<p>I thought that you might find these exerpts from a recent article in New York Lawyer to be interesting. </p>
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Lockstep No Longer a Lock as Star Rainmakers Head for the Exits
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Cleary Gottlieb Steen & Hamilton managing partner Mark Walker is old-school when it comes to partner compensation. He sees no reason to change Cleary's seniority-based lockstep scheme, in which the spread between the highest- and lowest-paid partner is less than 3:1. It's a no-hassle system -- no long meetings explaining bonus decisions and no disputes among partners over credit for bringing in business. And it is the foundation of Cleary's culture, Walker says, which emphasizes the collective over the individual.
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Leaders of firms such as Debevoise & Plimpton; Cravath, Swaine & Moore; and Simpson Thacher & Bartlett say they don't see a need to adjust their pay scales to accommodate star partners. With profits so high at those firms, even low spreads -- frequently less than 4:1 -- give few partners reason to complain. "We look at ourselves all the time," says Evan Chesler, presiding partner of Cravath, a firm with a spread of 3:1 (and profits per partner of $3 million in 2006). "There's not been any serious consideration to change our lockstep system."
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Partners now make moves that might have once been unimaginable.
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. . . *t's clear that several firms in The Am Law 100 are now deploying high-spread compensation systems specifically designed to reward their most valuable partners with more money than they could earn at even the most profitable low-spread firms. Firms have upped the difference between their highest- and lowest-paid partners to 10:1 -- or even more. And some of those firms have the capacity to pay partners as much as or more than the best-paid Cravath or Simpson partner.
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Traditionally, when the most profitable firms have lost star partners, it hasn't been to other firms, but to other industries, frequently the financial world. In 2000 Cravath M&A rainmaker Robert Kindler went to Chase Manhattan Corporation (now JPMorgan Chase & Co.) to become an investment banker. (Kindler has since moved on to Morgan Stanley.) In 2005 the leader of Davis Polk's M&A group, Dennis Hersch, followed Kindler to JPMorgan Chase. Last year Alan Schwartz left Simpson for the First Reserve Corp., a private equity firm. And in February, executive compensation expert Adam Chinn gave up his guaranteed millions as a partner at Wachtell, Lipton, Rosen & Katz to join Centerview Partners LLC, a newly formed investment banking boutique. Even the most profitable firms don't try to keep partners who are lured by the riches of financial institutions, which can easily pay them more. "We can't and we don't compete [with investment banks]," says Chesler.
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But now a few of the highest-paid partners at firms further down the Am Law 100 profitability chart are receiving more bankerlike compensation -- thanks to extreme spreads in the partnership, which often includes equity and nonequity tiers.
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In a modified lockstep system, Latham equity partners receive between 300 and 900 points. Income partners are given as few as 60 points on top of their fixed salary, according to a former partner. (The value of each point is determined by the profits available.) Bonuses, which are handed out in addition to the points, put even more distance between the highest- and lowest-paid Latham partners. Robert Dell, Latham's chairman and managing partner, won't reveal the firm's spread, but he says that 15 percent of the firm's profits are allocated to bonuses, which is an attractive selling point for laterals, especially those who know they can bring business to Latham. A top performer at Latham can now earn more than $5 million, according to a recruiter familiar with the firm. (The firm declined to comment on the figure.)
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In most firms with high spreads, the top tiers are very, very small. At DLA Piper, for example, the highest-paid partner -- product liability litigator Amy Schulman -- earned $5.75 million last year, according to a DLA partner who spoke on background. Another partner, San Diego-based patent litigator John Allcock, made $5 million. But according to this partner, below those two, the drop is significant, with the lowest-paid equity partner making $425,000.
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At Sheppard, Mullin, Richter & Hampton, where the spread is 19.6:1, a single lawyer -- Los Angeles-based antitrust and IP litigator Joseph Coyne Jr. -- is alone at the top, according to Guy Halgren, the firm's chairman. After Coyne, who confirms that he made $5.4 million last year with the help of a contingency fee case, the next-highest-paid partners made around $2.1 million. Partners at the bottom of the scale made around $300,000.
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But there's also a financial risk analysis that often keeps partners put. Lawyers are risk-averse. So many partners who could jump from a lockstep firm to a more eat-what-you-kill shop and make $4 million to $5 million for a year or two hesitate when they're offered no guarantees beyond that. Between that option and a guaranteed multimillion-dollar salary until they retire at their lockstep firm, "many will chose the latter," says legal recruiter Arthur Schwartz of Klein Landau & Romm.
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Shearman & Sterling may provide a cautionary tale of what happens to firms with low spreads that can't pay at the top of the market. Last year Shearman increased profits per partner 19 percent to $1.65 million, but over the years it has not kept pace with its peers in the New York elite. In 2000 the firm ranked 13th in PPP; this year it ranks 22nd. During Shearman's slide down the profitability chart, it has lost a raft of partners. Shearman asked some to leave, according to a former partner. But not all defections were planned, including the loss of such stars as antitrust partner Steven Sunshine to Cadwalader (he's now at Skadden, Arps, Slate, Meagher & Flom); tax litigators B. John Williams Jr. and Alan Swirksi to Skadden; and asset management partner Barry Barbash to Willkie, Farr & Gallagher. As it lost ground in the profitability ranks, Shearman did not significantly adjust its 4:1 spread -- and, says a former partner, lawyers with portable business realized that they could make more money elsewhere. (Shearman declined to comment for this story.)
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