Baker Botts Partner Pay Shift Drives Record Hiring Spree

A 185-year-old Houston law firm is aggressively embracing an industry trend: loading up on partners whose shares of profits are limited.

About half of the record-high 32 partners that Baker Botts has hired this year are nonequity partners, according to a spokesperson. That means they get 50% or more of their compensation from salaries, rather than profit shares.

“We have completely revamped our compensation model,” Danny David, the firm’s managing partner, said in an interview. “We have drop-kicked traditional notions of seniority-based compensation.”

Baker Botts increased its nonequity ranks by nearly two-thirds in the past five years while cutting its equity tier in half, according to data from The American Lawyer. The shift to a blended partner compensation model is meant to position the firm to face head-on the competition from Big Law marauders piling into its turf.

The pressure shows no signs of letting up with the firm, known for its oil and gas work, at ground zero in one of the hottest deal markets in a decade. Baker Botts began overhauling partner compensation as its footing among the country’s largest revenue-producing law firms slipped and David continued the push when the took the helm in August 2023.

More than 60% of Baker Botts’ 250 partners are nonequity, as of the end of last year. That’s higher than the rates at the other largest Texas-founded firms and nearing the level at Kirkland & Ellis, the megafirm that pioneered the multi-tier partnership. Eighty-nine of the country’s 100 largest law firms now have nonequity tiers.

Jeff Bloom, managing principal at legal recruiting and consulting firm Abbey Partners in Houston, said he’s not surprised Baker Botts has tapped into the trend.

“You can see them trying to invest and trying to build back up because they have taken a hit with departures over the years,” Bloom said. The firm’s total lawyer headcount is down about 16% in the last five years.

“It’s been challenging for firms, particularly homegrown, Texas-based firms, to compete with the influx of national law firms,” said Milan Markovic, a professor at Texas A&M School of Law. “For these firms, it’s important to keep their people who originate the most business happy. One way you do that is by keeping their draws very high and you still need to have a nonequity track to recognize people who you want to keep around.”

Blending Partner Pay

The Baker Botts partnership shifted dramatically toward the nonequity tier beginning in fiscal year 2021, with the firm slashing its equity ranks by more than one-third. Nonequity partners surpassed equity partners for the first time in 2022 and the firm has kept a lid on the ratio in the years since.

John Martin, who led Baker Botts during this stretch, did not respond to requests for comment.

David and other candidates campaigning to replace Martin pledged to seek a merger in order to expand and fight off poachers. David said the firm is no longer exploring merger talks, instead focusing on “expanding our capabilities in key markets,” such as energy and technology.

The firm’s profits per equity partner soared as its tier shrank: equity partners raked in nearly $2.9 million last year, up 80% from five years earlier. The firm’s revenue per lawyer, which includes partners, associates, and other attorneys, is up about 30%.

David declined to say whether the firm de-equitized partners in recent years. He also declined to say how the spread between the firm’s highest- and lowest-paid partners has changed in an era of top rainmakers fetching eight figures and how the firm pays new partners who are promoted internally.

The firm’s shift reflects market changes. Some new hires from competing firms are already being paid on a blended basis, David said. Some lawyer retirements reduced the equity tier, he added.

The overall goal is to establish “an entrepreneurial mindset,” David said.

He emphasized the firm operates as a single partnership: every partner contributes capital, has voting rights, and can run for leadership positions, he said.

Baker Botts continues to diversify and has hired energy, tax, litigation, intellectual property, and finance partners in Texas, California, New York, London, and Saudi Arabia. The firm hired Friedemann Thomma, the San Francisco-based head of Venable LLP’s transactions tax group, in October. It announced last week that Anna Irion joined the Houston office from Jackson Walker to represent clients in midstream oil and gas transactions and advise on data centers.

Big Law firms ramped up salaried partner positions after the 2008 financial crisis, largely due to concerns about profitability, said Markovic. The strategy juices profits by reducing the number of lawyers who get a piece of them. Firms use nonequity tiers to give up-and-coming attorneys an earlier shot at “partner” titles, and bill their work at higher rates. Major law firms deploy the nonequity partner model in different ways.

Kirkland, the world’s largest law firm by revenue, ballooned its tier of partners paid fixed salaries largely through internal promotions. The firm is known for managing the nonequity partnership with an “up or out” approach that gives most lawyers a few years to vie for an equity spot or move on.

Some lawyers prefer nonequity status because it relieves them of pressure to bring in new business. The trend also reflects a generational shift, said Ed Hirs, an energy economist at the University of Houston. Younger lawyers might opt for nonequity partnerships to increase their pay without the long-term commitment that comes with having to contribute their own capital in exchange for ownership stakes at some firms.

“It certainly gives them more flexibility, and they can bolt faster,” he said.

About 66% of Kirkland’s 1,700 partners are nonequity, or “partners in name only.” At its rival Latham & Watkins, about 42% of the firm’s 1,000 partners are nonequity.

David declined to detail how Baker Botts decides on the right blend of equity and salary for each partner, saying on that the firm’s partner compensation model is “titrated” to reflect lawyers’ contributions.

“We want to attract the most talented lawyers,” he said. “We’re not going to let our adherence to one method get in the way of that.”