As more law firms examine and adjust their partner pay systems, the use of bonus pools has become a popular method to reward star performers.
Just look to Cravath, Swaine & Moore, which has created a bonus pool funded by 15% of points from each partner, according to two sources familiar with the arrangement. The pool, dispersed at the discretion of firm management, will be awarded to whoever the firm considers high performers. Exactly how the firm determines the high performers is not clear.
While the new system could limit any partner’s pay, the sources said a great majority of the partnership was in support of the move. The new arrangement was considered a moderate approach, meant to stay competitive while also maintaining aspects of the firm’s lockstep partner pay system, which pays partners by seniority.
A Cravath representative was not immediately available to comment.
Law firms are continually examining and adjusting their pay systems, with bonuses pools becoming a common method to allocate more pay to high performers.
Many firms “reallocate their compensation pool while also working to increase their profitability so they have a larger pool to allocate from in the future,” said Kent Zimmermann, a law firm management consultant at the Zeughauser Group.
“The overall goal is often to get more money into the hands of people valued most by the market and who the firm can least afford to lose,” he said in an email. “[They want to] pay them as close as possible to what they can command in the open market.”
This also allows firms, he said, to take a “slow up, slow down” approach for any given year, instead of being stuck compensating someone over several years for one extraordinary year.
He added that “firms are all over the map on the size of their bonus pool” and that some firms have “goals in their strategic plans to ramp up the size of their bonus pool over a period of time.”
The pay system change by Cravath was observed by many in the legal industry as an effort to stem the movement of its partners to other firms, something the firm has not historically seen.
Several firms have picked off Cravath partners in recent years, especially those in the deal world.
Just last year, Jennifer Conway and Kara Mungovan joined Davis, Polk & Wardwell, while Damien Zoubek joined Freshfields Bruckhaus Deringer. After Zoubek and Mungovan’s moves, Cravath confirmed its move to the modified lockstep partner pay system.
Even after the lockstep change, the firm has continued to see some exits. In May, Freshfields added another Cravath M&A partner, Jenny Hochenberg, to its team, while M&A partner Allison Wein left for Kirkland & Ellis.
But Cravath has also brought in a number of new partners in the last two years, in another sign of a new competitive edge. The firm last year added Ronald Creamer Jr., the former head of Sullivan & Cromwell’s tax group; former Federal Trade Commission assistant director Daniel Zach; and Debevoise & Plimpton bank regulatory partner David Portilla.
And the firm made headlines when it announced an office in Washington, D.C., this month, adding as partners Jelena McWilliams, most recently the former chair of the Federal Deposit Insurance Corp.; Elad Roisman, former commissioner and acting chair of the Securities and Exchange Commission; and Jennifer Leete, former associate director in the SEC’s Division of Enforcement.
The firm has also been on steady financial ground. Cravath’s average profits per equity partner jumped 27% to $5.8 million last year, ranking sixth among elite New York law firms. The firm generated about $1 billion in gross revenue, according to American Lawyer reporting.
Other lockstep firms have also made compensation changes. Davis Polk & Wardwell moved to a modified lockstep system in September 2020. American Lawyer reported last year that Davis Polk’s partner compensation ratio—from the highest paid to the lowest paid—had been about 3-to-1 in recent years, and the change in the comp model entailed expanding the ratio to about 5.5 to 1.
Cleary Gottlieb Steen & Hamilton’s 2020 changes to its pay model allowed significant business generators to get paid more, while holding back others’ pay growth, American Lawyer has reported.
Christine Simmons contributed to this report.