But What About the "Black Box" Compensation System?

A regular reader (partner at an AmLaw 25 firm and, coincidentally, a fellow Princetonian) writes:

"You write about lockstep and eat-what-you-kill, but you don't say a word about "completely black box" compensation. There are some firms in which partners are told neither how much their colleagues are being paid nor the precise basis for their own pay.

"Is that a clever way to avoid jealousies in a law firm with offices in many cities that must necessarily pay differential wages in different locations? Or, in the alternative, is it insanity? Or something in between?"

Our reader does indeed cite a fascinating case which falls under neither model I discussed (although my suspicion is that it's not as rare as one might think, so it does bear discussion).

Having been trained as a securities lawyer, where Disclosure is God, I used to think that you could never have too much transparency and that the model our reader cites is indeed "insanity."   (A non-lawyer friend once asked me if I could summarize the securities laws in 25 words or less—this was, blessedly, before Sarbanes-Oxley, a revolting, pestilential abomination grafted like a tertiary-stage malignancy onto the Delphic wording and structure of the '33 and '34 Acts—and my response was that the securities laws required only this:  "You can do anything, so long as you properly disclose it.")

But the more I see of how people actually behave, the more inclined I am to the view that a little opacity isn't such a bad thing, and that in fact the Total Ignorance position is internally consistent and probably has some merit.

Why?

Essentially, the more widely dispersed the firm (geographically, and "virtually," as in having a multitude of practice areas), the more difficult it is to make meaningful comparisons between what lawyers in different cities in different countries doing different kinds of law "should" or "deserve" to earn. Let's face it; Bologna is never going to be as lucrative as NYC, London, or Hong Kong, nor is real estate transactional work ever going to be as rich as project finance or private equity.

This in turn means that unless the firm imposes a Procrustean and extremely unstable across-the-board uniformity, disparities in the profitability of work done will be more or less reflected in disparities in the compensation of those doing the work.

Don't we all know that, and aren't we all adults?  What would be so bad about conceding, and even enumerating the extent to which, that's the case?  The problem is the all-too-human one which Warren Buffett has fingered:  "The only one of the seven deadly sins more powerful than greed is envy." 

In other words, it's difficult to have your nose rubbed in the fact that you're not at the top of the remuneration pecking-order—no matter how well-paid you are in absolute terms. Accordingly, I'm coming around to the view that it's defensible, even smart.

But there's another dimension entirely:  We've been discussing compensation schemes as if they were the only way to get people to behave in desirable ways, when of course nothing could be further from the truth, as David Maister nicely points out in a comment he left on my original piece:

"What lawyers continue to misunderstand is that reward schemes do a good job of making sure that rewards go the right people, but are close-to-irrelevant in *creating* performance. Too many law firm debates are about different ways to pay people of different "inherent characteristics" (the superstar, the mobile lateral, the developer of people) as if their contribution is unchangeable, their personalities and their preferences being fixed.

"What this debate ignores is the possibility of getting people to adapt their behaviors through guiding, supporting, helping, coaching, cajoling, inspiring, confronting and a multitude of other highly interpersonal activities called MANAGING people. It is because law firms don't want to do this that they fall back on trying to do the impossible: trying to influence behavior through the reward system, which, since it will, and must inevitably, remain a blunt, unsophisticated instrument, will always be inadequate to the task. The issue for law firms is NOT what kind of reward system shall we have: it's are we prepared to see this place managed in any other way besides through the reward system? Is there another way to get people to do things other than to say "Do it and I'll pay you!"

Characteristically, David is absolutely right.  We all know we do things for a million different reasons other than money, including boosting our self-esteem, seeking peer recognition, wanting to be a team player, for the pursuit of intellectual curiosity, enhancing our professional reputation, impressing a client, etc., ad infinitum.

But I'm also reading "Eat What You Kill:  The Fall of a Wall Street Lawyer," Milton Regan's gripping, harrowing, better-than-any-novel, painstaking reconstruction of how John Gellene, a rising-star bankruptcy partner at Milbank in the mid-1990's (racking up 3,100 and 3,000-hour years consistently), a Phi Beta Kappa and summa cum laude graduate of Georgetown and cum laude graduate of Harvard Law, neglected to disclose what should have been an easy-to-overcome conflict of interest to the US Bankruptcy Court and ended up in prison, a convicted felon.

While Regan has only begun to make this inexplicable personal and professional blow-up understandable, it's clear that contributing mightily to the pressures Gellene felt subject to was Milbank's transformation in the late 1980's from the quintessential lockstep-compensation, WASP white-shoe firm joined at the hip to the Rockefeller family and Chase Bank, to a firm of entrepreneurs bent on growth and diversification.

This transformation may have been—indeed, I would be among the first to suggest it probably was—one of Milbank's finest hours, but change has consequences, and, occasionally, tragically exposes a personality type incapable of adapting to the transition.

But back to lockstep vs. EWYK vs. the black box:   The bottom line for me is that compensation across the partnership over time must be perceived as fair.  People will push and jostle and beef about this that and the other small adjustment, but ask them if it's fundamentally fair in the long run:  If that acid test can be passed, the system works.