HAPPINESS IS…CRAVATH?

Big law’s future has become big news. On September 25, The New York Times published a special section that included several articles on large firms; two are particularly interesting.

Culture Keeps Firms Together in Trying Times” discusses the handful of large firms that have shunned the widespread eat-what-you-kill approach to partner compensation. It focuses on three firms, Cravath, Swaine & Moore, Debevoise & Plimpton, and Cleary, Gottlieb, Steen & Hamilton, all of which have retained lock-step compensation systems. For any class of associates, those who survive to partner continue advancing together throughout their careers.

“The only way a partner does better is if the firm does better,” says Debevoise presiding partner Michael W. Blair describing the behavior that follows such structural incentives.

Lock-step is a sharp contrast to most other big firms, which follow what Dewey & LeBoeuf’s management called the “barbell” system: Lots of service partners on one side of the barbell balance out a handful of star partners on the other side. Then-Dewey partner Jeffrey Kessler rationalized the yawning equity partner compensation gaps that this approach creates: “The value for the stars has gone up, while the value of service partners has gone down.”

Not worth it

The Times quotes Cleary managing partner Mark Leddy’s answer to the Kesslers of the world: “People who want to be a star and make $10 million a year don’t fit in here…Breaking the lock-step system for them would be an unacceptable cost to our culture.”

Why does culture matter? There are many answers, but Major, Lindsey & Africa’s recent compensation survey may have identified an important one. Almost eighty percent of partners in lock-step compensation systems are satisfied or very satisfied with their work. A closer look at the MLA survey reveals that the combined group of satisfied and very satisfied partners is about the same for lock-step as for non-lock-step firms. But the lock-step firms’ have a big advantage in the very satisfied group — fifty-five percent compared to only twenty-six percent for non-lock-step firms.

Satisfied versus very satisfied

That leads to James B. Stewart’s observations about Cravath, where he was an associate in the 1970s. In “A Law Firm Where Money Seemed Secondary,” Stewart notes that all attorneys in his firm were intelligent, well-credentialed and hard working, but those advancing to partner had something else in common: They loved their work. It gave them a huge competitive advantage over those who didn’t. Returning to the MLA survey, I think Stewart may have captured a significant difference between the lawyers who are very satisfied and those who are merely satisfied: Attitudes about work affect performance.

Stewart also notes that “of the 20 or so associates hired each year, one or two might be chosen to be a partner.” He concludes that “over the ensuing decades, Cravath doesn’t seem to have changed much.” He’s right.

But the rest of the large law firm segment of the profession has. In fact, many have modeled themselves after the Cravath attrition-and-leverage model, but they added an unfortunate twist away from lock-step compensation: Partners eat what they kill, so every year’s compensation review is a new self-justification exercise. That incentive structure produces a much different culture; most of it is ugly and little of it enhances a firm’s long-run stability.

About the associates…

Before getting too misty-eyed over life at Cravath, it’s worth pausing on one more data point. In the most recent Am Law Survey of Midlevel Associate Satisfaction, Cravath placed 119 out of 129 firms — down from 111 in 2011. The firm has been dropping steadily on that list since 2010, when it placed 84th out of 137. (Both Cleary Gottlieb and Debevoise did much better.)

A closer analysis suggests that Cravath associates do, indeed, enjoy their work. Unfortunately, they don’t seem to enjoy it enough to offset the things that place the firm near the bottom of the satisfaction survey.

Cravath scored above the all-firm averages in work-related subcategories, including quality of work assigned, opportunities to work with partners, and level of responsibility. But it received low marks in other subcategories, including likelihood of staying two years, morale, communication about partnership prospects, and family-friendliness. Lock-step partner compensation isn’t a panacea, but imagine how much worse a place like Cravath would be without it.

Following the money

Perhaps the most telling comment about the interaction between compensation and firm culture comes from former Dewey & LeBoeuf partner Ralph Ferrara who spent twenty-three years at lock-step Debevoise before making what he describes as “an imprudent decision” in leaving: “In my heart, I never left Debevoise; it’s a place that I still love to this day.”

If the bankruptcy judge approves the proposed former partners compensation plan, Ferrara will pay almost $3.4 million to help fund repayments to Dewey’s creditors. Even so, given the amounts he reportedly made at Dewey, his move in 2005 was probably advantageous financially. I wonder if the additional money was worth it to him — and how his heirs will spend it.

5 thoughts on “HAPPINESS IS…CRAVATH?

  1. Would love to hear your thoughts on whether lockstep, while improving equality among partners, hurts partner/associate relations. It puts a lot of pressure on the firm not to make mediocre partners, or even just too many good partners. Which puts a huge gulf between partners and associates. What makes you think Cravath would be worse, and not better, if they were eat-what-you-kill?

    • Whether a firm is lock-step or eat-what-you-kill, the pressure not to make equity partners has become the same. My sense is that leverage ratios at Cravath have remained fairly constant over the past twenty years. But most other big firms have now moved to that leverage model, albeit with the eat-what-you-kill twist I describe. The gulf you describe has become a growing source of intergenerational tension, but it’s not unique to lock-step firms.

      In fact, I think eat-what-you-kill firms are actually worse because such compensation systems reward client hoarding, discourage client transition to younger attorneys, and offer little incentive to mentor talent for the future. Add the current lateral partner frenzy to hire high-priced attorneys with portable books of business and you have the unfortunate culmination of the eat-what-you-kill system. At least, that’s my opinion.

  2. I’ve wondered whether the Cravath model works well for it because of factors that make Cravath Cravath – stellar lawyers who like to practice law, limited types of services for which they are at the top of the market, and few branch offices (in their case, one with only a handful of lawyers – I think a cohesive firm culture is very hard to do across offices). Cravath is not the only firm like that, but they are few. Boutique practices also share those characteristics, and that is one of the reasons I suspect many of those flourish. I think it is just simpler to structure compensation that is percieved to be “fair” in those circumstances.

    Too many of the “full service” firms are collections of branch offices with high expenses, doing different things of varying quality in different legal markets with lawyers who also vary in quality, and it is harder to see how even a modified lockstep would work well for those firms, even though the alternative of eat-what-you-kill has the effects you observe. I would suggest that that type of firm just is not an optimal business model, and I’m not sure that lockstep would do much to fix that.

  3. Not only does eat what you kill discourage client transition and offer no incentive to mentor talent, it provides an excuse for some of the lazy work ethic of people with the relationship credit for institutional type clients. Having a partner billing 1400 hours while feasting off the greed of their credit and riding the backs of people billing 2000 hours will not spawn a collegial environment. While not all relationship lawyers are like this, there are a number who exist at old line firms based on such relationships. Younger and harder working attorneys end up establishing the relationship with the clients through their efforts while the relationship keeps gorging on their established credits, often refusing to share. When the younger or harder working attorneys are not rewarded by the eat what you kill system, they feel that the have no choice but to leave the firm along with the relationships they have established. Eat what you kill pushes the younger or harder working people out the door so they can end up eating what they are killing and increases lateral churn. They leave to the recriminations of their old firm, and the open arms of the next flawed system and a higher pay check. While they might not take all the business they thought they would, they are always relieved to part ways with those they believed were standing on their backs. Do you think the eat what you kill is the only reason, or do think there is shortage of quality legal talent and oversupply of big law firms that contributes to lateral moves?

    • The current problems aren’t limited to the eat-what-you-kill compensation system, but it contributes to them. The challenge is to devise a structure with incentives that reward long-term institutional thinking, rather than the short-termism (i.e., current year PPP) that is pervasive.

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