What kind of world are we living in? As we mentioned yesterday, a law school just announced that it’s lowering tuition — a shocking move, given that law schools almost always increase tuition by a few percentage points per year.
And now we get this news: a major law firm is cutting — yes, cutting — pay for top partners. This is a big surprise too, given that the powerful trend in the industry has been in favor of a growing divergence in pay between the highest- and lowest-earning partners. According to one recent study, “the spread in compensation between the highest- and lowest-paid partners in law firms has increased to 6-to-1 or 7-to-1 from the previous count of 4-to-1 or 5-to-1.”
So which firm is making this move, and what’s motivating it?
At a time when many U.S law firms are raising compensation for top-earning partners to attract stars from competitors, New York firm Shearman & Sterling has taken a different approach: It has reduced equity and pay for high earners and increased them for lower-ranking business generators, according to at least four people with direct knowledge of the matter.
The firm began phasing in compression of the pay ratio and changes to a bonus pool, comprised of 15 percent of firm profits, in 2011, sources said. Under the old model, half the pool was distributed on merit and half was rewarded at the discretion of the compensation committee for nonperformance-related reasons. For example, the pool was sometimes used to pad the salary of a first-year partner, according to a person familiar with the process.
It sounds like the guaranteed pay of top-paid partners compared to the lowest-paid partners is coming down. But there’s a catch:
Under the new model, the pool is being used almost exclusively to acknowledge individual performance, business generation, teamwork, or the performance of the partner’s practice area, said this source. It also provides a way for some partners to earn back basic compensation that has been reduced, according to one of the sources.
Ah, interesting — so maybe this isn’t as big a change as it first seemed. The bonus pool, now focused even more on performance, might end up rewarding the biggest rainmakers at the expense of the small fry. But how it will all shake out remains to be seen; as Reuters notes, this is the first year that will be fully controlled by the new pay structure.
Even if the bonus pool allocation could make things look more like they did under the old system, the new system is at least a partial break with the recent past:
Between 2008 and 2011, under the leadership of Rohan Weerasinghe, the firm had expanded the pay gap between top- and low-tier partners, said former partners. Weerasinghe last year left Shearman to became general counsel at Citigroup. Weerasinghe did not respond to a request for comment.
During his tenure, junior partners had their pay cut by hundreds of thousands of dollars in order to boost the compensation of more senior partners, according to former Shearman partners. Two of them said resentment over the system came to a head at a partners meeting in 2011, when some lawyers expressed dissatisfaction about the direction of the firm and about compensation of top earners.
About that time, firm management began to rethink the top-heavy compensation model and embrace the idea of rewarding business generation and recognizing star junior partners, said the former partners.
So now it sounds like the Shearman system will reward current rainmakers and future rainmakers? The parameters of this new system are a bit unclear. If you can provide us with additional information about Shearman partner pay, feel free to email us or text us (646-820-8477).
The changes are not without risk. The biggest danger is that they could cause top partners to defect to competitors. As Reuters points out, Stephan Hutter, a prominent European capital markets partner, left Shearman for Skadden last year, claiming that Shearman wasn’t paying him market compensation or investing sufficiently in his practice.
One can’t help seeing the ghost of Dewey & LeBoeuf in all of this. Dewey, of course, was notorious for the huge spread between the highest- and lowest-paid partners — a spread that might have run as high as 20 to 1. In reducing the disparities between partners at the top and the bottom of the pay scale, Shearman might be trying to make its partners more like true partners and less like a disparate collection of lawyers who happen to work under the same roof.
A small spread between the highest- and lowest-paid partners can work at a firm like Cravath, which is extremely stable and profitable. A Cravath partner who could make more elsewhere might stay put because he values the stability and is still making a huge amount of money (although even Cravath partners sometimes defect to competitors).
With these latest partner pay changes, is Shearman trying to make itself less like a Dewey and more like a Cravath? If so, will it work? Let us know what you think.
Shearman & Sterling cuts top-earner pay, lifts lower-tier stars [Reuters]
Partners’ salary gap increases [Chicago Daily Law Bulletin]