‘There’s a bunch of defensive mechanisms firms are using to shore up their stars – they could be lost to Paul Weiss or some other big firm if they don’t do something,’ says one US partner of the fierce war for talent at the very top of the legal market.
According to data from London legal recruitment consultancy Edwards Gibson, 2023 saw the highest number of lateral partner moves ever recorded in a year – 510 moves in London – with the trend continuing this year.
And the hiring frenzy is far from confined to the UK, with the US also seeing significant lateral movement, as demonstrated by recent moves by firms including Paul Weiss and Weil, Gotshal & Manges in cities from New York to Los Angeles.
Tellingly, with so much lateral movement between firms, it isn’t just less profitable UK or smaller US firms seemingly running a little scared.
As evidenced by recent moves to introduce salaried partners, review exit terms or overhaul partner pay structures, even some of the biggest and most profitable firms in the world have been scrambling to overhaul their systems in order to better attract and retain star performers.
As a senior partner in one top US firm in London with profit per equity partner (PEP) above $4m comments: ‘You’re seeing firms be more ruthless – we’ve lost partners to firms that are less profitable than us who are offering ridiculous money. That’s also why you’re seeing the [introduction of] non-equity tiers.’
Should they stay or should they go?
‘I’m not sure they intended to but Kirkland have changed the world and everyone else is struggling to keep up,’ the partner continues of the $7bn private equity powerhouse, where average PEP last year hit nearly $8m, buoyed by an army of salaried partners driving up profits.
But while Kirkland may be among the most profitable firms in the world, housing a handful of star performers able to take home nearly three times average PEP, even it has felt the impact of the growing number of firms trying to make inroads or boost market share with lucrative private capital clients by offering above market packages.
In London, the firm has seen 14 equity and non-equity partners quit to join Paul Weiss’s ambitious new English-law practice over the last 15 months, including debt finance partner Neel Sachdev and PE partner Roger Johnson, with several other partners including Eric Wedel and his team also leaving in the US.
Though the number of departures is tiny as a percentage of Kirkland’s near 1,500 strong equity and non-equity partnership, it was perhaps inevitable that the firm would want to take steps to maintain its grip on partners.
In July, the firm overhauled exit terms in its partnership agreement, with partners approving three key changes. The first gave the firm discretion to withhold accrued compensation from departing equity partners, marking a shift on the previous policy that withheld 55% of annual compensation until the following year for those leaving.
With destination firms likely footing the bill for any withheld profit distributions from recruits, the overhaul makes poaching from Kirkland potentially far pricier.
At the same time, Kirkland partners also approved two changes that make leaving easier for partners choosing to go elsewhere. The first reduces the notice period for all exiting partners from 120 days to 60 days, effectively returning Kirkland to the same notice period it had prior to 2016. The second slashes the time those leaving will have to wait for their capital to be repaid from 12 months to three. Combined, the changes mean Kirkland will be able to cut ties with all those choosing to go elsewhere far more quickly.
As a combination the package looks proactive rather than defensive but there’s no doubt it has piqued interest, with one recruiter commenting: ‘this feels different because Kirkland did something’.
‘The abandonment of once sacrosanct all-equity partnership structures by the US elite is a significant recent development which will inevitably aid recruitment.’
Scott Gibson, Edwards Gibson
And Kirkland isn’t the only one taking a look at exit terms. Linklaters considered implementing a similar-style policy to hold back pay from departing partners earlier this year, in the wake of high-profile exits, including Nicole Kar (competition), Dan Schuster-Woldan (M&A), and Will Aitken-Davies (M&A), all of whom joined Paul Weiss’ London office.
The Magic Circle firm ultimately decided against it, but one former partner comments: ‘I genuinely thought they would go through with it – I heard it was talked about extensively.’
‘It wouldn’t have worked anyway – US firms can offer more so it wouldn’t have stopped people from leaving,’ notes a partner at a US firm, underscoring that the real competition right now is at the level of the elite US firms.
Firmly in that US elite category is Latham & Watkins, which earlier this autumn delayed confirming when a five-partner leveraged finance team led by highly regarded partners Jayanthi Sadanandan and Sam Hamilton would be free to join to US rival Sidley Austin, according to sources familiar with the matter.
The delay confirming exit terms left some concerned the team may be held to notice. Equity partners at Latham technically have a six-month notice period, while non-equity partners have a three-month notice period but, like most US firms, it remains unusual for partners to be held to the full term. In the end the partners were able to join their new firm two months after handing in their notice.
Cashing in
Latham has also joined the rank of firms ripping up partner remuneration structures to better retain top talent, in response to firms like Paul Weiss introducing a black box compensation model that has enabled it to limit scrutiny on pay after handing out $20m-plus deals to a few star recruits.
Latham equity partners approved the introduction of a new ‘superpoints’ system in July that allows the firm to award significantly above standard top of lockstep deals to a small number of top performers.
Twenty two partners in the US and London have been awarded ‘super points’, with the new structure adding two tiers to the existing modified lockstep at 1,300 and 1,700 points, significantly above the core lockstep of 350 to 900 points. Combined with a discretionary bonus taken from a pool of 15% of the firm’s profits, it means top earners could make around $15m.
‘This is the first time they’ve made a change like this in 15 years. It likely won’t change for some time,’ reflects one US partner.
‘Latham’s ethos was based on having a tighter equity spread, with the difference between the highest and lowest earners not as stark. It was effective in institutionalising client relationships and ensuring partners were happy working together, rather than focusing on individual books of business,’ explains one US office head.
‘When it changed its compensation structure, it radically altered that ethos,’ he adds, suggesting that the cultural shift to a more individualistic reward system may not prove popular with all.
Other US firms also shifting the dial on compensation include Simpson Thacher, which has widened the spread between its highest and lowest-paid equity partners, introducing a 9:1 ratio between top and bottom that means top earners can now make more than $20m.
Traditionally conservative New York firm Cravath overhauled its partner comp in 2022, bringing in a modified lockstep and a 15% bonus pool, while Cleary has stated that it can pay new laterals up to $20m and Davis Polk has also said it is targeting the lateral market and reviewing compensation.
‘It’s a reaction to Paul Weiss and being able to reward the heavy hitters with more money to prevent them from leaving,’ says one US partner.
An army of salaried partners
In a market where being able to pay top amounts for absolute stars has become pressing, a number of more conservative US firms have also introduced non-equity partners.
The benefits are three-fold; in addition to freeing up equity points for top earners, it also serves as a key retention tool for more junior stars, ensuring they don’t join a rival before they can be promoted internally. In addition these partners come with a higher charge out rate than associates.
Simpson Thacher brought its salaried rank in during 2019 and now has 83 non-equity partners. Cravath introduced the non-equity tier in last July, closely followed by Paul Weiss, which ushered in its small salaried rank in March this year. Cleary made the same commitment in October, with its next partner promotion round to include its first salaried partners.
Paul Weiss chair Brad Karp tells LB the decision came after ‘years of internal debate’.
He adds: ‘We made this adjustment solely for competitive and retention purposes. We had watched for years as our peer competitor firms lured our talented counsel and associates by offering them non-equity partnership. Unlike so many firms, we did not add a non-equity class of partners to extend our partnership track, limit our number of equity partners and boost our profits per equity partner.’
Again, it’s an area where Kirkland has first-mover advantage. Once dismissed by rivals as glorified senior associates the firm’s salaried rank – which is open to high-flying associates after just six years – is now regarded by many as a key driver of its profitability, that also allows the firm to charge out at higher partner rates.
As one former Kirkland partner explains: ‘You have an army of salaried partners churning out work at profitable rates in order to get the PEP numbers K&E has.’
Freddie Lawson, head of partner search at Montresor Legal, comments: ‘Firms have taken note, and, as a result, shifted away from traditional pure lockstep systems, with several adopting salaried partner positions. Offering the partner badge to individuals earlier in their careers has proven to be very profitable for Kirkland.’
Edwards Gibson director Scott Gibson adds: ‘The abandonment of once sacrosanct all-equity partnership structures and seeming proliferation of non-equity tiers by the US elite is a significant recent development which will inevitably aid recruitment.
‘Whilst all-equity partnerships convey many advantages to elite law firms, they are structurally inflexible and due to the high bar to entry, make rapid partner expansion exponentially more problematic, and not to mention eye wateringly expensive.’
Ever decreasing circles?
The obvious question at this point is where it all ends. For firms that want to compete in key areas like private capital, staying competitive is crucial. And that means being able to compete financially too.
But simply adding a salaried tier and the flexibility to reward stars above market deals is unlikely to be enough.
For every partner paid significantly more, the firm risks upsetting multiple partners whose pay stays the same and a handful who will be receiving less to free up more at the top. Balancing it is not always going to be straightforward.
And if the above-market deal is for a lateral recruit it’s a particularly big risk.
As one US partner comments: ‘If Kirkland wants to pay a couple of partners $20m, then if they get it right, great and if they get it wrong it’s only a small rounding. But if you’re a third of the size, or smaller and you pay $20m to the wrong person that’s a big deal.’
There’s also the inherent risks around lateral recruitment even without the high pay.
‘People don’t talk enough about the importance of culture – building these businesses isn’t easy. It isn’t as easy as going to the sweet shop and saying can I have one of those, those and those. You have to make sure you can keep them happy and that you have a coherent strategy for the business.’ LB