What a 'real' partnership would look like
According to the Financial Times, Barclays Capital is thinking of following Goldman down the partnership route.
The paper reports today that the bank has set up a new 'partnership committee' under the auspices of Robert Morrice, chairman and chief exec of its Asian business. Henceforth, MD promotions will apparently be referred to as 'partnership promotions.' The 'partners' will have more say in the bank's strategy, and their pay will be more aligned to profitability.
Unfortunately, this may all be somewhat spurious. A senior BarCap employee tells us the bank has always called its MDs partners ("When you get a call from Bob Diamond announcing your promotion, he will say, "Welcome to the partnership"), that partners have always had a role in formulating strategy at BarCap, and that they've always been paid according to the bank's profitability.
However, even if BarCap were adopting Goldman's system of partner managing directors and offering exalted salaries and around 20% of the total compensation pot to its partnership cohort, this wouldn't be a real partnership.
As William Cohan pointed out last year, a real partnership is one in which partners would, 'share ratably in the both the pre-tax profits of the firm (should there be any), or in the liabilities created by the bad behavior of other partners."
"If the firm takes prudent risks that pay off, this top layer of management should get well compensated," says Cohan. "If the risks are not prudent and the losses grave, they should not only lose their jobs but also a significant portion of their net worth as well."
Most law firms are 'real partnerships.'
In order to become an equity partner, senior lawyers have to stump up a significant amount of their own cash (eg. 250k). Having done so, they are able to share in the profits of the firm. But if the firm makes a loss or needs more equity, equity partners can lose their stake, or may have to stump up more cash.
Last year, for example, equity partners at Clifford Chance were asked to invest a further 150k.
Needless to say no bank - whether it has partners or not - is operating anything even vaguely similar to this nowadays.
