The Evolution of Partner Compensation in Big Law Firms

In 2018, Sandra Goldstein, a prominent partner at Kravath, one of the world's highest-paying law firms, made headlines by moving to Kirkland & Ellis for an eye-popping salary. This move underscored a significant trend in how law firms compensate their top talent. While elite lawyers typically earn substantial incomes, very few partners make as much as $11 million annually. This raises questions about the disparities in partner compensation, the decision-making process behind these figures, and the factors considered in determining pay.

Compensation Models in Law Firms

Different law firms employ various approaches to compensate their partners. Broadly, these can be categorized into two main models: lockstep and merit-based.

Lockstep Model

Historical Context: Paul Drennan Cravath introduced the lockstep model in the early 20th century. This model pays associates top dollar from the start, encouraging them to remain with the firm as they ascend to partner status.

Advantages: Promotes teamwork and minimizes internal competition, as partners are not competing for credit or compensation based on individual performance.

Challenges: Predominantly used by elite New York firms with wealthy Wall Street clients. Firms outside New York struggled to match these high pay scales.

Merit-Based Model

Rise in Popularity: Gained traction in the 1990s with the rise of private equity clients and lucrative M&A work spreading across the country.

Advantages: Allows firms to reward top performers more generously, thereby attracting and retaining high-performing partners.

Challenges: Can lead to sharp competition among partners and potential discontent over compensation disparities.

Notable Compensation Approaches

Black Box Model

Description: Salaries are kept confidential and decided by a managing partner or a small committee.

Advantages: Prevents partners from comparing salaries, which can help maintain harmony and encourage teamwork.

Challenges: Lack of transparency can lead to mistrust and dissatisfaction among partners.

Two-Tier Partner System

Equity Partners: Receive a significant portion of their compensation from the firm's profits.

Non-Equity Partners: Typically have fixed salaries and are billed at rates close to equity partners but compensated significantly less.

Example: Kirkland & Ellis utilizes this system, resulting in equity partners earning almost nine times more than non-equity partners.

Case Study: Sandra Goldstein's Move

Sandra Goldstein's transition from Kravath to Kirkland highlights the financial incentives driving top lawyers to leave lockstep firms for merit-based firms. As an equity partner at Kirkland, Goldstein secured a top-tier compensation package, reflecting her high performance and contribution to the firm’s profitability.

Conclusion

The shift from lockstep to merit-based compensation models in law firms represents a broader trend towards performance-driven rewards. This change is reshaping the landscape of partner compensation, driving top talent towards firms that offer the most lucrative and flexible compensation packages. For many elite lawyers, transitioning to a merit-based firm is the pathway to achieving significant financial rewards, as exemplified by Sandra Goldstein’s career move.