“Transparency!” is a far more clarion call to arms than “Opacity.” And as a securities lawyer, I was trained–and didn’t take much convincing, truth be told–that full disclosure was a not so minor deity. Yet here I am composing on essay on everything that’s wrong with it when it comes to compensation–for partners especially, but even for associates.
How did I get to this intellectual pass?
I would like to believe it starts with an openness to rethinking things that I assume to be true but may have only thought about superficially or lazily, but that’s a bit tendentious and self-congratulatory, so let’s just assume I had been blithely following the crowd.
Standing back from Law Land (an exercise I commend to you regularly), in Corporate America there is…no such thing as pay transparency. Bank Vice Presidents have no idea what other Bank Vice Presidents make, and the same with middle managers, accounting staff, marketing and business development professionals, and on and on and on. “Pay transparency”–short of public company regulatory mandates touching at most a handful of people at the tippy tippy top of the pyramid–simply is unthinkable. Now, this 98% of the for-profit economy might be wrong, and Law Land at 2% uniquely right, but is that how you would bet? Or advise a client?
Second, particularly with the recent spasm of city and state “salary disclosure” laws in job offered and help wanted ads, the view has been expressed that transparency would eliminate bias and enhance equity. And who could be against that? The problem is simple: It might work in theory, but it doesn’t in practice. Publicized pay bands or ranges can be so wide as to be useless, job definitions can be slithery and elastic, “cost of living” adjustments in the name of effective parity (New York City vs. Tampa or Omaha) can paper over reality on the ground, and the list goes on and on. Then of course there are the famous and predictable “unintended consequences.” Current employees want to ask you for a raise? You have the drop-dead comeback: “But then we’d have to disclose that and everyone would insist on it.” This promotes employees’ interests exactly how?
But back to Law Land.
I began by questioning what exactly is so laudable about transparency. “We have an open system!,” boast law firms as if it were entirely self-evident to all but the most obtuse or benighted that they were staking out the virtuous high ground. Closely allied to this boast emotionally, if not intellectually, is the warm and welcoming aura of having nothing to hide, being open to, indeed inviting, scrutiny and unfettered examination.
I grant you all those cozy associations; we began by noting that opacity and secrecy are hard sells in the abstract. But at what cost?
- We can kick off our list of reservations on open-book compensation with the invidiousness of small differences, noted above. The most intense rivalries are always local: Oregon/Oregon State is almost legendary (well, with certain college football circles), as is Army/Navy. But St. John’s vs. the Alabama “Crimson Tide?” It’s almost nonsensical to put these two teams in the same sentence. And this matters because if Partner A makes $500,000 and Partner B $3-million, A really has to admit in their heart of hearts that they understand the justification for the disparity. It’s Partner A at $500,000 and Partner B at $550,000 that prompts an uproar, with nothing good to come of it.
- Infamously, The American Lawyer publishes its annual PPP rankings every year, embellished as they are. This means all of your partners, in obvious distinction to associates, will leap to your firm’s average PPP of record and peg themselves as higher or lower than that creative-writing-derived number. If they’re higher, don’t expect them to drop by your office to offer thanks and gratitude, but if they’re lower they will be at best demoralized and at worst plotting ways to undermine your authority. Tell me, please, what good has thus come of this?
- And three guesses whether clients appreciate hearing about what enviable sums their outside counsel take home; surely it can only deepen their admiration for your business acumen and selflessness in service to their interests and the profession as a public service calling.
- Which brings us to the final point: What purpose or goal is actually served by announcing individual partners’ comp for all to see? We know what the downsides are: Turning immaterial and frankly trivial differences into fonts of resentment and rebellion, and, no matter how impressive your firm’s real (GAAP-derived) PPP figures are, putting a thumb in the eye of all who are “below average”–among people who have never seen themselves as below average in their lives.
So here we have the calculus: On the beneficial side of the ledger, nothing in the least tangible that we can discern and on the destructive side of the ledger, undermining (understandably!) the morale of many of the most valuable contributors in your firm.
One last thought.
As the lateral partner arms’ race has escalated and intensified, driven at the top of the market by firms who have decided that a core part of their strategic toolkit will be offering eye-popping guarantees to pluck high-profile talent from competitors, fundamental bonds of trust within law firm partnerships have been bending under the strain. And it’s understandable: In the immortal phrase, it shines a spotlight on the belief that “some animals are more equal than others.” (Whether this paying-over-market strategy will prove sustainable in the long run is, so far, unknown. You can count me a skeptic, based on the extremely challenging math and what I choose to think are shaky assumptions about human nature, but so far the evidence is that firms taking this risk are getting away with it.)
The erosion of trust within partnerships, particularly at the most prestigious, elite firms where everyone justifiably sees themselves as A players among other A players, can be corrosive to the entire enterprise in the long run. If I were a Managing Partner of such a firm, I would pay vastly more attention to “T[rust]PP” than to PPP.
I welcome any and all comments and reactions, public or private, showing how pay transparency builds and does not undermine trust. On the “for transparency” side of the ledger we have…..what exactly? That warm fuzzy feeling of standing vaguely on the side of the white and against the black? While on the “against transparency” side we have, in the long run, contributing to a potential existential threat to the entire firm. Then again, the choice remains yours.
The point about small differences in results in an open system needlessly engendering significant resentments is well taken. And the standard management response to the grievance that inevitably follows is usually some combination of moving the goalposts, obfuscation or “sorry, the scorecard is the scorecard”. A straight answer is almost never given. I’d also add that the delusion that in-crowds/out-crowds go away with an open system isn’t true either.
Many thanks for this additional commentary (and not just because it checks the box of “confirmation bias!”) The reality on the ground is that everyone >50th %-ile thinks they earned it richly and no thanks to you (management) but everyone < 50th %-ile or below their office neighbor, or their "class year" mate, or their roughly same revenue peer, finds it immensely grating, unjust, alienating, and unforgettable. And for what good purpose, I ask??
To give the devil his due though, as someone who has worked under both, I’ll say this for open systems. There are far fewer truly lopsided side deals (side deals will always be with us) in an open system. And what might be considered self-dealing (again, will always be the case) needs firmer public justification lest there be a major outcry across the aristocracy as it were. And even then stuff slips through.
I’d also say that an open system seems to put somewhat more (relatively gentle) pressure on management to more judiciously police the senior end of the equity partnership, some of whom may not be hitting it quite as they should be (but have maintained their unit count/draw level nonetheless). People blatantly not pulling their weight engenders a bunch of cross-generation resentment as well. My experience is that that can’t last all that long under an open system, while the same process seemed to take much longer under a closed system.
As perhaps an interesting tidbit: in Finland, there is full transparency on salaries and earnings since all individual tax information is public and every year in October, on the “National Jealousy Day” when the taxation from the previous calendar year is final, the media goes really deep on who earned what.
As an example, the media creates databases of all individuals earning over 100k a year (the median income is around 45k) and provides to the public specific search engines, the “taxengines”, that allow you to find any such individual by name and location and get their entire earnings history (for every year over 100k).
In that environment the choice between openness and opaqueness does not exist. We just have to live with literal full transparency on the market. Which does have its own interesting implications.