Welcome back to the Big Law Business column. I’m Roy Strom, and today we look at the management headache associated with tweaking compensation policies. Sign up to receive this column in your Inbox on Thursday mornings.
Big Law leaders face one of their toughest tests in making a case for changing compensation policies in response to a flurry of high-profile partner moves and rivals’ pay packages that can soar as high as $20 million.
Leaders selling their partners on big changes are embracing a management challenge that can roil partnerships or, if done successfully, unleash a firm’s financial power to attract top talent and defend against poaching.
Firms that have recently made or are considering changes to their compensation policies include Paul Weiss, Davis Polk, Simpson Thacher, and Weil Gotshal. The changes include instituting secrecy around partner pay (Paul Weiss), boosting the top end of partner pay (Davis Polk and Simpson Thacher), and rewarding rainmakers for generating business (Weil Gotshal).
The changes represent a drastic departure for most elite New York firms, which within a generation have gone from an egalitarian compensation approach to one that acknowledges some partners are more valuable than others.
Firm leaders have to weigh just how much to lean into compensating stars without alienating other partners who, as a result, are bound to receive less. Similar to what happens after merger deals are struck, firms often see some departures after instituting new compensation policies.
Nevertheless, leaders across the board are reviewing their compensation policies, said Lisa Smith, a principal at law firm consultancy Fairfax Associates.
“Firms need to be careful when they make some of these changes that they don’t disrupt too much the things that have driven the firm’s success from a cultural perspective,” Smith said. People worry about “if we over-reward certain kinds of behavior, will that put a damper on collaboration or client service? So people are rightfully cautious about doing too much or stretching too much.”
Many firms can only make compensation changes agreed to by a partnership vote. Some partnership agreements grant leaders chief executive-like decisionmaking abilities. But even then, leaders are careful to make a lawyerly case for new policies that impact how profits are divvied up between partners.
Describing the process for Weil’s changes, which weren’t explicitly detailed, executive partner Barry Wolf last month told The American Lawyer that nearly all of the firm’s partners were interviewed about what changes they’d like implemented. In the end, Wolf said the only suggested change the partners adopted was placing more emphasis on compensating business generation.
It’s unclear how advanced these discussions are at many firms, but as executives deliberate they could be at risk of losing top partners to higher-paying firms.
“They tend to be very democratic processes no matter what,” said Smith, whose consultancy recently wrote about the raft of options available to firms. “Partners do have a choice, so you want to make sure they are buying into the changes that are being made.”
New York law firm leaders considering these changes do have the benefit of a resurgence in demand for their services that is helping them power past peers.
Demand for New York law firms’ time grew by roughly 5% in the first quarter of the year, according to data from both Citi Global Wealth at Work’s Law Firm Group and Wells Fargo’s Legal Specialty Group. That growth was more than twice the industry average, driven by a return of large transactions and capital markets work that elite firms dominate.
At a sample of 31 New York-headquartered firms, revenue grew 16% in the first quarter compared to the same period a year ago, according to Citi. That was the second-highest growth rate out of 11 regions the law firm group tracks.
That growth is providing confidence for managing partners and law firms pursuing changes to their compensation strategies, said Michael McKenney, a senior client adviser in Citi’s Global Wealth at Work Law Firm Group.
“There really seems to be a breakaway moment that’s happening,” McKenney said. “There are industry leaders who are separating themselves in a positive way from their peers.”
Having a competitive compensation structure is vital to that group, he said.
“It is because people, when they’re generating, they expect to be paid,” he said.
A related concern is the “idea that people will say: ‘I’d be better off if I left the firm and came back as a lateral,’” said Smith. “So that’s a challenge leaders of firms need to navigate.”
The pay gulf between these firms’ highest- and lowest-paid partners has been widening, a phenomenon likely to accelerate because of the recently announced changes.
Wells Fargo tracks pay for the highest 10% of partners and the lowest 10%, and the spread increased at the end of last year to the highest paid partners earning 5.9 times the lowest-paid group, up from 5.6 times the previous year.
Citi has also observed the pay spread expanding, with some firms reporting the top 10% earning seven or eight times the bottom 10%, McKenney said.
While profits per partner on average grew about 6% for firms as a whole, compensation for the lower end group was essentially flat, said Owen Burman, a senior consultant for Wells Fargo’s Legal Specialty Group.
Burman said it takes “a special talent” for law firm leaders to manage through that type of change. Some firms are finding the job requires more than one person, he said.
“These are extremely challenging discussions because it does go to the heart of the culture of the firm,” Burman said. “That’s why you’re seeing leadership transitions, and not just a generational transition, but two people might be taking over a role formerly held by one person. It’s because of the complexity of managing a large firm these days.”
Worth Your Time
On AI Lawsuits: In a dispute over an eerily similar AI voice, Hollywood actress Scarlett Johansson turned to John Berlinski, a partner at Los Angeles-based boutique Bird Marella whose clients include Brad Pitt, reports Justin Wise.
On Soccer Lawsuits: The US Soccer Federation’s new chief legal officer, J. Carlos Kuri, faces an early test as the league seeks to resolve two long-running antitrust cases, Brian Baxter reports.
On IRS Lawsuits: A Baker McKenzie partner who sued the Internal Revenue Service over documents related to its audits of partnership and pass-through entities has voluntarily dismissed his lawsuit, John Woolley reports.
That’s it for this week! Thanks for reading and please send me your thoughts, critiques, and tips.
