In 1992 American author and relationship counselor John Gray published a book that instantly made him famous. The book has sold more than 15 million copies and it was the "highest ranked work of non-fiction" of the 1990s, spending 121 weeks on the bestseller list. The title: ‘Men Are from Mars, Women Are from Venus’. This title must have been a stroke of genius and it has been applied to many other situations in which structural misunderstandings between certain groups exist.
In the context of this article one could perhaps paraphrase and say ‘Some Lawyers are from Mars, and some Lawyers are from Venus’. Working with lawyers from all parts of the world, we find remarkable similarities despite cultural differences. If you have been to the annual IBA meeting, you will know what I mean. There is this instant feeling of recognition and familiarity. However, some differences can still be sensed: this is particularly true when you interact with China and connect with Chinese lawyers for the first time. In the eyes of European, American and Australian lawyers, sometimes it seems PRC lawyers are from a different planet even though superficially we would expect all lawyers to be the same.
TGO Consulting has been working with China for many years and we have developed some great relationships and cherished friendships. We find China a great source of inspiration and innovation. We learned through experience that we fundamentally need to adapt our way of thinking and reasoning when we communicate with our Chinese friends. This article, which is co-authored by my good friend Mike He, is to help lawyers outside China to better understand where Chinese Lawyers are coming from. In doing so, we aspire to contribute to less frustration and surprises, and a smoother cooperation or referral business.
Understanding where China’s legal industry is coming from
The modern Chinese legal industry according to our understanding started only around 1990. So, unlike the Western world, in China the legal industry is only a few decades old. After the recovery of the lawyer system in China in 1979, lawyers were viewed as civil servants who worked in state-run law firms. It is not hard to imagine that lawyers then were reluctant to develop new practice areas or new clients as they received fixed salary no matter how much they contributed to the firm.
Thanks to some pilot programs in 1988 which encouraged “more pay for more contribution”, many law firms transformed into cooperation firms and finally partnership firms in 1990s which allowed lawyers to keep a percentage from the revenue they bring to the firm. With the growth of the Chinese economy and release of the long-suppressed impulse for wealth, the percentage a partner can keep reaches a high level and a strict eat-what-you-kill model gradually becomes the dominant remuneration model for most Chinese law firms.
The major advantage of eat-what-you-kill model is that it greatly motivates the partners to develop their own clients, business and revenue. For partners at their early stage, they can easily control the cost (such as lawyers’ salary) and maintain it at a relatively low level so that they could earn more margin and flexibility. For law firms, it is also one of the easiest ways to attract more partners and build a relatively large-scale law firm instantly.
However, the downsides are also obvious. As partners mainly get profits from their own revenue and clients, selfishness and low professionalism breed. It is usually very hard for partners to refer cases to each other or cooperate on the same projects due to lack of profit-sharing mechanism as well as trust on each other. It is not hard, however, for a partner to leave a firm with his or her clients due to lack of loyalty to the firm and bond to other partners.
Most partners in Chinese law firms would have their own P&L and only the bare minimum of costs would be shared. It will come as no surprise that this form of partner remuneration will drive partner behavior. Moreover, it will also tend to confuse the clients when they feel the astonishing gaps in lawyers’ professional skills and service between different teams within the same firm due to the lack of standard recruitment and training at the firm level. One should also not expect commitment from other partners unless there is a strong monetary incentive.
As a result of the rapid increase of economic development and a shared entrepreneurial spirit among the Chinese society, many Chinese partners, even today, are driven by the unlimited impulse for the pursuit of fortune and independence. Though many Chinese lawyers and law firms have realized the advantage of cooperation and commitment to the firm and have made some serious and solid efforts, the majority of the Chinese lawyers and law firms still embrace eat-what-you-kill model. This in many aspects is fundamentally different from lawyers in many countries in Europe and America where in various gradations there is more emphasis on cooperation and the firm as a whole after so many years of exploration and evolution.
Only 1% of law firms in China has a lockstep profit sharing system.
Many of today’s partners in Chinese law firms have completed a study and gained experience in the US and the UK before setting-up or joining a law firm in China. As the result of the study, exchange or working experience of many Chinese managing partners in UK and USA in 1990s and early 2000s, they brought the “Prometheus fire” - lockstep remuneration model – from Magic Circle firms in UK to the Chinese legal market.
In 2000s, a very limited number of Red Circle firms in China started their lockstep reform. The outcome is mixed. Thanks to the (modified) lockstep reform, one particular firm developed so quickly that it became one of the top tier Chinese law firms within a relatively short period of time. The lockstep reform created a sense of altruism as the partners there seem to care more about how to jointly pitch a giant/top client and develop it as the client of the firm instead of worrying more about who this client belongs to and how much margin he or she can get.
Moreover for this particular firm, the lockstep reform also contributed to the increased investment on the firm’s branding, facilities, administrative service, recruitment and training as a whole. Many young talents from international law firms chose to join the firm as they were quite used to its similar remuneration system, and its high standard of talents and professionalism. Likewise, many multinational companies also chose to hire the firm as it can provide them with united strength from different offices and different practice areas.
On the opposite side, another firm who adopted a pure lockstep approach encountered a total “Waterloo”. Many talents left due to the reform. It was not until 6 years later that the firm involves “merits” evaluation into its remuneration system again. It was a bitter memory that most of the partners and lawyers do not want to remember even till now.
Why is the outcome so different? The two examples unequivocally show us that lockstep is certainly not the ‘holy grail’ for Chinese law firms or even all firms. Lockstep, in theory, can create a sense of common interest, generate more resource to key clients, encourage cooperation, attract partners who value professional performance, and gain comparative advantage when the market competition is fierce. However, lockstep must be implemented cautiously according to the very strategy, need and reality of the firm. Lockstep is a means of remuneration to better serve the interest of the firm and its lawyers instead of a sacred end by itself.
To be more specific, the problem is, essentially, seniority must not be the only indicator that measures a partner’s contribution to a firm. Individual motivation to make more fortune and the fair sense of “more contribution, more payment” shall be respected. Otherwise like in the second and failed example, young, energetic rainmakers may vote by their feet as the result of the long-lasting sense of “exploitation” by those senior partners who earn much more according to their points while contribute much less according to their profit-generating performance.
4% of Chinese law firms turned to hybrid model while 95% still have undiluted eat-what-you-kill
Facing both the challenge of talent loss as well as the demand of deeper integration among the firm, quite a few top-tier Chinese firms tend to embrace “modified lockstep” nowadays (including the above-mentioned two firms now). About 4% of law firms has adopted a hybrid system of profit distribution, which we are also used to in other parts of the world.
Eat-what-you-kill model remains no doubt the most popular model among Chinese firms. Usually, an equity partner in such firms submits 10%-40% of his or her total revenue to the firm in return for its light-touch contribution to branding, office facilities and office administration. The partner then has to pay from the remaining 90%-60% of his/her revenue the salaries of the lawyers in his/her team. Whatever remains after the cost of being with the firm and the salaries of the lawyers in the team have been deducted is the personal income of the partner. Typically, the partner in a traditional Chinese law firm will end up keeping 50%–70% from the total revenue he or she earned every year.
No remuneration system is perfect and can solve all problems once for all. The golden rule is: the remuneration system should match and serve the firm’s strategy. It is gratifying that more and more Chinese firms have realized that and are gradually combing the elements of both lock step system and eat-what-you-kill system into a hybrid system which suits their strategy and culture. On one hand, law firms must recognize and respect the annual financial performance of the partners and their legitimate need to be rewarded accordingly.
On the other hand, law firms must also create a pool of common interest by recognizing and respect the historical contribution and non-financial contribution of the partners to the firm’s interest. Only through this way can law firms achieve a delicate balance and develop in a steady and vibrant manner. Transforming from a pure eat-what-you-kill model to a hybrid model, many old law firms are given a second life and are gradually regaining their strength step by step. Adopting the hybrid merit-based model combining both revenue performance and seniority or contribution to the firm from the very beginning, many new firms are attracting more and more partners to join and leading a new exciting wave of firm development in China.
Getting to know the Chinese legal market
The legal industry in China is developing at a rapid pace. By the end of 2020, there are more than 520,000 Chinese lawyers and 34,000 Chinese law firms in China. Non-litigation practice areas such as capital markets, M&A, private equity and venture capital are booming in developed regions like Beijing, Shanghai and Shenzhen. Traditional litigation and routine legal consulting for enterprises are still the dominant practice areas for lawyers in less developed regions.
According to 2020 Global 100, 6 out of 10 largest firms in the world are Chinese law firms. At least 5 PRC law firms have entered the Global 100 with regard to total revenue per year. At least 5 PRC law firms have more than USD 1 million in profit per equity partner. There is another PRC law firm which has 83 offices and over 10,000 lawyers worldwide. The vast majority of lawyers outside China has little or no knowledge or understanding of what is going on in the Chinese legal market. There are great opportunities for cooperation and doing business.
This is the first in a series of articles that will help to bring you up to speed. The second article will be published later this year.
About my co-author Mike He
My good friend Mike He is the co-author of this article. Mike holds an LLM from Harvard and he is the Chief Strategy Officer at Merits & Tree Law Offices.
His firm is a typical example of a hybrid remuneration system. Unlike many traditional Chinese law firms, M&T partners share M&T’s profits (one firm, one profit pool for all) instead of splitting the revenue (one firm, different profit pools for different partners and their teams). For those young partners, the firm almost fully focus on their annual financial performance so that they could be encouraged to generating more clients and increasing their revenue. For those senior partners, the firm divide the evaluation elements into two major parts – (A) annual financial performance and (B) other factors such as historical contribution, seniority, and management – so that a sense of common interest can be formed while their annual merits can also be recognized and appreciated.
Through this hybrid remuneration system, M&T strives to build a “one firm” firm with excellent professional quality, integrated cooperation and self-motivated talents. It is now widely recognized as one of the most promising law firms in China.