A few days ago LegalWeek had a short piece announcing that:
Hogan Lovells is set to offer marquee lateral hires above-lockstep pay deals as part of ambitious plans to dramatically expand its City M&A practice.
The strategy is intended to underpin the firm’s commitment to upgrade the merged entity’s corporate practice in the City without being restricted by legacy Lovells’ lockstep.
We further learned that legacy Hogan paid its highest-earning partners about 15 times as much as its lowest-earning, while the comparable ratio at Lovells was 2:1.
The article is indeed very brief (and, oddly, has attracted not a single comment) but the only remark from anyone in sight which approaches an opinion is this:
One partner at Hogan Lovells said: “On the one hand, this enables the firm to attract good people with the potential to transform the London corporate practice. It does, however, bring problems with it – the firm will be perceived as having a blank cheque, which is not ideal.”
Now, contrary to the deafening silence from commenters on the LegalWeek site, we most decidedly have some views on this.
The stated justification, as always for such bargains with the Satanic side of the marketplace, is that it’s necesary in order to attract the caliber of talent the firm aspires to–and this rationale is most often trotted out in highly-competitive, high-ticket practices such as M&A, as here.
And just what is wrong with that? After all, “you get what you pay for,” right? And how can you rationally expect a hotshot M&A partner in the City to leave bread (or gelt) on the table in the face of pressures ranging from “that’s how you keep score” to the potential imprecations of loved ones at the obtuseness of said immobile partner.
Finally, isn’t the free market in labor a marvelous thing for human freedom writ large? (The UK’s custom of brief “garden leave” doesn’t materially impair the workings of the market; it’s merely a hiccup.)
The left brain in us agrees with all those things, which may be roughly summed up as:
- You can’t be in denial about supply and demand; and
- Human economic actors deserve the freedom to seek out their “highest and best use” in the marketplace they find in front of them.
And yet.
The first sign of trouble in this utility-maximizing homo economicus landscape is that 15:1 vs 2:1 ratio of highest- to lowest-paid partners at the two legacy firms. When I see such a pronounced divergence, my instinctive reaction is that one of them has to be wrong. You can temporize and split the baby by saying that 2:1 provides insufficient incentives for superstars and 15:1 ignores the reality of team members’ contributions, so let’s just settle on 7:1 or 8:1 and call it a day.
But I’d prefer not to.
I think 15:1 is so extreme as to be prima facie ill advised, even dangerously centrifigual.
Obligatory caveat: We don’t know how many individuals are at the “1” and at the “15” antipodes. More specifically, we don’t know what the distribution curve of the legacy Hogan compensation model looks like.
If everyone is more or less bunched up in the middle, say from 6 to 9, with some poor wretch hanging on by their fingernails at 1 and the return of Louis Brandeis at 15, then we can all understand and move along. But if the distribution curve is shallow and gentle with significant numbers of people below (say) 4 and above 11, you have to ask yourself a fundamental question: What kind of a “partnership” is this? It sounds more like a row of McMansions on one block and on the other side of the alleyway some double-wides.
But don’t just take my word for it.
Some years ago I served on a New York State Bar committee chaired by the ineffable Francis X. Musselman, former managing partner of Milbank, and (one of the few times one can actually say this with a straight face) “a titan of the profession.” If you never knew Fran, imagine the Managing Partner from Central Casting: White hair, a trace of an Irish brogue, a chesty laugh that shook the walls, and an overall demeanor that small children probably confused with St. Nicholas. Among Fran’s other many accomplishments was his service as the trustee in bankruptcy of the estate of the law firm of Finley Kumble.
[For those of you unfamiliar with this late and unlamented firm, here’s the short history courtesy of Wikipedia {citations omitted}:
Finley, Kumble, Wagner, Underberg, Manley, Myerson & Casey was a United States law firm founded in 1968. The firm, based in New York, had grown from eight lawyers at its inception to over 700 lawyers at the time of its bankruptcy and dissolution in 1987. At the time it dissolved, Finley, Kumble was the fourth largest law firm in the United States, and at its peak was the country’s second largest firm, behind only the international firm Baker & McKenzie.
The firm’s precipitous demise is believed to have been caused by infighting among its partners and excessive debt incurred by the firm’s famous practice of paying exorbitant salaries to prominent and well-connected attorneys to entice them to join the firm as partners, including former United States Senators Joseph Tydings, Paul Laxalt, and Russell B. Long, as well as by its rapid expansion, including the addition of firm offices in cities around the United States and the United Kingdom. By the time it folded, the firm had debts in excess of $60 million. (The proximate cause of its downfall, which occurred on Christmas Eve 1987, was its bank refusing to extend a credit line to pay staff holiday bonuses: Lights out.–Bruce)
Finley, Kumble is notable for being among the first law firms to shun traditional, collegial legal management protocols in favor of operating more like a conventional business, for example, by routinely recruiting partners from other firms and shunning seniority-based partner compensation in favor of paying greater salaries to those partners who generated the most business, strategies that have since become common in the legal industry.
The trajectory of Finley Kumble is probably one worthy of study for anyone interested in the history of the profession.]
In any event, at some point Fran had occasion to revisit that episode in his life very briefly and he recounted with growing amazement the pay disparity between highest- and lowest-earning partners at the firm. “It was,” Fran said with eyebrows arching and voice deepening, “And can you believe this? 17:1! 17:1 is not a partnership!”
But back to Hogan Lovells.
Here’s what I fear about their above-lockstep pay plan, and it’s not what the unnamed Hogan partner fears–that the firm will become known for writing big checks to laterals. (The Yankees are known for writing big checks to free agents, too, but as long as you can keep doing it it’s one sort of a business model.)
No. What I fear is subtly different, but I think it makes all the difference in the long run: That with such a public proclamation that the firm’s relationship with its partners is based primarily on pay–and this they cannot deny, strenuously as they might try (watch what we do, not what we say)–then the entire fabric of the partnership is at risk of being turned into a guild of mercenaries.
Accuse me of longing for a perhaps lost age when people came together to practice law because they admired and respected each other as intellectually astute professionals and (imagine) even enjoyed one another’s company. There are worse reasons for getting up in the morning. But once the stated rationale for attracting members to the partnership and the primary glue for keeping them there is simply compensation: Well, shades of Clifford Chance/Rogers & Wells.
This falls into the category of hard problems.
I would be the first to tell you that you cannot suspend the laws of supply and demand. That’s presumably the Hogan Lovells position. But I would hasten to add–as would Adam Smith himself, which anyone who’s read Theory of Moral Sentiments would have to admit–that human life is not premised exclusively on an exchange economy. There is much wisdom in the models of the family, of nonprofits, of volunteer organizations, and of all the institutions, from museums to opera companies to great universities, that manage to pay their people fairly and immediately change the subject to the far more existentially important matter of getting on about why they’re here to begin with.
We could take a lesson.
