In Partner Pay, Law Firms Are Under Pressure to Strike Right Balance

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The Shift: In Partner Pay, Law Firms Are Under Pressure to Strike Right Balance

In the race to increase profits and attract the best talent, law firms are now caught in a conundrum in adjusting partner compensation.

If a firm moves too slow in adjusting their compensations systems and partnership tiers—in order to attract and retain the best talent and rising stars—their rivals will gain scale by luring their talent and gaining a competitive edge.

If a firm moves abruptly to an extreme version of eat-what-you-kill environment, emphasizing new business generation at all costs, its culture can quickly sour and some of their best talent may exit, with some believing their firm is too driven by “profit-mindedness.”

The Conversation

Some of the most successful law firms now appear to be those that have struck a so-called goldilocks zone in partner compensation and the partnership structure. They’ve kept and rewarded some of their best talent, including up-and-coming practice leaders, rainmakers and high-performing associates, all without creating a sharp-elbowed, profits-at-all-costs culture.

Just look to Covington & Burling’s comp system, which doesn’t have billing or origination credit. The firm credits the system for its team-based approach in working on client matters and for providing them an edge in lateral hiring. Meanwhile, Covington doesn’t often see partner exits, and the firm’s profits per equity partner is ranked in the top half of the Am Law 100.

Debevoise & Plimpton is another example of a law firm that has managed to seemingly keep up profitability, talent retention and innovation, all the while sticking to a lockstep comp system.

And these are just some Big Law systems that appear to work—for their own firms. Other firms have compensation arrangements that reward contributions from pro bono, mentorship and in-office presence, as well as new business generation.

The successful systems stand out as more elite firms move to break lockstep compensation or move to a black-box pay system, which seemingly would diffuse tension between partners over large differences in pay.

The move to less transparency comes as law firms become bigger partnerships, with larger revenues and profits. As firm profits grow, they risk a law firm culture that has an emphasis on profitability at all costs. This is one of the top traits that inspires lawyers to harbor negative feelings toward their firms in a lateral environment where partners are always looking for greener pastures, according to a recent survey.

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

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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.

Christine Simmons is a senior editor for business of law news. Contact her at [email protected] and find her on Twitter: @chlsimmons