When it comes to partner pay, the first thing everyone salaciously wants to know is “how high is up?” And second by a nose is probably “Who’s on top and by how much, especially compared to me?”
Please, people, we can do better than this. (You have to admit it sounds a bit childish stated so baldly, but tell me where I’m wrong.)
This brings us forthwith to Paul Weiss’s widely reported new policy of “obscuring” compensation among the firm’s partners, as The American Lawyer delicately phrased it a few days ago: “It signals a further departure from Paul Weiss’ modified lockstep pay, in which compensation is largely determined by seniority and therefore widely known.”
As regular readers know, I am both a student of economics and a former securities lawyer, two areas where information transparency is not just celebrated in principle, it is viewed as indispensable to markets functioning fairly, efficiently, and with minimal transactional friction and deadweight loss.
Why in economics is full and accurate informational transparency deemed so essential? Simple enough: Incomplete or asymmetric information leads directly to a wide array of mechanisms of market failure, and smoothly functioning efficient markets are at the heart of free and high-performing economies. And this foundational principle is widely codified in laws against misrepresentation in public markets in general.
So why, as you have gathered by now, am I four-square in favor of Paul Weiss’ new policy?
Let’s start by going straight to the source. According to Brad Karp, Paul Weiss’ chairman:
While Paul Weiss continues to use a modified lockstep system, which sees the majority of partners paid in lockstep, Karp said the firm has the flexibility to meet the demands of a changing market.
“We are not doctrinaire and we have adjusted our system in recent years to deal with changing market realities and to maintain our competitive edge.”
This strikes me as bracing strategic clarity even if—especially since—it contradicts long-observed law firm tradition and custom of partner pay transparency. And as long as we’re here, may I ask you a rhetorical and non-snarky question: Where else in the massive for-profit sector of the economy do you find executive and management pay widely publicized internally and freely shared with the business press?
Now, I would be the first to entertain the possibility that we have it right and essentially the entirety of the rest of the private sector has it wrong, but if you were asked to bet on this, where would you place your chips?
Let’s extend this one step further.
Under the most traditional form of the partner compensation lockstep model—all but extinct at this point, but instructive for what it represents nonetheless—partner compensation is distributed in the form of a bell curve, starting at a relatively low point for newly minted partners, rising throughout one’s career, and then tailing off as one winds down and retires. (Not a perfectly symmetric curve–its rise is longer and gentler than its decline, but you get the point.)
This is not a violent misrepresentation of a lawyer’s career-spanning economic contribution to the firm assuming those who make partner are of essentially equivalent merit and value. But of course they’re anything but. Reliably productive lawyers with sound judgment and flawless technical expertise merely meet the price of admission to the partnership, but gifted and superlative rainmakers are rare. With scarcity comes value.
Therefore the graph of compensation for these exceptional individuals cannot and should not be mapped on to the “normal” curve of rank and file partner comp; it deserves to skew highly and dramatically to the right–think of a “power curve” (in the mathematical not socioeconomic sense).
Paul Weiss’ decision is a plain recognition of this market reality. Gifted business-generating BigLaw partners know exactly their value and they will expect to be compensated accordingly. After all, the firms they work for are not charitable causes and the transaction costs (for the partner) of moving to a new firm that will recognize their value are immaterial compared to the stakes and the promised rewards.
Might we then expect more rational, economically efficient black box compensation models? Three cheers if so.