Partner Comp Systems and Competitive Advantage: Lessons From the Kirkland, Cravath, and Paul Weiss Lateral-Hiring Wars

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To succeed at retaining and attracting partners, it’s not enough to have high firm-average profit per equity partner (PEP). In addition, a firm’s comp system must have wide enough a range, and be variegated enough, to match individual partners’ comp with the economic contribution of their practices. Failure to do so undercompensates stronger performers and allows them to be lured away by competitors. Even firms with lower PEP but more variegated systems will be able to offer higher compensation.

While the departures don’t happen overnight in a mass exodus, the dynamic is real. Witness the toppling of London’s Magic Circle. They had lockstep comp, with top-to-bottom ranges of three-or four-to-one. The attendant under-compensation of the highest performers created an opportunity that U.S. firms, with their typically broader compensation ranges, exploited to hire away top talent. The London elite (except for Slaughter and May) worsened their predicament by expanding into continental Europe and Asia; these lower-profit markets put a drag on firmwide PEP. While the Londoners introduced country-specific lockstep ladders, and uncapped the top end in varying forms, it’s proven too little, too late. The Magic Circle firms ranked in the top 10 globally by PEP in the 1990s; today, they are clumped around 40th.

What makes comp systems so insidious is that they’re so hard to change. If some partners are being paid less than that which the economics of their practices would suggest, then necessarily others are being paid more, with the former subsidizing the latter. The bell-shaped distribution of practice economics means that a relatively small number of high performers subsidizes a much larger number of relative underperformers. The democratic nature of partnerships makes unwinding the subsidies intractable.

The latent pressures to broaden comp ranges have been growing as the economics of individual partners’ practices continue to diverge. The pressures intensified sharply with the stunning profitability growth from 2019 to 2021. Firms including Davis Polk & Wardwell, Latham & Watkins, Cleary Gottlieb Steen & Hamilton, Ropes & Gray, McDermott Will & Emery, and Cooley recorded 50%-plus PEP growth over these two years. This surge in profitability was centered in high-end transactional practices. For firms whose comp systems have vestigial lockstep or other tenure biases, the gap between comp and economic contribution widened for partners in these practices.

Thus, it’s no surprise that the gloves came off in lateral partner hiring last year, and that we hear of significant changes afoot in comp systems. The following looks at how these may play out at three of the principals: Kirkland & Ellis, Cravath, Swaine & Moore, and Paul, Weiss, Rifkind, Wharton & Garrison.

Kirkland

Among the many things Kirkland is doing right, two stand out. First, they’ve established a culture of a partnership of entrepreneurs, i.e., partners who are second-to-none both as lawyers and as businesspeople. Second, they’ve combined this ethos with a comp system that’s allowed them to build leadership positions in lucrative New York practices (strategic M&A transactions, attendant financing and related litigation) by hiring laterally from the indigenous elite.

An important element of their comp system is their income partner tier. This provides enormous leverage in terms of numbers: Kirkland has 1.7 income partners for every share partner (compared with 0.7 and 0.3 at Latham and Gibson Dunn, respectively). This tier also provides extraordinary financial leverage: at Kirkland, average share partner comp is over 10 times the income partner average (compared with three and five times at Latham and Gibson Dunn, respectively). As an aside, and consistent with the notion that pressure on comp systems intensified with the extraordinary profit growth from 2019 to 2021, Kirkland’s leverage on both metrics surged over these two years: numbers and financial leverage grew from 1.4 to 1.7, and eight to 10, respectively.

These leverage ratios point to Kirkland having tapped into and established a winner-take-all dynamic, analogous to the professional tennis tour (ATP). Tournament prize money is heavily concentrated among the very top players, yet hordes of others clamber to break into their ranks, enduring penury as they do so. While the odds of their making it are low, the payoff is so high that it’s compelling to them to try. It is the same with Kirkland’s income partners. As a group, the aspirants exert vastly more effort than that for which they’ll ever be rewarded, the benefit of which redounds to the share partners, but it’s compelling for individuals to give it a try.

Another powerful feature is the breadth of compensation within the share partner ranks. In 2016, the ratio between comp of the top and bottom tiers was reportedly nine-to-one; one imagines that today it’s probably over 10—a huge difference from the three- or four-to-one ratio in a traditional lockstep, or the four- or five-to-one ratio in a “modified” lockstep. This range is thus a powerful weapon in luring star partners from lockstep firms.

The knock against Kirkland used to be that the firm’s culture was idiosyncratic in a way that would prove uncomfortable to newcomers. The data on this is scant. Between 2016 and 2018, three partners joined Kirkland from Cravath, arguably the firm’s antipode on culture; all three are still there.

Whatever Kirkland is doing, it’s working. Over the past 10 years, the firm has risen from eighth to first in PEP rank. Its partnership culture and compensation systems are bedded in and well suited to today’s gloves-off environment (indeed, to a degree, they’ve created the pervasive free-agency spirit). Although they’ve recently had lateral departures to Paul Weiss in London (a sui generis environment within many firms), their focus in the years ahead will be on fine-tuning what they’ve already established rather than on wholesale change. Thus, they become the benchmark against which to compare others.

Cravath

For decades Cravath sat above the fray: stellar reputation, perennially top five by PEP, zero partner attrition, sparse lateral hiring, a single-tier partnership, and lockstep comp.

But in 2016, Chambers Band 1 dealmaker Scott Barshay left for Paul Weiss and, two years later, Chambers Band 1 litigator Sandra Goldstein joined Kirkland. However, there the defections stopped; one suspects Cravath modified the top of their lockstep?

In 2020, when PEP at other transaction houses grew by 20%, Cravath’s grew only 4%. Then in 2022, after growing with the market in the intervening year, Cravath’s PEP declined 19% (while its peers stayed flat). This left the firm ranking 13th by PEP—its first time outside the top 10, and down nine places since just 2018. 

Relatedly, partner departures restarted in this timeframe and seem ongoing. A couple were similar in profile to the 2016-18 departures: Chambers Band 2 dealmaker Damien Zoubek joined Freshfields as co-head of M&A; Katherine Forrest, an antitrust litigator and Chambers “Eminent Practitioner,” joined Paul Weiss. But others were of a new profile, fourth- to seventh-year M&A transactions partners: Allison Wein to Kirkland, Jenny Hochenberg to Freshfields, and Andrew Elken to Latham. The recent departure of Rory Leraris, a transactions litigator, to Davis Polk is of similar ilk. Last year also saw one of Cravath’s rare lateral hires move on: David Portilla, a Chambers Band 4 banking regulatory/ compliance lawyer, who’d joined from Debevoise in 2021, departed for Davis Polk.

This churn suggests the following problems for Cravath: their past modification of lockstep has been insufficient, they have a new challenge with the pipeline to senior partner in their core practice, and (unlike much of the rest of the market) they struggle to identify, hire, integrate and retain lateral partners with support practice specialties.

Something had to be done and, not surprisingly, there are reports of three new initiatives: a “loosening” of its lockstep, the introduction of a non-equity tier, and the opening of its second U.S. office in Washington, D.C. The “loosening” seems a logical response to the first two problems above. But it does seem like just that: a response, a defensive measure. In a market where rivals continually raid and rally, is it enough for a firm to play defense but have no offense?

An impetus for the non-equity tier may be to bolster PEP through higher leverage, but such takes time to realize (as the non-equity ranks need to get to meaningful numbers). A second, more immediate, benefit relates to the third initiative, the opening in D.C. The office is being populated with hires from government; while well-connected and excellent technically, such lawyers don’t bring business, lack the skillset to develop client relationships, and operate at low leverage (at the time of writing, the firm’s website shows five partners, two counsel, and three associates in D.C.). For such recruits, the non-equity tier is an appropriate track.

But why, after over 200 years, has the firm decided to open a D.C. office? The oft-referenced downside to Cravath’s transaction-focused model is that the firm officiates at the wedding (the merger) but doesn’t stay to support the marriage (ongoing corporate needs). As broader-line competitor firms have approached Cravath’s level of excellence in transactions, this focus may be becoming a handicap. However, adding regulatory advisors in D.C. doesn’t address this; rather, it seems to bring in-house ancillary services that traditionally might have been sourced from specialists at other firms. There is a risk that, as with all new offices, there’ll be pressures internally for the office to grow and reflect the business mix of its location. If this happens, then Cravath could start to resemble the Magic Circle of the 1990s: immensely proud, chary of moving far from traditional lockstep, and expanding into lower profit markets. A comparable fate would await.

Paul Weiss

While Kirkland has been rising in the PEP rankings, and Cravath falling, Paul Weiss has been extraordinarily consistent, varying only between third and fifth over the past decade. But this consistency belies the intensity of the firm’s efforts to enhance its position. Paul Weiss has been an aggressive recruiter of star talent and has hired even from Kirkland. Although the firm is lockstep, they have reportedly paid recent laterals as much as $20 million a year each—3.5 times the firm’s average partner comp. One assumes that their lockstep has substantially greater breadth, and flexibility, than the traditional model. 

Not content with its current competitiveness, Paul Weiss is apparently moving to black box comp. This will enable it to align comp with economic contribution across partners of all practice types and tenures. Moving from lockstep to such alignment will free up comp from partners with low-leverage or support practices to bolster that of partners who open and expand major client relationships, and to amass dry powder for when the right star laterals become available.

Black box comp is not without its challenges. Some are prosaic: e.g., how does one accurately determine the economic contribution of a partner’s practice? But some are profound and far reaching: will it dull the competitive instincts of some partners if their colleagues don’t know what they make?

The black box requires that partners don’t go around the system and share comp info in small groups or anonymous postings. The incentive for partners to do so is going to be intense at the start, as partners wonder if they’ve benefitted from, or been hurt by, the change. Also needed is that those determining comp awards don’t just avoid, but avoid even the suspicion of, cronyism, sexism, inverse-ageism, self-dealing, etc. This is no trivial challenge given the intense skepticism of lawyers as a breed. There’ll inevitably be missteps—will partners afford the new system the time it needs to get bedded in? What happens when there’s a leadership change? Brad Karp has been chairman since 2008; the enormous trust he has built up will not automatically transfer to his successor.

The firm is also thought to be introducing a non-equity tier. This is a little surprising. With black box comp, you don’t need an income tier to ensure partners in support practices, say, are compensated appropriately. Indeed, a second tier can be a setback when it comes to lift-outs or hiring of partner teams—laterals from the non-equity tier at their present firms can be attracted by the prospect of being a full partner in a single tier; lawyers from the government likewise would find it more consistent with their professional standing to be full partners, albeit at lower comp.

So why then would Paul Weiss be thinking of an income tier? One suspects that their aim is to have something akin to the Kirkland, Latham, and Gibson Dunn models: an up-or-out tier just prior to equity partner promotion where would-be partners are vetted for their business and relationship-development skills (and not just their technical abilities) and in which the aspirant share partners will be induced to stay by the prospect of eventual elevation. Once established, the numerical and financial leverage would boost equity partner comp significantly.

In Closing

At some level, the above reads as a litany of trials and tribulations afflicting the super elite. But there’s more to it. At the least, it makes that case that firms do well to continually reassess the effectiveness of their comp systems—they are recruiting and retention tools with profound implications for firms’ long-term vitality. Further, it should persuade firm leaders to watch closely how Paul Weiss’ transition to a black box goes. If other firms see it can be done, they may want to replicate it.

Hugh A. Simons is formerly a senior partner at The Boston Consulting Group and chief operating officer at Ropes & Gray. He writes occasionally about business aspects of law firms. Hugh welcomes reactions at [email protected].