The $20 Million Payday Deals
Albert Goodwin, LawFuel contributing editor
Although ‘lateral’ may mean ‘sideways’, it certainly means ‘UP’ when it comes to lawyer compensation as some of the lateral transfers now occurring among big law firms see the big law pay scale rise to $20 million or more. Heady stuff.
The pressure is on major law firms to retain top talent as the lateral hiring game steps up a notch.
Revamping comp structures is a high-stakes game that can either galvanize a firm’s recruiting power or sow discord in the partnership ranks.
Firms like Paul Weiss, Davis Polk, Simpson Thacher, and Weil Gotshal have all taken the plunge recently or are considering shaking things up at the compensation and lateral hire level.
Simpson Thacher recently made the news with their big law raises to big money to keep up with the likes of Paul Weiss, Kirklands et al.
The firm’s chair, Alden Mllard, said the obvious: they “intentionally made the decision to adjust our compensation structure to attract and retain the best talent across our global platform.”
And therein lies the major issue when it comes to paying the big money for big law rainmakers.
We’re talking seismic shifts here, as the ‘black box’ pay schemes take shape and become more frequent.
From instituting secrecy around partner pay to super-charging top-end compensation and rewarding rainmakers for bringing in the big bucks, these moves represent a tectonic departure from the old-school egalitarian model.
Legal Mega Paydays
Here’s the rub: Firm leaders have to walk a tightrope, lavishing stars with mega-paydays without alienating the rest of the partnership who’ll inevitably see their slices of the pie shrink as a result.
As we have extensively reported with the London lateral hires, principally the move of Neel Sachdev from Kirkland & Ellis to Paul Weiss for a reported $60 million over three years, the deals are eye watering.
It’s a delicate balance, and just like with mergers, you can expect some defections whenever comp policies get an overhaul.
Comp reviews are sweeping the industry according to Lisa Smith of Fairfax Associates. “Firms need to be careful…they don’t disrupt too much the things that have driven the firm’s success from a cultural perspective,” she cautions.
After all, if you over-reward certain behaviors, you risk stifling collaboration and client service.
For many firms, any comp changes require partnership buy-in through voting. Even for those with CEO-like leader powers, you can bet your billable hour that a compelling legal case will be made to justify upending how profits get divvied.
Barry Wolf (pictured) of Weil spearheaded their recent revamp favoring business generators after interviewing nearly every partner on their wish list. “Partners do have a choice, so you want to make sure they are buying into the changes,” he told The American Lawyer.
A renaissance in demand for elite New York firms’ services, powered by a resurgence in big-ticket transactions and capital markets work. Citi data shows 16 per cent revenue growth in Q1 for a sample of NYC heavyweights, among the highest nationwide.
Bloomberg Law quoted Lisa Smith of Fairfax Associates who said: “Firms need to be careful when they make some of these changes that they don’t disrupt too much the things that have driven the firm’s success from a cultural perspective.”
People worry about “if we over-reward certain kinds of behavior, will that put a damper on collaboration or client service? So people are rightfully cautious about doing too much or stretching too much.”
As Michael McKenney of Citi puts it, “There really seems to be a breakaway moment…There are industry leaders who are separating themselves in a positive way from their peers.” And in this rarefied air, competitive compensation is key “because people, when they’re generating, they expect to be paid.”
The pay divide is widening rapidly, with the spread between the highest and lowest 10 percent of partners now approaching 8x at some firms.
While profits per partner grew around 6 percent on average, compensation was essentially flat for the lower tiers.
It’s a tricky balancing act that takes “a special talent” to manage according to Wells Fargo’s Owen Burman. So much so that leadership transitions are becoming more common, with some firms appointing co-leaders to handle the mounting complexities.
“These are extremely challenging discussions because it does go to the heart of the culture of the firm,” says Burman.
In other words, get the strategy right and you’re golden. Fumble it, and you risk tearing your firm’s very fabric apart.
