A recent poll/post about
the "optimal" partner compensation system produced interesting—and
very mixed, a/k/a divided—results,
with the option "there’s no such thing" coming in second overall.
Off-line, I had a subsequent conversation with a couple of partners
in large firms here in New York about what my views are on
the question, and it’s worth a moment’s elaboration.
Basically, if the question is what partner compensation system is
optimal, my answer is: "It depends." What
it depends upon is where the firm is in its lifecycle or what its strategic
objectives are. I view lockstep/eat-what-you-kill not as dichotomous
opposites (though they surely can be, in the pure, extreme cases),
but more as a continuum. Being relatively nearer to or farther
from each end encourages different kinds of behavior by partners.
In short, I think "EWYK" is probably where you want to be when the
firm is young and growing, and/or when you’re entering new markets
(London, e.g., for a NYC-based firm).
Conversely, lockstep is right for mature, "climax stage" firms that
own a niche and have no reason to make radical changes (the classic
example is what I characterize as New York’s "bulge bracket" firms
such as Cahill-Gordon, Cleary-Gottlieb, Cravath, Davis-Polk, and Simpson-Thacher).
One of the most "fabulous facts" about any law firm I know is that Davis-Polk has never seen a partner leave to become a partner at another law firm. Can you say "cohesive?" The
primary—but non-negotiable—caveat is that you cannot have
a "tolerant" lockstep. That way lies insanity, as shirkers
will freeload and workers will resent it to the point of decamping elsewhere.
Most importantly, use the compensation system to shape the firm culture, rather than letting the firm’s culture shape the compensation system. Remember who’s driving the bus.
EWYK is good at: Entrepreneurship (Greenberg Traurig is the
poster child of this ethic); entering new markets or practice areas;
growth for its own sake; and attracting gorilla laterals.
Lockstep is good at: Maintaining mature and solid practices;
promoting collegiality and collaboration; institutionalizing clients;
and avoiding time-consuming and disruptive squabbles over things like
origination credits:
If I had to pick one and only one system?
"Modified lockstep," meaning a base of 70-80% of compensation set
by lockstep, with room for 20-30% in bonuses or demerits based on outstanding
or subpar performance. Sprinkle in some built-in recognition
that some practice specialties are inherently more profitable than
others, and that some places in the world are inherently costlier
to live in than others.
And one more thing: No formulas. Please ensure
the acid test, the ultimate determination, turns primarily on the gut feeling that,
"Yeah, that sounds right to me."
