One of the most respected firms in the nation, Davis Polk & Wardwell is abandoning the strict lockstep compensation system, under which partner pay is based on seniority, and is moving to a new modified compensation system.
The New York-based law firm said last week the new modified lockstep compensation system will take into account other performance-related factors in pay besides seniority, such as partners’ client work and work on associate development and diversity initiatives.
The Wall Street firm said this new structure will allow for more flexibility to pay competitive salaries for talent and that the firm is “committed to investing in practices and lawyers that contribute to the strategic growth of the firm.”
Neil Barr, the managing partner of Davis Polk, told Bloomberg Law the firm is strategically focused on measured growth and cognizant of the market environment.
“We ultimately concluded that our existing compensation structure, which paid partners solely on the basis of seniority, was simply not compatible with our strategic designs going forward,” Barr told Bloomberg Law.
According to data collected by The American Lawyer, Davis Polk has 1,000 attorneys and has brought in $1.4 billion in gross revenue with profits per equity partner of $4.5 million, placing it sixth in highest partner profits.
The elite law firm was one of the few New York big law firms to follow the strictly-lockstep structure, along with Cleary Gottlieb Steen & Hamilton, Debevoise & Plimpton, and Cravath Swaine & Moore. While these firms have typically been some of the most profitable when it comes to attracting talent, a seniority-based system can be limiting.
In recent years, many law firms with strict lockstep systems were forced to ward off the competition stealing their attorneys by offering higher compensation earlier in their careers.
The pressure on lockstep firms is intensifying as many big law firms are reviewing their lockstep compensation models, according to the American Lawyer. Law firms such as Kirkland & Ellis and Paul, Weiss, Wharton, Rifkind & Garrison have relied for years on various modified systems.
Davis Polk’s decision to shift to a modified compensation system comes shortly after other many elite firms that use the lockstep model have lost top legal talent to Big Law competitors.
In May, Kirkland & Ellis which follows a modified lockstep system poached the star dealmaker Edward Lee from lockstep Wachtell, Lipton, Rosen & Katz, in May this year. In 2018, Kirkland has also poached Cravath senior partner Sandra Goldstein for a reported $11 million a year for five years, plus a signing bonus.
In 2016, Cravatah lost its veteran dealmaker, Scott Barshay, by Paul Weiss, which use the modified lockstep system to head its global M&A practice for a reported $10 million a year.
“When such a prestigious, collegiate and profitable firm feels the need to move to modified lockstep it demonstrates the impact the recent hot lateral market and the preparedness of firms to make eyewatering guaranteed offers is having on the market. This will inevitably have a longer-term impact on the culture of firms.” Tony Williams, principal of Jomati Consultants, told Global Legal Post.