Changes in Top Law Firm Compensation

The Wall Street Journal reports that the spread between the highest paid partners and their peers at top law firms is growing:

Now some top rainmaker partners at firms in New York, Los Angeles, Washington and Chicago earn $10 million or more a year, compared with $640,000 for the average partner at a U.S. firm, said Jeffrey Lowe, a managing partner at the legal recruiting firm Major, Lindsey & Africa.

Traditional notions of pay equity are falling by the wayside at firms eager to hire and retain proven business generators, whatever their cost, particularly at a time when many companies are reducing spending on outside lawyers. Faced with declining revenues, firms want big-name lawyers who perform mission-critical work and whose billing rates are more resistant to economic downturns.

Rather than a new phenomenon, it’s more likely that this is the continuation of a broader trend.  David Maister identified it in 2006, when he updated his original essay about the One Firm Culture, noting that even the most egalitarian, insular firms are increasing their use of both lateral hires and differentiated compensation:

The one-firm firms have largely avoided the stampede toward individual-based (or profit-center-based) reward schemes. However, since 1985 most one-firm firms have gradually expanded the individual component of their reward scheme (in fact if not in rhetoric) and have increased the total compensation ratio between the highest-paid members and the lowest-paid members.

At Latham, until 1993 the long-term compensation element (known as units) was essentially lockstep, with seniority as the main driver. Under cover of the early 1990s recession, this system was changed. Management’s considered view was that the firm could not operate successfully in the emerging marketplace without providing more incentive for short- and long-term individual performance, particularly on the business development front.

The highest paid partners, based on the WSJ analysis, tend to work at smaller firms – only Skadden cracked the list of both the ten largest firms and the ten with the highest average-partner compensation, where it was #10 and the only firm with more than 200 partners.

Many of the highest paid lawyers in these firms specialize in complex business transactions: high stakes, once-in-a-lifetime deals where incremental experience can add massive value to clients.  As Megan Mcardle put it in an explanation last year of Goldman Sachs’ high fees, “when you have only one chance to get it right, you tend to open up your wallet and pray. So one-shot deals are very, very expensive—a logic that prevails with weddings, funerals, and college diplomas.”  Wachtell, the firm with the highest paid partners in the Journal’s analysis, specializes in mergers and acquisitions, and as the article points out towards the end, banks and hedge funds are now competing for the same talent, driving up compensation relative to other practice areas. 

It will be interesting to see how law firms manage increasing inequality between partners in different practice areas.

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