Lockstep vs. Eat-What-You-Kill: Compensation statistics highlight Dewey LeBoeuf’s folly

I read an interesting story in the New York Times this week about partner compensation in the post-Dewey LeBoeuf world.

A sign marking the Dewey & LeBoeuf LLP headquarters on 6th avenue is seen in New York May 29, 2012. REUTERS/Shannon Stapleton

Written by Peter Lattman, the piece highlights the stark contrast between the rainmaker-friendly, eat-what-you-kill compensation system preferred by high-risk enterprises like Dewey LeBoeuf, and the strict lock-step, seniority-based format preferred by such establishments as Cravath, Swaine & Moore.

The side-by-side comparisons are astonishing. For instance, Lattman reports that, in the years before it collapsed, Dewey poached 37 partners from its rivals, luring them away with multi-million-dollar pay packages.

How many outside partners has Cravath, Swaine & Moore — ranked fifth in profitability by American Lawyer — hired in the past 50 years? Only four. That’s right — in the past half century, Cravath, Swaine & Moore has promoted its partnership almost exclusively from within.

Here’s another statistic. At the peak of its compensation disparity, the ratio between highest- and lowest-paid partners at Dewey was 25-to-1, with top rainmakers receiving multi-year contracts well over $7 million annually. Junior partners, meanwhile, made a relatively paltry $300,000 (all figures in U.S. dollars).

So what kind of compensation ratio can you find at Cravath, Swaine? It’s capped at a strict 3-to-1.

Of course, under such a model, frustrated stars will inevitably seek out greener pastures, but Lattman ends with the cautionary tale of Ralph Ferrara. The former partner at Debevoise & Plimpton (which also adheres to a strict lock-step compensation system) left the firm in 2005, after 23 years.

Ultimately the star partner ended up at none other than Dewey LeBoeuf, where he earned about $6 million a year, until the firm went bankrupt earlier this year. He recently agreed to return about $3.4 million of that compensation to help repay creditors. Yikes.

For an exhaustive survey of the partner-compensation landscape in Canada, Lexpert subscribers are advised to read Marzena Czarnecka’s May 2012 feature “Partner Compensation: The Real Score,” where she goes into detail about numerous compensation systems (such as “Modified Hale and Dorr” and “50/50 Subjective-Objective”).

For non-subscribers, here are some choice quotes to whet your appetite:

Norman Bacal, Heenan Blaikie LLP: “… you can talk all you want about building teams and client service coming before everything else, but if you’re compensating on who is sending the bill and who is opening the file, you will get a different type of behaviour.”

James Casey, Field LLP: “[Determining compensation is] a tough, tough job, and I think it’s the worst job in the firm. You have to make distinctions between your partners, all of whom you like and respect. It’s a very difficult task.”

Glenn Solomon, JSS Barristers: “Every partner in every firm ever in the history — ever — believes that their compensation in terms of dollars and percentage should go up every year. And that’s easy to do — until you realize that, if your share goes up, someone else’s has to go down.”

-David Dias

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