Law Firms Look At Closing Pay Systems

Editor's Note: This article raises a number of serious questions about closed vs. open compensation systems. Stay tuned for an upcoming A&FP panel discussion on these issues.)

When Robert Tucker and 35 other partners jumped ship as Arter & Hadden was sinking in 2003, they wanted to leave behind the infighting about money that had pervaded some of the relationships at the now bankrupt Cleveland law firm.

They had seen how flaps over pay can tear partners apart, Tucker says, and they hoped to eliminate the divisiveness that had plagued their former shop, which today is still mired in bankruptcy litigation.

Opting for closed compensation when they formed Tucker Ellis & West, Tucker says that implementing a system where attorney pay is kept confidential ' even among the partners themselves ' was one of the smartest moves they made.

'We have tried to create an environment where lawyers enjoy practicing law again,' he says.

Unlike the vast majority of businesses in the United States, law firms generally operate under open systems that disclose the compensation of individual attorneys. The closed systems at Jones Day and Greenberg Traurig are major exceptions.

But some observers say that law firms are moving toward closed systems as they function more like businesses and less like true partnerships.

One of the reasons for the movement is that decisions about compensation are becoming increasingly subjective, says James Jones, a director of professional-services consultancy Hildebrandt International.

Law firms more often are taking into account collaboration efforts, mentoring and business development, in addition to billable hours, when it comes time to deciding on pay. As the variables for determining compensation increase, charting compensation on a matrix becomes more difficult and makes firm management less eager to disclose its decision-making processes.

In addition, as law firms get bigger, they are becoming more centrally managed. Many firms that started with a handful of partners who determined how to divide the pot at the close of business each year have grown to or merged with hundreds of lawyers who have a managing partner making the administrative decisions.

Gradual Changes

But a wholesale departure from open systems is not occurring, Jones says. 'The tendency that we've seen is for firms to make it more difficult to get at the information.'

Where a firm previously may have distributed compensation data to all partners, it may decide to give that information only to practice heads, he said. Eventually, a firm may keep the information at the managing partner's office and have it available only by request or, at some point, not at all, Jones explained.

At DLA Piper Rudnick Gray Cary, for example, the firm makes its partner compensation information available through practice leaders.

'We think transparency is pretty important,' says Frank Burch, joint chief executive officer of the 3159-attorney firm. He adds, however, that for attorneys who want to know the particulars of someone else's compensation, 'they have to make an effort to go look.'

The information released at DLA Piper includes the different factors involved in a partner's pay, but it does not include the 'judgment piece' as to how management decides on a specific amount, Burch says.

It is unlikely that large firms with open compensation systems will undergo a swift turnabout to a closed format, says Ed Wesemann, a principal in the Savannah, GA, office of Edge International, a consultancy.

'It's like trying to get the toothpaste back in the tube,' he says.

But, like Jones, he expects it to happen over time. Wesemann says that as more firms grow larger and lose their original identity, they will be able to implement a closed system without partners crying foul. Moving to such a system may be part of a compromise in compensation structures, he said, especially for mergers occurring between European firms with lockstep compensation and U.S. firms that follow merit-based systems.

'Firms may want to go back and start from scratch,' Wesemann says.

And if they do go to a closed format, they will save a tremendous amount of time that he said is wasted on haggling over paycheck comparisons.

'I've seen partners leave because of $500 in compensation,' he says.

A study released last year by Edge International found that 77% of U.S. law firms review compensation annually ' a process that Wesemann says can take hundreds of hours each year.

Fostering Collaboration

One of the greatest advantages of a closed system, say its proponents, is that it fosters collaboration instead of internal competition. Advocates of closed systems say that attorneys are more focused on the good of the firm ' and are rewarded for promoting it ' rather than getting ahead of the partner in the next office.

'If you are comparing your compensation against somebody else's, I don't believe you're fulfilling your entrepreneurial responsibility to the firm,' says Tucker, adding that Tucker Ellis & West has grown since 2003 from about 80 to 120 attorneys, with offices in Cleveland, Los Angeles and San Francisco. The firm, which focuses on litigation and middle-market corporate work, has experienced no lateral partner defections, he says.

The closed system at Tucker Ellis, which also does not keep track of billable hours, allows attorneys to concentrate on the 'excellence of their lawyering as opposed to the numbers being generated,' Tucker says.

That may be true, but David Scherl, managing partner of New York's Morrison Cohen, says that the success of a closed compensation system depends on a firm's business model.

Morrison Cohen, with 85 lawyers, uses an open system, where each partner's pay is disclosed, although associate pay is not. Scherl says that the firm has no plans to grow beyond 125 lawyers.

Functioning under an open meritocracy system (Scherl is 'very offended' by the term 'eat what you kill') makes sense for his firm, which focuses on midlevel capital markets work and commercial litigation, he sats. Full transparency, he says, enables lawyers to 'know what the rules of engagement are,' keeps partners 'highly motivated,' and ensures that the standards for compensation are applied evenly to every partner.

But open systems may not work for bigger firms with multiple offices and top-down management, he says. 'When you get beyond 150 lawyers, you really behave differently. You don't know your partners.'

The greatest benefit to a closed system is the ability for management to make business decisions void of office politics, says Cesar Alvarez, chief executive officer of Greenberg Traurig, a 1482-lawyer firm that has used a closed system since its inception.

Alvarez says that he works with three key partners in determining compensation and other business decisions, but in the end, the direction of the firm rests with him.

A closed system is particularly beneficial when an attorney's performance falters, he says. Instead of an entire firm knowing that a partner's pay was cut, only he and the attorney are involved.

'It's Common Sense 101,' Alvarez says. 'If you have an open system and you take somebody's pay down, you have made a very public statement.'

The result is higher attorney morale overall and a better chance for the lawyer in trouble to get back on the right track.

Moreover, a closed system allows the firm to bring in laterals that are crucial to growth without inciting anarchy among partners who may disagree with the new hire's compensation, he says.

Leigh Jones writes for A&FP's affiliate publication The National Law Journal, in which this article originally appeared.

Editor's Note: This article raises a number of serious questions about closed vs. open compensation systems. Stay tuned for an upcoming A&FP panel discussion on these issues.)

When Robert Tucker and 35 other partners jumped ship as Arter & Hadden was sinking in 2003, they wanted to leave behind the infighting about money that had pervaded some of the relationships at the now bankrupt Cleveland law firm.

They had seen how flaps over pay can tear partners apart, Tucker says, and they hoped to eliminate the divisiveness that had plagued their former shop, which today is still mired in bankruptcy litigation.

Opting for closed compensation when they formed Tucker Ellis & West, Tucker says that implementing a system where attorney pay is kept confidential ' even among the partners themselves ' was one of the smartest moves they made.

'We have tried to create an environment where lawyers enjoy practicing law again,' he says.

Unlike the vast majority of businesses in the United States, law firms generally operate under open systems that disclose the compensation of individual attorneys. The closed systems at Jones Day and Greenberg Traurig are major exceptions.

But some observers say that law firms are moving toward closed systems as they function more like businesses and less like true partnerships.

One of the reasons for the movement is that decisions about compensation are becoming increasingly subjective, says James Jones, a director of professional-services consultancy Hildebrandt International.

Law firms more often are taking into account collaboration efforts, mentoring and business development, in addition to billable hours, when it comes time to deciding on pay. As the variables for determining compensation increase, charting compensation on a matrix becomes more difficult and makes firm management less eager to disclose its decision-making processes.

In addition, as law firms get bigger, they are becoming more centrally managed. Many firms that started with a handful of partners who determined how to divide the pot at the close of business each year have grown to or merged with hundreds of lawyers who have a managing partner making the administrative decisions.

Gradual Changes

But a wholesale departure from open systems is not occurring, Jones says. 'The tendency that we've seen is for firms to make it more difficult to get at the information.'

Where a firm previously may have distributed compensation data to all partners, it may decide to give that information only to practice heads, he said. Eventually, a firm may keep the information at the managing partner's office and have it available only by request or, at some point, not at all, Jones explained.

At DLA Piper Rudnick Gray Cary, for example, the firm makes its partner compensation information available through practice leaders.

'We think transparency is pretty important,' says Frank Burch, joint chief executive officer of the 3159-attorney firm. He adds, however, that for attorneys who want to know the particulars of someone else's compensation, 'they have to make an effort to go look.'

The information released at DLA Piper includes the different factors involved in a partner's pay, but it does not include the 'judgment piece' as to how management decides on a specific amount, Burch says.

It is unlikely that large firms with open compensation systems will undergo a swift turnabout to a closed format, says Ed Wesemann, a principal in the Savannah, GA, office of Edge International, a consultancy.

'It's like trying to get the toothpaste back in the tube,' he says.

But, like Jones, he expects it to happen over time. Wesemann says that as more firms grow larger and lose their original identity, they will be able to implement a closed system without partners crying foul. Moving to such a system may be part of a compromise in compensation structures, he said, especially for mergers occurring between European firms with lockstep compensation and U.S. firms that follow merit-based systems.

'Firms may want to go back and start from scratch,' Wesemann says.

And if they do go to a closed format, they will save a tremendous amount of time that he said is wasted on haggling over paycheck comparisons.

'I've seen partners leave because of $500 in compensation,' he says.

A study released last year by Edge International found that 77% of U.S. law firms review compensation annually ' a process that Wesemann says can take hundreds of hours each year.

Fostering Collaboration

One of the greatest advantages of a closed system, say its proponents, is that it fosters collaboration instead of internal competition. Advocates of closed systems say that attorneys are more focused on the good of the firm ' and are rewarded for promoting it ' rather than getting ahead of the partner in the next office.

'If you are comparing your compensation against somebody else's, I don't believe you're fulfilling your entrepreneurial responsibility to the firm,' says Tucker, adding that Tucker Ellis & West has grown since 2003 from about 80 to 120 attorneys, with offices in Cleveland, Los Angeles and San Francisco. The firm, which focuses on litigation and middle-market corporate work, has experienced no lateral partner defections, he says.

The closed system at Tucker Ellis, which also does not keep track of billable hours, allows attorneys to concentrate on the 'excellence of their lawyering as opposed to the numbers being generated,' Tucker says.

That may be true, but David Scherl, managing partner of New York's Morrison Cohen, says that the success of a closed compensation system depends on a firm's business model.

Morrison Cohen, with 85 lawyers, uses an open system, where each partner's pay is disclosed, although associate pay is not. Scherl says that the firm has no plans to grow beyond 125 lawyers.

Functioning under an open meritocracy system (Scherl is 'very offended' by the term 'eat what you kill') makes sense for his firm, which focuses on midlevel capital markets work and commercial litigation, he sats. Full transparency, he says, enables lawyers to 'know what the rules of engagement are,' keeps partners 'highly motivated,' and ensures that the standards for compensation are applied evenly to every partner.

But open systems may not work for bigger firms with multiple offices and top-down management, he says. 'When you get beyond 150 lawyers, you really behave differently. You don't know your partners.'

The greatest benefit to a closed system is the ability for management to make business decisions void of office politics, says Cesar Alvarez, chief executive officer of Greenberg Traurig, a 1482-lawyer firm that has used a closed system since its inception.

Alvarez says that he works with three key partners in determining compensation and other business decisions, but in the end, the direction of the firm rests with him.

A closed system is particularly beneficial when an attorney's performance falters, he says. Instead of an entire firm knowing that a partner's pay was cut, only he and the attorney are involved.

'It's Common Sense 101,' Alvarez says. 'If you have an open system and you take somebody's pay down, you have made a very public statement.'

The result is higher attorney morale overall and a better chance for the lawyer in trouble to get back on the right track.

Moreover, a closed system allows the firm to bring in laterals that are crucial to growth without inciting anarchy among partners who may disagree with the new hire's compensation, he says.

Leigh Jones writes for A&FP's affiliate publication The National Law Journal, in which this article originally appeared.