Money, Money, Money! Remuneration Structures Amongst Law Firms

Elite New York law firm, Cravath, Swaine & Moore has overhauled its remuneration structure – moving from traditional “pure lockstep” to a pay structure that rewards partners based on merit.


According to presiding partner Faiza Saeed, the move to a more merit-based system would allow Cravath to “thrive in a dynamic marketplace while maintaining the values and culture … that define our firm.”


Cravath is one of the oldest law firms in the US and is seen as a bastion of the pure lockstep model. It was designed to foster collegiality and equality among partners but has come under pressure as rival firms lure top lawyers with eye-watering pay deals.


While Cravath partners took home on average $4.6m last year, other firms have proved to be far more profitable. For instance, Wachtell, Lipton, Rosen & Katz’s partners pocketed some $7.5m on average.


This move has no doubt been influenced by the success of rival firms with so-called ‘Eat What You Kill’ remuneration structures. For example, Kirkland & Ellis generated a record annual revenue of about $5bn following overwhelming demand during the pandemic. With this wealth, the firm has gone on a spending spree – luring lawyers such as Keir MacLennan and Vincent Bergin from Freshfields Bruckhaus Deringer to name just one of many examples.


This so-called “raiding” of magic circle lawyers by US firms has become a common narrative within the financial press. Competition from US firms with flexible models, which are willing to pay multi-million-dollar sums for star partners, is forcing rivals to modernise their policies.


Both Allen & Overy and Freshfields Bruckhaus Deringer have adopted modified lockstep models to remain competitive.


Despite this pressure, other firms such as Slaughter and May, continue to maintain an effective and stable lockstep largely by eschewing full-scale global expansion and focusing tightly on the upper crust of UK deals. The firm is far smaller than its UK rivals, with just 560 lawyers compared to Freshfields’ 2,800.


Pure Lockstep, Modified Lockstep, and Eat What You Kill… What’s the difference?


Lockstep


The lockstep model is most widely used among firms in both the UK and the US, but as recent trends suggest, this is quickly changing.


In this system, equity partners’ profit shares increase in line with their seniority with the firm. This means that all equity partners who joined the firm in the same year will be paid the same – and typically, this also influences associate pay.


Pros


·Creates, stability, cohesion, and loyalty by emphasising group achievement and teamwork rather than competition between lawyers at the same firm.

·It provides certainty in terms of partner progression – there is arguably greater transparency and emphasises the sense of sharing and support between partners.

·In theory, it should create a more collegiate culture in which lawyers pursue the firm’s best interests rather than their own, while also rewarding longevity and loyalty.


Cons


·Fails to link reward with individual performance – encouraging inefficiency and unfair situations where lesser performers can ‘coast’ on the greater contributions of others.

·It lacks the flexibility to deal with underperforming partners as well as high performing partners regardless of seniority.


·Lockstep assumes that senior partners generate more for the business than junior partners, and therefore fails to properly account for the speedy progress of higher-performing partners.


Eat What You Kill


A colourful phrase to describe a pay model that is the opposite of pure lockstep. Firms provide lawyers with a base pay calculated using a formula that considers the firm’s overheads, but the remaining profits are split based on performance.


A firm adopting this model may be more accurately described as a cost-sharing arrangement between individuals rather than a partnership.


Pros

·Rewards high-achieving individuals for their work, providing a personal incentive to continue to perform.

·Suits a firm that hires a lot of partners laterally, as such partnerships will not have developed organically, and is thus less concerned with authentic working relationships.

·Emphasises performance, which should in theory ensure all lawyers pull their weight financially.

·Works well with lawyers that are competitive and individualistic rather than collaborative.

·Benefits a firm’s cash flow by incentivising clients to pay promptly.


Cons


·Could be a detriment to a firm’s cohesion and long-term stability – and thus volatile. For instance, Dewey & Leboeuf collapsed in 2012 which operated a pure merit-based partner remuneration model.

·It does not account for essential functions as referrals between a firm’s lawyers as there is no incentive to encourage this behaviour.

·It punishes those lawyers who engage in vital work for the development of the firm, such as management and training roles, as they are not as lucrative for the firm in the short term.


Modified Lockstep


Modified lockstep attempts to get the ‘best of both worlds’ – striking a balance between pure lockstep models and merit-based systems. This is not consistent within the industry and can come in many forms.


Some firms opt to remunerate associates and partners through a bonus system that is either tied to the firm’s overall performance or the teams. However, this still does not adequately reward individual performance.



Regarding partners, some firms use a “points” system in which partners continue to be paid based on seniority but may be awarded points based on performance. A single point would carry a pre-decided value (let’s say £50,000), and only a very small group of partners would ever reach the highest end of the scale.

While Modified Lockstep seems to be the most rational remuneration model in incorporating the positives of both models, it inevitably also retains the drawbacks.


Where do you fit in all of this?


Ultimately, this article is asking you to think creatively – what structure would you adopt if you were a managing partner of a large commercial law firm?


While work comes first, remuneration structures have a significant impact on the way law firms operate as a business. This would affect the way you work, and therefore it is highly recommended that you place some consideration into this when choosing a firm.


Written by Adam Badawy

www.linkedin.com/in/adam-badawy