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(Don’t Just) Show Me The Money!

The solution to the law firm compensation dilemma has nothing to do with money.

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If you took physics back in high school, you may recall that one of the basic laws of nature is that gases in a closed container will always expand to occupy 100% of available space. Allow me to propose an equally immutable law about law firm compensation: I believe scientists will prove conclusively in our lifetime that every law firm attorney on earth believes they’re worth at least 15% more than they’re actually being paid.

If there’s one topic sure to cause law firm partnerships around the globe to bring the knives out, it’s the compensation structure. Every law firm managing partner I’ve spoken with has lamented the pain that comes with partner compensation. It’s a universal, endemic problem in virtually every law firm.

The tensions inherent in choosing a compensation system are classic, and primarily come down to a problem of priorities. How much do you set aside to keep your rainmakers happy, since without them you wouldn’t have work to do? How much goes to the “service partners” and associates, who know the cases even when they aren’t the relationship lawyers? Do you take care of partners following a series of down years in their practice out of the hope they’ll pick back up, or do you divert their salary to ensure that today’s rising stars stick around? When an attorney has a huge year, do you reward them right away, or wait to see if the boom will repeat? It’d be simple to throw money at all these problems, but there’s never, ever going to be enough to make everyone happy. Priorities have to be set, which means perceived winners and losers get chosen.

And nobody wants to be a loser.

Even a firm that has a strong handle on how it wants to prioritize its funds then has to grapple with determining a system to enact those priorities. Do we go with a fully objective comp and bonus system, where everyone knows what they’ll get? But if not executed correctly, that can lead to infighting over client credit, apportionment of receivables, calculation of overhead, or any of the other subjective calls that are made in setting up any objective system. Purely objective comp systems also may leave the firm without a good way to financially recognize non-monetary contributions to the firm overall, such as pro bono work, firm and community leadership, or other activities that only indirectly help the bottom line.

We could solve those deficits by integrating more subjective systems, but subjectivity opens its own can of worms. Even the most evenhanded, fair-minded compensation committee may end up accused of cronyism, favoritism, or blindness by attorneys who don’t believe their contributions were fully valued. Subjective structures are inherently susceptible to criticism, and when done wrong they can damage attorney relationships.

Many, if not most, large law firms attack this problem with a compromise system, one that attempts to balance the many competing interests at stake. But like a philosopher once said, a good compromise leaves everybody mad. Partners with huge books wonder why so many bonuses are going to the attorneys who don’t have them. Attorneys without huge books feel like their experience and institutional knowledge aren’t valued as much as they should be.

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Other firms forgo the messiness of compromise in favor of a clear, defined compensation system that unapologetically sets priorities. Cravath is a famous example, with its lockstep seniority-based salary. Anyone heading into a stint at Cravath knows what to expect. Your salary will depend on what year you are, full stop. Bonuses are guaranteed to be a certain amount, with some small discretionary extras for exceptional performers. In theory, it allows attorneys to stop fighting over client credit and focus on bringing in dollars. It’s accepted that some underperforming attorneys will be overpaid, and some overperforming attorneys may be underpaid. The clarity of purpose and expectation are the primary features of the system. And, for decades, Cravath has had great success with its system — even in the face of other firms steadily abandoning the model since the 1980s.

But now, even the Cravath system is starting to show its cracks.

Any time an attorney gets left feeling undervalued, they’re vulnerable to poaching. Case in point, just a few weeks back it was announced that Sandra Goldstein, former head of litigation at Cravath and one of its most senior rainmakers, is moving over to rival Kirkland & Ellis. Goldstein is just the latest of Cravath’s senior partners that Kirkland has snagged in the past few years. Cravath’s lockstep system, which theoretically should have favored Goldstein hugely given the length of her tenure, wasn’t enough to keep her onboard. Kirkland’s flexible compensation structure has been pointed to as one of the primary tools it’s used to bring partners over in recent times. The pay-for-performance and book of business market pressures are becoming too great for even a juggernaut like Cravath to withstand.

Compensation is a universal problem with no clear universal answer. Rival compensation systems are eternally locked in a rock-paper-scissors dynamic where any given system is necessarily going to have weaknesses that other firms can exploit to steal talent with the promise of higher earnings. Compensation systems that reward seniority necessarily do so at the expense of younger high earners, who can get paid better somewhere that bases paychecks exclusively on dollars received. Eat-what-you-kill firms will struggle to keep the partners that do all the administrative work, but don’t get financially credited for it.

And that leads to the real point that I want my fellow firm managers to take away from this article. There’s almost always someone out there who’s willing to pay your attorneys better than you are. You’ll never find the perfect comp system, and you’ll never make everyone happy with their take-home pay. The basic realities of law firm management don’t allow it. That means that if compensation is your only strategy for retaining your best and brightest, you’re playing a losing game.

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If you want to keep your attorneys happy, and keep them around, compensation has to just be part of the larger puzzle. To really keep attorney retention rates high, a firm needs to develop its internal culture. Attorneys need to know they have a home that values what they value. They need a team they’re glad to see every day. Those are the kinds of benefits that can’t be compared to other firms in an apples-to-apples kind of way. Happy attorneys who feel part of something greater are much less likely to seek out greener pastures than attorneys whose only connection to their firms are their direct deposit stubs.

Remember when you were a kid on the playground, playing Rock Paper Scissors, and some punk would come into the circle and throw Jackhammer, or Volcano, or some other crazy play that they said beat everyone else, no matter what they threw? That kid was onto something. When Alexander the Great couldn’t untie the Gordian Knot, he grabbed a sword and started hacking. To solve an unsolvable problem, we need to look off-menu for our solutions. Waving goodbye to the concept of the perfect compensation system seems as good a start as any.

James Goodnow

James Goodnow is an attorney, commentator, and Above the Law columnist. He is a graduate of Harvard Law School and is the managing partner of an NLJ 250 law firm. He is the co-author of Motivating Millennials, which hit number one on Amazon in the business management category. You can connect with James on Twitter (@JamesGoodnow) or by emailing him at James@JamesGoodnow.com.

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