Why Top Lawyers Leave Lockstep Firms for Merit-Based Pay at Elite Law Firms (Full Transcript)

Speaker 1: In 2018, Sandra Goldstein, a partner at Cravath, one of the highest paying law firms in the world, left for more money at Kirkland. Even for those accustomed to big laws, big salaries, the reported amount was eye-popping. While elite lawyers make a lot of money, not all partners make $11 million a year, not even close. So, why are some partners paid more than others, even within the same firm? Who makes those decisions? And what factors do they consider? Roy Strom, who covers the business of law, and Kent Zimmerman, an advisor to big law firms, are here to explain.

Speaker 2: Different firms use different approaches for partner compensation. Some firms pay based on how senior the lawyer is in the law firm. That's generally referred to as lockstep. Most other firms compensate based on contributions, merit.

Speaker 1: Paul Cravath was an early adopter of the lockstep model in the legal industry, implementing it in the early 20th century. The idea was, pay your associate's top dollar from the start, and they'll stick with you as they rise through the ranks and become rain-making partners.

Speaker 2: The benefit is, there's no sharp elbows because people are not jockeying for who's gonna get credit for bringing work in or for doing the work.

Speaker 3: It's designed to encourage lawyers to work together as a team to solve client problems.

Speaker 1: Lockstep was the norm for elite firms in New York that had wealthy Wall Street clients. Firms in other cities couldn't keep up with the high pay scale. Then came the 90s and an influx of private equity clients that spread attractive M&A work across the country. Law firms outside of New York finally had the financial opportunity to turn the tables by using a merit-based compensation model.

Speaker 2: They were not in a position, necessarily, to pay lockstep across their partnership at a level that would make them market competitive on comp. They were in a position, though, to pay and even set the market on their most significant contributors. It really was a way to shift, to manage to the interests of the highest performers rather than managing to the interests of the most senior lawyers.

Speaker 1: With this strategy, merit-based firms started poaching top-performing partners who were bumping against their compensation ceiling at lockstep firms. All of a sudden, merit-based firms were like Leonardo DiCaprio in The Wolf of Wall Street.

Speaker 4: I will make you richer than the most powerful CEO in the United States of f*** America.

Speaker 1: And for some lockstep firms, it began to be a problem akin to the one Brad Pitt had in Moneyball.

Speaker 4: Well, you know we're being gutted. We're losing Giambi, Damon, Isringhausen. We're in trouble. You'll find new guys. Billy, I need more money.

Speaker 1: Lockstep firms weren't lacking money, but they were lacking the flexibility to pay more money to their best partners. This is why when law firm lawyer salaries make the news, like Sandra Goldstein, it typically comes from a move to a merit system. In fact, there's only a handful of firms that still use lockstep to pay partners. But even the merit-based system isn't one-size-fits-all. There's a variation of this model called black box that a few firms like Jones Day use, where salaries are kept secret and decided by a managing partner or small committee.

Speaker 3: So it's a way to kind of keep people from feeling like they're underpaid or overpaid compared to people that they work with.

Speaker 1: In theory, it's a way to avoid sharp elbows and encourage teamwork, like lockstep. But for some, being left in the dark can be even worse.

Speaker 3: Partners can feel like management makes decisions based on things that they don't understand or for reasons that they disagree with or they just don't trust.

Speaker 1: Which is a fair concern. After all, there is a wide salary range even among partners from the same firm, especially in firms that have a two-tier partner system.

Speaker 3: An equity partner is somebody who makes at least 50% of their salary from the firm's profits in a given year. A non-equity partner has the title partner, but their salary comes usually in a fixed number. But from the outside, you would never really know who's equity partner, who's non-equity partner. It's not a distinction that firms make public.

Speaker 2: That's a huge engine of profitability because with non-equity partners, you are able to bill them out at rates that are close to equity partners, yet compensate them far less.

Speaker 1: Kirkland famously uses this system, and it pays its equity partners almost nine times more than its non-equity partners. Which brings us back to Sandra Goldstein. She's an equity partner at Kirkland, which makes her a top earner at the firm. Ultimately, though, for Goldstein and many other lawyers at elite law firms, leaving a lockstep firm for an equity partner position at a merit-based one is the way to get that big payday.