lisa Rohrer and James W. Jones’s 2015 case study, “Reforming Partner Compensation at Mattos Filho,” we follow the eponymous firm’s first managing partner as he tries to install a new system for compensating his partners. Founded in 1992, Mattos Filho, Veiga Filho, Marrey Jr. e Quiroga (“Mattos Filho”) was originally formed as a boutique tax firm by a small group of lawyers who departed the similarly named Mattos Filho & Suchodolski when their lopsided command of billings generated discontent among their former partners.

The small firm expanded during the 1990s and 2000s, eventually outgrowing the decentralized management structure typical of Brazilian firms at that time. After a high-level reevaluation of the firm’s governance structure, Roberto Quiroga Mosquera, a charismatic founding partner and one of Brazil’s elite tax lawyers, was elected the firm’s first managing partner in 2009. Among his chief priorities upon assuming the leadership role: reforming partner compensation.

The eat-what-you-kill system functioned on three primary factors: equity, origination, and production.

Initially, Mattos Filho operated under an eat-what-you-kill (EWYK) compensation system, a vestige of its days as a small boutique firm where the prospect of going out and getting new business was both urgent and full of possibilities. Fast-forward to 2009, and many of the positive effects of the system—partners invested in the health of the firm and motivated to maximize their own contributions to it as they saw the returns reflected in their compensation—had abated and were likely to continue to diminish as negative consequences built to a critical mass. Quiroga sought to head off the problem before that happened.

What is a case study?

A case study is an educational tool that allows students to analyze a factual situation confronting an individual or organization. Case studies, which are historically accurate, address topics such as the evolution of an organization’s business model, cooperation within teams, a corporate lawyer navigating his turbulent career, or a difficult merger between two law firms. Cases are not meant to provide definitive answers but instead to show multiple points of view and highlight the complexities and ambiguities of particular situations.

Mattos Filho’s eat-what-you-kill system

The EWYK system functioned on three primary factors: equity, origination, and production. Over time, tensions grew around each of these points.

Equity. Under the original EWYK system, partners were required to buy equity priced according to a yearly appraisal of Mattos Filho’s value. As the firm flourished, the cost of shares increased, placing a steeper and steeper burden on young partners. It became clear that something had to change, and as this realization settled into the collective conscious of the partnership, newer partners paid only the minimum required amount and were reluctant to give even that with the expectation that the system was soon to be upended—thus erasing the disproportionate burden they were just forced to bear.

As the firm flourished, the cost of shares increased, placing a steeper and steeper burden on young partners.

Origination. Another pillar of Mattos Filho’s EWYK system was the use of client origination fees. In short, partners earned a percent of all revenues from clients they were the first to bring in. Of course, this was meant to motivate partners to be as entrepreneurial as possible in finding new clients who could offer high-end work, which is exactly what the then-new firm needed. However, as the firm grew, this became less of a carrot for all hardworking partners and more of a stick for those who were newer to the scene. Quality opportunities with new clients dwindled as Mattos Filho’s market share increased—though they certainly did not disappear—and meanwhile partners who no longer had any meaningful connections to old clients were still earning their origination fees. Resentment grew among younger partners as they struggled to benefit from this system.

Production. The billable hour also played a starring role in Mattos Filho’s EWYK compensation structure. As many observers have noted (including the Center on the Legal Profession’s own Heidi K. Gardner in “Collaboration in Law Firms”), one major drawback of the billable-hour format is that it can discourage collaboration between lawyers. At Mattos Filho, this was another problem that landed hardest on young partners with comparatively smaller books of business than their more established counterparts. If everyone was guarding their own piece of the pie, then it would be that much more difficult for up-and-coming partners to learn from their more experienced colleagues and become better lawyers for the firm.

Ushering in the new

Quiroga was caught in a catch-22. Change the system too much, and he would upset the oldest and most productive partners in the firm. Change the system too little, and he risked an exodus of young talent frustrated by a system that restricted their compensation. Whichever he chose, there would be clear winners and losers in the short term. After employing a compensation consultant, he proposed a system that was merit-based, but considered “merit” to encompass a wider range of contributions, one that was prospective insofar as one year’s performance directly affected their compensation in the following year; and it was subjective to the extent that specific numbers related to performance were not the only factors that determined compensation.

Resentment grew among younger partners as they struggled to benefit from the eat-what-you-kill system.

Quiroga knew he faced an uphill battle implementing this reform, and he settled on an approach based on coalition building and appeals to the long-term health of the firm. First he got buy-in from those who stood to lose the most—the firm’s most influential and successful partners—convincing them with a series of visits with American firms that the kind of firm they wanted Mattos Filho to be could not operate on an EWYK system. “Quiroga was pushing the change, and he was willing to give up on his own entitlements,” noted one partner. “He had moral authority in driving the change because he was willing to lose his privileges, just as other senior partners would.” With this powerful base of support, he moved on to the executive committee, then to the founding partners, and finally to the whole partnership. While some partners objected to the change, it was eventually voted in and set to take effect in January 2010—effectively ending EWYK a year into Quiroga’s tenure as managing partner.

Quiroga’s mission to reform partner compensation was not without fallout. Some lawyers defected, perceiving better opportunities elsewhere. The case study ends by posing reflection questions: Did Quiroga do the right thing? Would the new system work? Did he move too quickly to change something too deeply ingrained in the fabric of the firm?