Top Wall Street law firm Davis Polk & Wardwell is abandoning its pure lockstep structure, under which partner pay is based on seniority, to aid its growth plans in the face of stiff competition for talent from rivals with more flexible systems.
The move to a modified lockstep will allow it to reward partners on the basis of their performance – or perceived ability to over perform when it comes to laterals – thereby improving its ability to fend off raids from rivals like Chicago-based giant Kirkland & Ellis, which has a track record of luring talent away from Wall Street rivals.
The policy change was revealed by Davis Polk senior partner Neil Barr in an interview with Bloomberg Law yesterday (10 September) when he said the firm’s strategy of “measured growth” was no longer compatible with a system that paid partners on the basis of their seniority.
It follows an internal review that was kicked off in January and leaves just a handful of top law firms in the world’s most competitive legal markets of New York and London operating a pure lockstep.
They include Cravath Swaine & Moore, Cleary Gottlieb Steen & Hamilton, Debevoise & Plimpton and Wachtell Lipton Rosen & Katz in the US and London magic circle firm Slaughter and May, which continues to make a virtue of its pay structure, stating on its website that its lockstep means ‘we grow together by working for our mutual benefit’.
Tony Williams, principal of Jomati Consultants, said: “When such a prestigious, collegiate and profitable firm feels the need to move to a 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.”
Debate over the merits of lockstep pay is triggered whenever a ‘traditional’ Wall Street firm falls victim to a partner raid, although it remains relatively rare.
When Kirkland – which operates merit-based pay and has large ranks of salaried partners – hired M&A partner Edward Lee from Wachtell in May, Kirkland's chairman, Jon Ballis, described him as being “among the top young M&A lawyers in the country”.
Lee was on the Wachtell team that advised on the year’s two biggest deals. Opposite him on one of those deals – Celgene’s $87.7bn acquisition by Bristol-Myers Squibb – was Kirkland’s Jonathan Davis, who was hired out of Cravath in 2016.
When Kirkland hired another Cravath partner, Eric Schiele, in 2018, it proclaimed its ability to stand ‘toe-to-toe with the upper echelon of New York’s Wall Street elite’.