Last week Jim Stewart of The New York Times published $11 Million a Year for a Law Partner? Bidding War Grows at Top-Tier Firms which was pegged to the news that Sandra Goldstein had left Cravath for Kirkland, and a reported compensation package of $11-million/year for five years, plus a signing bonus. A few weeks earlier the Financial Times had come out with The dawn of the superstar lawyer, pegged in turn to Scott Barshay’s 2016 move from Cravath to Paul Weiss, which drew a direct causal link to Cravath’s lockstep:
Frustrated with Cravath’s age-old system of paying its partners according to longevity and seniority versus sheer output, Mr. Barshay left the only firm he had ever worked at to move to a New York rival. Paul, Weiss.
Brad Karp, Chairman of Paul Weiss, was quoted in both articles and made congruent remarks. From the FT:
“It’s becoming more and more difficult to retain star talent in a purely lockstep model. You’re seeing sums that rival sports free-agent compensation arrangements being offered to star partners at corporate law firms.”
And from the NYT:
“There has been a gradual but steady erosion of both client and partner loyalty. 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.”
Let’s not appear to be picking on Cravath; these stories were, as I noted, journalistic “hooks” for the FT and the NYT but the future of lockstep is not a Cravath issue; it’s an issue for leadership of our industry. Long ago (fifteen years? before that?) it became clear to me, and presumably to other observers and analysts, that the Magic Circle would continue to experience frustration, vast expense, and tears in their efforts to penetrate the New York market if they continued to (by and large) export their lockstep to these shores. Meanwhile, some home-grown New York firms (Cleary, Davis Polk, Debevoise, Simpson Thacher) appear to be managing their partnership ranks rather differently even as they continue to hew to fairly strict lockstep models.
Which brings me to the issue always at the forefront of lawyers’ minds: Definitions. What do I mean by “lockstep” here? We all know what eat-what-you-kill means, or think we do, although EWYK itself comes in rigorous and more flexible permutations.
This is the larger point, isn’t it? I have always conceived of partner compensation models as falling on a spectrum from purist 19th Century lockstep to Ayn Rand-ian EWYK, with a continuum between them, “continuum” in the quasi-mathematical sense meaning any and all values or locations between the extremes are available: There are no discrete stopping points or gaps in what’s theoretically possible.
So for today’s purposes “lockstep” I shall deem to mean the quite strict version of lockstep, meaning seniority-driven partner compensation with little management discretion to vary from the formula’s dictates. “Quite strict” and “little discretion,” you ask? Let’s say something on the order of less than 20—25% away from what the pure formula would prescribe.
Abstracting from our industry’s obsession with partner compensation, this sounds a heck of a lot like our associate compensation plans, doesn’t it? A seniority-driven lockstep with, especially as years accrue, discretion over individual bonuses. If nothing else, this demonstrates we know how to do it when we are so motivated.
The essentially universal prevalence of this associate compensation model invites another observation: It apparently makes some sense. That is to say, both distant and recent history in Law Land support the hypothesis that associates paid under this model feel properly motivated, view their compensation as fundamentally fair, and that there is no genuine or systematic senior/junior resentment or envy.
Permit me to extrapolate from this track record: To a large extent, wouldn’t a similar model work for the great majority of partners? That is to say, fixed annual increases in baseline compensation with management discretion to award year-end bonuses (or to subtract year-end demerits) based on outlier variations in performance. This is sounding a lot like a minorly modified lockstep system.
And, I would argue, the reason it’s proven stable and durable vis-à-vis associates—and in many firms vis-à-vis partners—is simply that it reflects human nature and the normal course of a professional’s career. Seniority isn’t everything, but as Malcolm Gladwell’s famous (perhaps too famous) 10,000-hour rule demonstrates, plain old practice and experience count for a lot. It’s a handy, convenient, “bright line,” and not intrinsically irrational proxy for the development of legal expertise and judgment and by extension value to the firm and to clients.
Besides, most people are within two or three standard deviations of the norm in terms of performance and if not hyper-attuned to each and every individual each and every year, it’s good enough over the long run, and at some point more and more management time devoted to head-of-a-pin adjustments to comp is not worth it.
This leaves us with the high and low ends of the performance curve, where I would advise most of the conversation and analysis ought to focus.
The low end is, conceptually if not emotionally, easier to deal with. My favorite remark of all time about lockstep was Tony Angel’s when he was running Linklaters: “There is no such thing as a tolerant lockstep.” In a rather profound sense, that’s all you need to know about this end of the curve.
Now, in real life it’s not remotely that simple. Dick has been a stalwart comrade, Ellen’s had a ghastly series of tragedies in her personal life, Mike is just struggling through a downturn in an intrinsically cyclical practice, etc.; the litany will be endless. Yet at some point we all know who’s going to stage a comeback and who’s lost the capacity or the will to do so. Leadership knows it, colleagues know it, associates and staff know it. (And you think clients don’t? Really?) Some of our most emotionally charged engagements have addressed situations like this.
But when I titled this column, “The Death of Lockstep?,” I was obviously referring to the high end of the performance curve. This is where lockstep meets its acid test.
And I submit it is here at the high end that lockstep is on the wrong side of history.
Since Steven Brill launched his “AmLaw 50” over thirty years ago with its notorious revelation of PPP, the trajectory of BigLaw has been towards more and not less transparency. You can celebrate or mourn this vector–or you can perform what is for today’s purposes a somewhat beside-the-point holding action questioning the veracity of the AmLaw numbers (as we have and will continue to do until they clarify their methodology)–but this is the way we are moving in the 21st Century.
Which brings us to labor market economics. In labor markets where talent is a key differentiator (celebrity entertainers, sports stars, best-selling authors, software coders, hedge fund managers, and yes, law firm partners at the tippy top of the most elite ranks), compensation tends to migrates towards an equilibrium distribution resembling a classic power curve. To oversimplify, assume that the top 20% make what the next 80% make, and the top 20% of the top 20% make what the bottom 80% of the top 20% make, and so on. This is of course a simplifying approximation but the key point is that labor markets for talent depart wildly from our familiar bell curve “normal” distribution at the high end of the ladder.
If you’re looking for a geometric analogy, the distribution is “fractal;” at whatever degree of resolution you analyze it, the pattern is the same. Nautilus shells, fern leaves, and even Jackson Pollock paintings are fractal patterns.
Back to BigLaw:
We have crossed an irreversible threshold from institutionalized clients loyal to a law firm for decades, as partners and general counsel come and go, to a more transactional world where law firms are only as good as their last deal, and Fortune 500 firms increasingly look for marquee lawyers (yes, backed up by prestigious firms with impeccable boardroom credentials) more than they hew to traditional relationships, Marquee names matter in ways they didn’t ten or twenty years ago.
This describes a labor market for talent, where the power curve compensation distribution trumps the normal/bell curve distribution of talent. Lockstep has met the 21st Century, and it’s becoming clear who the winner is.
Can firms overshoot the market, overpay stars, and come to rue the day? We’ve already seen it happen. And can firms proudly refuse to participate in this marketplace reality and, shoulders squared and heads up, march into the future without change? Yes, and a fortunate handful will shoulder on in that posture, blessed by history, culture, and strong spines.
All the Magic Circle firms (I put Slaughters in a different category) have “broken” their locksteps at the high end, and the New York white shoe elite has also done more than a bit of nipping and tucking, especially when it comes to accountability at the low end. And note what’s not happening: An equivalent number of firms is not moving in the other direction. If you wonder what the future holds on this score, I don’t know that you need to look too much further than this. There may never be zero lockstep firms, but there will be fewer five years hence than five years ago, and so on and so on.
Lockstep for the rest of us mere mortals? As I implied earlier, you can mourn increased transparency and its inevitable corollary of our labor market for talent moving towards stars and superstars and almost everyone else, or you can celebrate it, but you cannot lead your firm as if it isn’t happening.