The Significance
Law firms need to make hard decisions to stay ahead in the market. Leaders of law firms that have momentum in the market said a willingness to change was important.
Davis Polk Wardwell and Paul, Weiss, Rifkind, Wharton & Garrison, two traditional litigation powers, now are both players in private equity and M&A. Both firms have altered their compensation structures—modifying lockstep partner pay—to better fit into how the legal market is now as opposed to 10 or 15 years ago, The American Lawyer noted last year.
By growing the pay ratio among the highest and lowest-paid partners, firms have sought to compete for rainmaking talent while making room for practitioners who don’t measure up to higher thresholds for equity partnership, according to law firm consultants and leaders.
Paul Weiss, considering a nonequity tier, is also one of the latest law firms to move to a black box compensation system, after luring at least a dozen Kirkland & Ellis partners globally last year.
However there’s a balance that’s necessary here. As The American Lawyer reported, big changes to partner compensation can result in cultural rifts among partners who might lose shares under a system that rewards revenue generation and high-performers who feel like they’re subsidizing less profitable practices.
“If partners think they’re only compensated based on productivity, it will lead to bad behavior,” said Matthew Bersani, a recruiter and consulting and founding partner of Cliff Group. “There’s no reason for partners to work together and train associates.”
Indeed, upward pressure on partner pay could breed resentment from homegrown partners over getting paid less than high-demand laterals new to the firm.
In the eat-what-you-kill environment, “you may be alienating your homegrown people,” one recruiter noted.
The Information
Want to know more? Here's what we've discovered in the ALM Global Newsroom:
- With Scale Top of Mind, More Law Firms Are Willing to Put Merger Option on Table
- A 'Sweatshop'? Lawyers Detest Law Firm Cultures That Emphasize Profitability
- No Origination Credits in Partner Pay? Covington Sees Advantages
- Debevoise's Michael Blair to Retire, Firm Names New Presiding Partner
- Law Firms Are Tweaking Partner Comp Reviews to Reward Collaboration
- Momentum in Big Law: Who Has It, Why and What They Do to Keep It
- Law Firms Seek Flexibility in Revised Partner Comp Systems, Balancing Seniority With Productivity
- Paul Weiss Hides Partner Pay Inside ‘Black Box,’ as Firm Shells Out for Top Laterals
- Elite Firms Revisit Comp Formulas as Star Talent Has 'Extraordinary Leverage'
- Paul Weiss’ Trio of Kirkland Hires Could Each Score $20M Yearly
- Freshfields Hits Cravath Again for Latest New York Partner Addition
The Forecast
The factors at stake on each extreme may explain why changes to traditional pay models have come gradually.
“I think the firms that are getting it right are the ones that are able to reward merit without creating a siloed system where it’s an eat-what-you-kill kind of philosophy,” Bersani said.
The right comp system would look different for each firm, whether it’s through bonus pools in good years, avoiding origination credits, or expanding the ratio of the lowest paid to highest paid partner.
Law firms are adjusting their pay systems—keeping in elements that lead to more collaboration and firm loyalty, while trying to award high-performing partners for business generation—in an increasingly cutthroat environment. Lateral partner exits at even elite firms are more routine now.
The pressure to get a firm’s compensation system right and keep a collaborative culture is as high as ever. But we know from examples in the current market that it’s possible to obtain this goldilocks zone in partnership pay.
