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Davis Polk just abandoned its strict seniority-based pay scheme, putting pressure on holdout law firms still using an ‘old school’ lockstep structure to follow suit

  • Davis Polk & Wardwell, one of the most prestigious law firms in the US, announced Thursday that it is modifying their lockstep compensation model, which traditionally pays lawyers based on seniority.
  • Legal recruiters that Business Insider spoke with say that the move, which comes at a time when law firms are shelling out big bucks to attract rainmaking lawyers, is a defensive one designed to keep talent at Davis Polk.
  • “Lockstep just doesn’t compete with what they’re willing to pay… With today’s world, everything’s on the table,” said one prominent recruiter.
  • Visit Business Insider’s homepage for more stories.

Davis Polk & Wardwell, one of the country’s oldest and most established law firms, announced on Thursday that it is switching to a modified pay system.

The move leaves just a few firms, such as Cravath, Swaine & Moore and Debevoise Plimpton, as strongholds of the traditional strict-lockstep model, where lawyers’ compensation is determined by seniority.

“Davis Polk has long been a hold out on lockstep, but this is going to put more pressure on the remaining firms,” said Alisa Levin, principal of legal search group, Greene-Levin-Snyder.

The new modified system “recognizes and rewards the entirety of a partner’s contributions on behalf of clients and in support of firm priorities,” Davis Polk said in a statement.

Some think the change is a way for the firm to grow in an increasingly competitive market. In an interview with Bloomberg Law, which first reported the change, Neil Barr, a managing partner at the firm, said, “The firm is strategically focused on measured growth and we are cognizant of the market environment in which we find ourselves.”

Legal experts that Business Insider spoke with, however, see the move less as one geared toward attracting new talent, and more about keeping the talent they already have.

Fending off other law firms to keep “their best people in the door”

Davis Polk’s momentous move comes at a time when law firms have been using higher pay to tempt rainmakers at other firms.

On Monday, Cleary Gottlieb, which abides by the traditional partner compensation model, lost Neil Whoriskey, who co-led its M&A practice, to Milbank, as first reported by the American Lawyer. Cleary has been hit by a number of exits from their M&A practice to Freshfields in late 2019, per Above the Law. Freshfields abandoned the lockstep model earlier that year.

“Firms like Kirkland and Paul Weiss have shown that they’re willing to pay up for the top people,” said Avery Ellis, national executive managing director and senior recruiter at Mestel & Company, adding that some firms have shelled out anywhere up to $12 million, or even more, to attract top-performing partners. The New York Times reported that Sandra Goldstein, who was a senior partner at Cravath, was poached by Kirkland in 2018 for a staggering $11 million annual salary for five years, plus a signing bonus.

Compensation experts told Bloomberg Law in 2018 that top partners at Big Law firms can earn between $3 million and $10 billion a year.

“Lockstep just doesn’t compete with what they’re willing to pay,” Ellis, who specializes in placing lateral partners, said. “With today’s world, everything’s on the table.”

Read more: There’s a ‘fundamental shift’ happening at Big Law firms, which are laying off workers even as they’re raising pay

Levin, a recruiter who’s worked with white-shoe law firms like Cravath and Kirkland & Ellis, added that she doesn’t see Davis Polk’s modified lockstep as a similar means of gaining new talent. “I don’t think Davis Polk is going to be the next Kirkland or Paul Weiss with very deep checkbooks,” she said. Instead, Levin thinks the firm will be focusing on retaining their rainmaking lawyers.

Ross Weil, partner at legal recruiting firm Walker Associates, said that the new payment system doesn’t necessarily lead to more profitability, but is rather about holding on to what you have. He said that star partners in corporate transactions, private equity, and restructuring practices were among the “most vulnerable to being picked off” by other firms.

Linda Ginsberg, senior partner of legal search group, Ginsberg Partners, and a former litigator at Davis Polk, said that while she sees the modified lockstep system has a defensive aspect, it also can be geared toward growth. Davis Polk, she thinks, will be better able not only to keep its top lawyers, but also to attract more talent with the increased flexibility.

Whatever the firm’s motivation, all four recruiters expressed that they weren’t surprised when they heard the news, since all lockstep firms have been revisiting their compensation models amid an increasingly competitive market for talent.

“If you stay in lockstep, there’s tremendous pressure to increase profits to push lockstep as high as possible,” said Ellis. “But when you have firms like Kirkland throwing around gigantic packages to attract rainmakers, you gotta do what you need to do to keep the best talent.”

What the modified compensation model means for Davis Polk and the legal industry

There will be some winners and losers at Davis Polk, Levin told Business Insider. Those who are top performers within their practice will be further financially incentivized to continue performing well. On the flip side, attorneys who aren’t perceived as contributing much — and had relied on their lockstep numbers for their high pay — will now be measured differently, and likely be paid less.

“The real test will be if Davis Polk’s collegial culture can survive this kind of tectonic shift,” Levin said. “It’s a food fight over slices of a finite pie.”

Cleary Gottlieb reportedly has also taken steps to modify its compensation system to reward more productive partners, per Law.com in May. Cleary did not respond to a request to comment.

“I think it’ll be the start of more firms protecting their assets by paying their people more,” added Walker Associate’s Weil. “It ultimately boils down to the fact that practicing law is a grueling business, and lawyers want to be paid fairly for their time and sacrifice.”

Read more: Inside the struggles at Hughes Hubbard & Reed, the once high-flying law firm that’s now slashing staff and losing rainmakers

The fact that top-tier firms like Davis Polk are making changes to stay competitive is a “further statement that the legal industry has just become more and more of a business and less of a profession,” thinks Ellis, underscoring the increasing pressures on law firm to act as corporate entities designed to generate profit. Davis Polk’s 2019 profits per partner was $4.5 million — up 2.5% from 2018 — ranking it fifth among the Am Law 100.

More broadly, legal experts see the trend toward modifying or wholly dropping the pure lockstep system as one that will continue.

Ginsberg said that the move was inevitable. “At some point I think it also has to happen at Cravath, Cleary, and Debevoise — the remaining old New York lockstep firms — because of the market today,” she explained, where the legal landscape has expanded to offer so many more choices of law firms for clients and candidates alike.

She added that the “old-school” lockstep model simply no longer matches up with this new reality of heightened competition in the industry.

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