The compulsively readable James Stewart of The New York Times, who authors the weekly “Common Sense” column, which ranges widely across the business landscape, just published “$11 Million a  Year for a Law Partner? Bidding War Grows at Top-Tier Firms,” which discusses the economics of lateral recruitment and compensation models at, yes, top-tier firms and proceeds from the journalistic hook of last week’s move of Cravath partner Sandra Goldstein, former head of the litigation department, to Kirkland.  Jim notes that three other Cravath partners have defected to Kirkland since 2012.  (Jim was a Cravath associate before resigning to pursue his career in journalism.)

If you don’t follow Common Sense, you should start effective immediately.  I said it was “wide ranging,” and just as examples some of the recent weekly installments have discussed whether Wells Fargo’s $1-billion fine was justified or was piling on, the travails of the Tesla Model 3, whether there can be such a thing as a “winner” in trade wars, and the evidently perverse popularity of hedge funds among college endowment chief investment officers (the hedge fund gang has underperformed garden-variety stock market indices for at least the past decade).

This week’s article lays out the magnitude of the compensation being paid in BigLaw’s high-altitude precincts ($11 million per year for five years for Ms. Goldstein, plus a signing bonus, according to Jim’s sources) so I won’t rehearse those numbers here.  But what makes the article interesting is Jim’s wide-ranging and astute analysis of the economics of firms such as Kirkland vs. firms such as Cravath.  (I take the two being used as somewhat emblematic representatives of the two models themselves and do not read the article as a critique of either firm individually.)

One can’t help but start with the perfectly obvious reality that partners never ever used to leave Cravath–certainly not for another law firm:

Brad S. Karp, the chairman of Paul Weiss Rifkind Wharton & Garrison, said ‘‘the nature of big law’’ had changed.

“There has been a gradual but steady erosion of both client and partner loyalty,’’ said Mr. Karp, who hired Scott Barshay, the former leader of Cravath’s corporate department, in 2016. “A generation ago, clients were reflexively loyal to their law firms. The relationship today is more transactional and clients tend to be more loyal to particular partners. This new paradigm creates more opportunity, but also creates more flux.”

This leads to where it should lead, namely a comparison of lockstep and eat what you kill.

“Our compensation model is just one element of our approach to producing the quality that we want our brand to represent,” said Faiza J. Saeed, [Cravath’s] presiding partner, when we spoke this week. “It incentivizes partners to invest in the training and development of our people and aligns partner and client interests by encouraging partners to collaborate and deliver the full expertise of the firm.’’

And Jim uses some thoughts of mine to provide the contrast:

“Kirkland is the antithesis of Cravath when it comes to compensation,” said Bruce MacEwen, president of Adam Smith, Esq., a consultant to law firms, who writes widely about their economics. “It’s very individualistic and competitive, with a very big spread between the highest- and lowest-paid partners. But Kirkland has a reputation for excellence that rivals Cravath’s.”

Do the defections from Cravath mean lockstep is doomed?  Note what hasn’t happened:  There have been no defections the other way.

It’s rarely prudent and almost inevitably premature to posit the demise of any system of corporate governance that has been around for a century or so, so I’m going to stay away from the ultimate question.  As perverse as it might seem to an undergrad economics major who’s just spent a semester having the power of incentives drummed into their brain, lockstep has undeniable power, paraphrasing Ms. Saeed, to “deliver the best of the firm” for each client engagement, regardless of whose phone rang first.  This is a good thing.

And yet: Another thing that is not happening is firms migrating towards lockstep; the tropism is all in the other direction.

Returning to first principles, one of the most important, and somewhat counter-intuitive, observations one can make about BigLaw partner compensation systems is how amazingly diverse they are–and yet you can cite examples of firms using almost any variant that are highly successful.  Does this mean comp isn’t all it’s cracked up to be?  Just a thought; discuss among yourselves.

Let’s leave it at this: The Kirkland model may not be a universal solvent/panacea either, at least not if pressed too far.

“Is ‘eat-what-you-kill’ inherently unstable?” Mr. MacEwen said. “That’s a good question. The Kirkland model risks emphasizing the star at the expense of the team. The existential risk for a Kirkland is that they go too far and forget all the B players they still really need.”

In other words:  Wherever your firm chooses to fall on the lockstep/eat-what-you-kill spectrum, nothing will ever substitute for leadership, vision, and seriously professionalized business management; do not ever imagine you can take your eye off this ball.

More chapters remain to be written here,

Courtesy The New York Times and Daniel Acker/Bloomberg

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