The Optimal Partner Compensation System, Revisited

A recent poll/post about the "optimal" partner compensation system produced interesting—and very mixed, a/k/a divided—results, with the option "there's no such thing" coming in second overall.

Off-line, I had a subsequent conversation with a couple of partners in large firms here in New York about what my views are on the question, and it's worth a moment's elaboration.

Basically, if the question is what partner compensation system is optimal, my answer is:  "It depends."   What it depends upon is where the firm is in its lifecycle or what its strategic objectives are.  I view lockstep/eat-what-you-kill not as dichotomous opposites (though they surely can be, in the pure, extreme cases), but more as a continuum.  Being relatively nearer to or farther from each end encourages different kinds of behavior by partners.

In short, I think "EWYK" is probably where you want to be when the firm is young and growing, and/or when you're entering new markets (London, e.g., for a NYC-based firm).

Conversely, lockstep is right for mature, "climax stage" firms that own a niche and have no reason to make radical changes (the classic example is what I characterize as New York's "bulge bracket" firms such as Cahill-Gordon, Cleary-Gottlieb, Cravath, Davis-Polk, and Simpson-Thacher). 

One of the most "fabulous facts" about any law firm I know is that Davis-Polk has never seen a partner leave to become a partner at another law firm. Can you say "cohesive?"   The primary—but non-negotiable—caveat is that you cannot have a "tolerant" lockstep.  That way lies insanity, as shirkers will freeload and workers will resent it to the point of decamping elsewhere.

Most importantly, use the compensation system to shape the firm culture, rather than letting the firm's culture shape the compensation system. Remember who's driving the bus.

EWYK is good at:  Entrepreneurship (Greenberg Traurig is the poster child of this ethic); entering new markets or practice areas; growth for its own sake; and attracting gorilla laterals.

Lockstep is good at:  Maintaining mature and solid practices; promoting collegiality and collaboration; institutionalizing clients; and avoiding time-consuming and disruptive squabbles over things like origination credits:

If I had to pick one and only one system?

"Modified lockstep," meaning a base of 70-80% of compensation set by lockstep, with room for 20-30% in bonuses or demerits based on outstanding or subpar performance.  Sprinkle in some built-in recognition that some practice specialties are inherently more profitable than others, and that some places in the world are inherently costlier to live in than others.

And one more thing:    No formulas.  Please ensure the acid test, the ultimate determination, turns primarily on the gut feeling that, "Yeah, that sounds right to me."