1 The Psychology of Compensation

 

In 1620, a small group of English men, women and children left the shores of Europe and set sail for the New World in search of religious freedom. The ship Mayflower landed in Plymouth Harbour in late 1620 and the arrivals began building their settlement as a community. They faced a few first years of incredible hardship. Many stories have been written about the Pilgrims, as they were later referred to, especially the events leading up to the birth of the now traditional Thanksgiving festivities in the US. But there is another story of the Pilgrims’ life in the first years of settlement that might especially fascinate law firm partners.

 

Upon arrival the settlers implemented a system wherein all supplies and produced food should be owned collectively and divided based on need and equality as determined by plantation officials. Community members were not allowed to produce their own food but to farm common ground and harvest the produce for common good. Members received rations irrespective of whether they helped work the land or whether they did other chores in and around the settlement. Three years after arrival the colony abandoned the system.

 

The thinking behind implementing such a system, often referred to as the "Common Store" or the "Common Course", could be easily imagined. The leaders of the colony believed that a unified, communal effort was the only way to survive the harsh wilderness. By pooling resources, they hoped to ensure that the sick, the elderly, and the children were fed even if they couldn't work the fields. In a brand-new settlement with limited tools and seeds, it also seemed more efficient to manage everything from a central hub than to have 100 people trying to figure it out individually. But this is not entirely the truth. The reasoning was equally rooted in a mix of religious conviction and high-stakes business law. Indeed, the Pilgrims were Separatists withdrawing from the Church of England. They held deep convictions about Christian charity and were inspired by the biblical descriptions of the early Church in the Book of Acts, where believers held "all things in common." They saw the Common Store as a way to practise selflessness and avoid the sins of greed and individual ambition. But the Mayflower voyage wasn’t just a quest for religious freedom. It was also a business venture funded by a group of English investors called the Merchant Adventurers. The investors had insisted on a seven-year contract where all profits and assets, such as houses, lands, and food, belonged to the "joint stock." The communal system was meant to ensure that every ounce of effort went toward paying back the massive debt of the voyage rather than settlers building personal wealth or private gardens. Despite these intentions, the system was scrapped in 1623 three years upon arrival.[1] What went wrong?

 

First of all, strong young men felt it was unfair to work hard while their families received the same rations as those who did little. Further, without the ability to "own" their labour, many settlers became reluctant to work. The system created resentment rather than the "Godly unity" the leaders had hoped for. It was clear that the system was failing. Going forward, plots of land were assigned to each family for them to farm for their own sustenance as the system of sharing was abandoned.

 

The story in this form has of course been used to tout the economic benefits of private ownership and how collectivism always fails due to lack of incentives to do your best.[2] However, leaving the analysis and true meaning of events surrounding the Plymouth Colony’s first years to historians and other academics, it can be interesting to mention this story in the context of law firm compensation systems. The settlers obviously weren’t partners at a law firm. Neither were they communists turned capitalists. They were for the most part separatists, fleeing the Church of England and joined in a common search for a better future. Whether religion or the fight for survival made them implement a system of collectiveness, something caused it to fail. The Plymouth Colony succumbed to discussing and questioning their ‘profit distribution model’ within a short period of existence. Despite intentions of reaching success as a collective at the onset, before long the ones capable of a higher production filed complaints of unfairness to the plantation officials. This is where the story echoes law firms. Nearly every top law firm out there is constantly discussing their profit distribution model. But in their case it isn’t triggered by the fear of starvation. Whether in a good year or a bad year, partner compensation is still on the agenda. Turnover is mostly, by any standard, plentiful. In fact, few other businesses have such a good return on the dollar with so little skin in the game as a business law firm.

 

But as arguably most of us know, compensation is relative and not absolute. Having a Porsche makes you feel special until your neighbour buys a Ferrari. Reacting to a disadvantage in comparison to peers is an innate human quality as shown by the now well known experiment carried out in 2003 using capuchin monkeys.[3] Two female capuchin monkeys were given tokens in form of a round pebble which they could exchange for a piece of food from their caretakers. As long as both monkeys received the same type and amount of food – in the experiment a piece of cucumber - both monkeys were happy. But when one monkey started receiving grapes in exchange for the same token, the other monkey would not accept it: she threw the cucumber back at the caretaker and was visibly upset. In psychology, this behaviour is identified as ”inequity aversion” - the resistance to incidental inequalities. Humans and animals will even go so far as to forgo a gain in order to prevent another individual from receiving a superior and unfair reward. Throwing the cucumber back at the caretaker is called “disadvantageous-inequity aversion”.

 

Humans take the comparing of compensation even further than most animals. We may even balk at receiving more than our peers. Humans can experience “advantageous-inequity aversion” which means we can give up something good because it’s more than someone else is getting. As far as animals are concerned, this behaviour has only been found to some extent in chimpanzees.

After the capuchin experiment researchers wanted to know if having an aversion to receiving more than others is something innate in a human or if it has been taught. In short, is it nature or nurture? It turns out it is not nature.[4] In an experiment 900 children from seven different cultures were faced with a choice to either accept or reject candy that was offered in unequal measures.[5] The researchers found that, all over the world, children tended to reject the candies when the offering favoured another child. There were also some older children that would reject offers that presented them with more than what other children would get. None of that is surprising as adults have presented the same behaviour in previous experiments. The surprising part was that the children only displayed advantageous-inequity aversion in three participating countries: Canada, the United States, and Uganda. In the other countries - Mexico, India, Senegal and Peru - they accepted receiving more than the other child and enjoyed the sweet taste of inequality. This experiment indicates that finding unfairness ok is a result of culture. When the children rejected disadvantageous offers it comes from a concern about their social status. It’s not about right or wrong, it’s about how they will be perceived by other children. The culture will allow or forbid a difference in rewards. But in our experience, partner complaints on the distribution of compensation are not a case of ‘I’m getting less for same effort’, or ‘I’m receiving more for the same effort’. Rather, it’s ‘I’m doing more and should be getting more’. Generating the most revenue, working the most hours or bringing in the most clients translates into being smarter and working the hardest and that this should be fairly rewarded. With money.

 

This attitude has been prevalent in the Western meritocracies for some time. The most common explanation for inequality and ‘riches’ is that the wealthy have earned it, by talent, intelligence or hard work. However, there is no data to back this up. Exploring the role of talent and luck in success, physicists Alessandro Pluchino and Andrea Rapisarda and economist Alessio Emanuele Biondo showed in their paper Exploring the role of Talent and Luck in Getting Success[6] that there is no connection between generating wealth and scoring higher in personal qualities such as talent, intelligence, skills, smartness, efforts, wilfulness, hard work or risk taking.[7]

Instead the authors could conclude that “if it is true that some degree of talent is necessary to be successful in life, almost never the most talented people reach the highest peaks of success, being overtaken by mediocre but sensibly luckier individuals.” The authors add that “as a matter of fact, it is rather common to underestimate the importance of external forces in individual successful stories.” A closer look at many rainmakers would probably lead to the same conclusion. Having a number of premium clients with deep pockets and interesting cases can often be traced back to inheriting a portfolio from a predecessor. When a partner takes over from the retiring partner who trained him or her, he or she also inherits the clients. No guts or talent in acquisition was needed and once you have an A-client others will follow.

 

And yet, many law firms spend disproportionate amounts of time discussing how to divide the profit among the partners. Having lengthy conversations on how to distribute profit does not make the firm as such more profitable. These discussions are mostly just inward looking and a time-wasting, emotional-consuming energy drain. So why does a well-intended collective sooner or later succumb to an endless discussion on how to distribute the profit? Why is the compensation model constantly on the agenda?

 

Mirror, mirror on the wall

By nature, most people are not overly focused on money and performance. As young adults go to university, their decision on what faculty or topic is mostly guided by their personal interests and abilities, and labour market perspectives. This is no different for those studying Law. As further dissected in Chapter 2 (What Compensation Really Is), when the student later in life becomes a partner in an elite business law firm, something happens and over time they seemingly become more and more obsessed with money. Partners in such law firms always want to earn more. The Big Law might well be the only industry sector in existence, where profits HAVE to increase year on year, every year. It is not only that, but there is also a permanent anxiety that there are partners and competing law firms out there, that are making more money than they are. There is an eternal comparison going on, draining substantial emotional energy.

How come the elite law firms are more obsessed with money than perhaps any other commercial enterprise, including investment banks and commodity traders? For any other business revenue and profit will fluctuate over the years. Just look at the annual reports of Goldman Sachs to see that good years and not so good years have occurred in no particular order. Realistically this would be what any business would expect. It is the nature of an entrepreneurial activity in a volatile economic reality. Now look at the numbers of the elite law firms. Revenue and profit have steadily and continuously grown for decades, with for a number of firms 2022 being the only notable exception. Isn’t this fascinating? How can it be that the elite business law firms seem to be isolated from the economy and seem to be immune to entrepreneurial risks?

To understand these dynamics we perhaps need to go about three decades back in time. In the nineties. Back then the legal profession looked vastly different. Partnerships were more resembling gentlemen’s clubs than commercial businesses. One could even say that commercialism was frowned upon. Also the clients were less organised and legal departments were still an exception.

In 1993, David H. Maister, formerly a professor at Harvard Business School and by then an independent advisor to professional service firms, published his book ‘Managing the Professional Service Firm’. The book discusses – among others – how to balance the roles and responsibilities of junior, middle, and senior staff members, and how to leverage their skills and time to maximise profits and client satisfaction. This might have been the first time that many law firms became aware that there were levers to pull and buttons to dial with which they could improve their profitability. Within only a couple of years this insight profoundly changed the elite law firms. Gentlemen’s clubs had now become businesses.

Today’s baby boomers have built their careers and their practice on the shoulders of the generation before them, who generously introduced them to their clients and left them their entire practice upon retirement. It is exactly those baby boomers that have been instrumental in the largest cultural shift in a generation within the business of law.

The baby boomers introduced legal specialisation. Before, every partner was more or less a generalist. Today partners in big law are super specialists. With super specialisation comes differences in earning capacity and profitability. This convergence between practices arguably started to unravel the fabric of solidarity and trust.

The legal profession is built on the system of master and apprentice. This is much like the guilds a couple of centuries ago. The difference being that when an apprentice became a master in a guild, he would set up his own shop. In a law firm the apprentice becomes a partner within the same firm. Because of this the old master apprentice relationship unofficially continues in a social and psychological manner.

Many of the baby boomers have inherited substantial practices and networks from the generation before them. This is the starting capital on which they have further built their practice. With a large and successful practice comes influence. This influence is further supported by the subconscious ‘parent-child’ relation with their former apprentices. The baby boomers in many firms wield strong influence and are considered the opinion leaders. Those who have the power and the influence do not want to dilute it. They cling on to it and will defend it.

One way of defending one’s position is to make sure others will not become equally strong or stronger. There certainly is a lot less generosity towards new partners these days. Baby boomers also have the tendency to make weaker partners. Often these have been their loyal lieutenants before being made partner. Creating weaker partners is another mechanism that unravels the fabric of solidarity within a partnership.

Due to the professionalisation of the legal industry, baby boomers have witnessed unparalleled growth in partner compensation. None of them could imagine that they would ever earn as much as they do today. It is all too easy to confuse financial success with personal excellence. It is all too easy to start believing that you make so much money because you are God’s legal gift to mankind. Earning large amounts of money has now almost become a right.

At the same time deep inside there is an annoying little voice questioning the superstar status. To an extent many lawyers suffer from ‘the imposter syndrome’. Confirmation and affirmation are needed to suppress that little voice and bolster self-confidence needed to be a rockstar lawyer. This is where once again all the aforementioned elements come together. The partner needs to be the opinion leader, needs to have power and influence and needs to earn more money than everyone else. It has become a vicious circle. Partner compensation is not only a token of success, it is also a confirmation of success and power.

As mentioned, the first in a group of friends, colleagues or neighbours who can buy a new Porsche, will be over the moon. It is a visible token of success in the world. They clearly made it. This happiness will evaporate when neighbours start buying Ferraris and Lamborghinis. Suddenly the Porsche owner is no longer the king of the hill. Now the goal is a Bugatti and after that a helicopter or a private jet.

Partners are always comparing their compensation with the presumed compensation of their peers. This is most visible in the US market, where law firms self-report their revenues, number of lawyers/partners and profit margin, making it easy to calculate profit per equity partner. In other jurisdictions without self-reporting, law firms try to make a calculated estimate based on annual reports that have to be filed and other public sources. And also, obviously, lawyers do talk with each other and there are laterals that spill confidential financial information. It is fair to say the legal industry is permanently comparing partner incomes. Partners will become very restless if they believe partners at the firm next door are making more money. However, at no point will this lead to the conclusion to double down on getting more market share. To increase focus on how to outsmart the competition, deliver a better product, to devise a recipe for a bigger pie. Instead, the knee-jerk reaction is to personally want more of the existing pie.

 

Wag the dog

 

Is the Plymouth Colony then simply a tale of how a more or less equal sharing partnership will always fail due to an inherent lack of incentive and end up in an eat what you kill system? Some will point to the prodigious success of Kirkland & Ellis - with its highly performance-based, non-formulaic merit system - who at the time of writing is fighting the number one ranked on profit per equity partner in AmLaw’s top 100, Wachtell, Lipton, Rosen & Katz with its US$9.04 million per partner.[8] At first sight, one might be inclined to think that the individual system is the most fair system and will be a system that does not create tensions between partners. That might be one of the reasons why an eat-what-you-kill system has been so widely adopted across all parts of the world. Partners who work hard and are successful are rewarded and some others that do not perform do not drag them down. Whereas in theory the individual system might seem ideal, in practice this system creates all sorts of issues. Based on our experience partners in firms which follow an individual based profit distribution system have more discussions on profit distribution than those who employ a collective system.

The reason behind this is that in an individual profit distribution system there typically are all sorts of internal compensation systems such as origination credits, or rewards for management positions. In the individual system, there is a clear disadvantage for a partner who cooperates with another partner on a large matter. The cooperating partner will have to ‘pay’ origination credits and while helping out on the other partner’s big mandate will have no opportunity to get out and work on their own book of business. We have come across situations where this type of ‘partner’s partner’ is only made to make the strong and originating partner even more successful. The question ‘who owns the client’ is of particular interest to any partner working in an individual profit distribution firm. On top of that comes that in some firms each partner must ‘pay’ a certain percentage of their profit to the founder(s) of the firm or to the brand. Another issue with the individual system is that partners don’t want newly appointed partners to cannibalise on their practice, so each new partner has to find a new niche and a new clientele to build a practice. An individual profit-based system also runs a risk of poor utilisation of associates.

 

So, if an individual profit distribution system can create all sorts of fights and tensions, is a collective system any better? The short answer for that is: in theory yes but in reality most often not. Lockstep implies a relative consideration of partners’ contributions and evolution, with a broader scope of criteria. Such a compensation system can reward and thus stimulate a number of partner behaviours that is important to the success of the firm. This could be collaboration on acquisition and subsequent matters, ensuring that associates develop the talent that the future of the firm requires and that partners continuously hone the core dimensions crucial to success. A lockstep system can steer on these aspects. That’s the theory. In reality, under any collective profit-sharing system, partners inevitably seem to become hypersensitive to under-performers. The mere thought that while they are working hard and have built a great practice, some others are leading a laid-back life, go home at five and still make the same amount of money is unbearable. We experience that in collective systems the firm leadership is under permanent pressure to identify and deal with under-performers.

 

In order to prevent partners from under-performing, collective distribution-based firms invariably monitor individual partners. Every partner has to produce a minimum amount of revenue under their own name and has to meet a threshold in billable hours. The surprising thing is that this effectively will create similar tensions as in an individual based system. If I have to produce revenue, I will want the file and the client put in my name. If I have to produce billable hours, I will make sure I meet my threshold, before handing out work to my associates. In an attempt to make the important measurable, law firms have instead made the measurable important.[9]

 

Sharing a collective profit requires trust. When partners complain about compensation in an equal sharing system it is often because trust has been diluted. Profitable partners start to distrust the abilities and ambition of less profitable partners. And yet, usually all of the top earning partners, who are often the most senior ones, were present when the partners they are complaining about were made. They voted in favour. In partnership agreements there’s rarely a mechanism to get rid of partners. This is fine if the firm is ‘strict at the gate’. But few law firms are. For many reasons lawyers are made partners that should not have been made partners. Mostly this is a consequence of internal competition between practice groups.

 

There are as many compensation models as there are law firms. The reality is that it is not a specific compensation system that forms the perfect recipe for success. There is no such thing as the perfect compensation model. Successful law firms will have found a model that works well for them, in spite of the model’s shortcomings. In the continental European market, it is hard to find an eat what you kill firm amongst the ‘national champions’, while this system is more the norm in the USA and East Asia. Most law firms have something in-between. Top law firms in all these markets have so far proven that any system is not per se more successful than the next.

 

Think about the following statement: The profit of your firm will not increase because you change the way you divide it. With a few elaborations and preconditions, most law firm partners would agree on this. And yet, when partners sit down with their fellow partners to discuss progress, or the lack thereof, the discussion will eventually end up focusing on the profit distribution system. There are seemingly three triggers. The first is, just as with the Pilgrims, heavy lifters complaining about partners that seem to enjoy a free ride and don’t put in the effort. The second trigger is the wish to change partner behaviour, typically this means stimulating collaboration. The third is preparation for growth by lateral hiring. The most passionate contributions to a partner strategy meeting often goes along the lines of the following: “We should absolutely focus on this specific client segment/expanding our market share in practice areas X and Y/strengthening our brand in industry Z, but FIRST we have to do something about our profit distribution system that benefits weak partners!” Or “If we only changed the way we divide profit to an equal sharing system then we would be able to collaborate easier and leverage our collective experience and client contacts!” Or “We need to provide incentive to those who bring in business by allowing them a more fair compensation!”

 

We have looked in depth at lateral movements of partners across a number of markets. In some markets lateral movements are common. In other markets they remain rare, often because the market isn’t big enough. One thing partners who move firm have in common: the primary motive for moving is rarely money. Typically, they have lost confidence in their firm’s strategy or have developed cultural or interpersonal issues. As mentioned before, there is further no evidence that partner compensation changes partner performance. Taking away money from a weak partner will just legitimise their weakness. Giving more money to a top performer will only keep him/her happy for so long.

 

With regard to using compensation as an instrument of stimulus for wanted behaviour, over the years we have done multiple in-depth analyses and never have we found any evidence that individual partner performance and behaviour can be influenced by compensation. If the discussion on profit distribution is about incentives to do better, then partners would examine real stimulus or structure helpful support to help underperformers build a healthy practice. Inevitably, complaints are always seeking to give less to underperformers and more to partners that have already got it right. Never ever did this lead to underperformers trying to do better. Receiving less money will not transform a weak partner into a strong partner. It only serves to legitimise the fact that such a partner can stop trying altogether. Strangely, this is similar for other aspects that are part of a partner compensation formula: rewarding collaboration hardly increases real world collaboration. Partners that feel comfortable collaborating will collaborate regardless and those that prefer to work on their own will continue to do so even if this means they will miss out on a percentage of their compensation.

 

This is not an argument that law firms should not take action on underperformers, it is an argument that they have their priorities wrong. Partner compensation has become an issue of ‘wag the dog’. It distracts from more important issues. Law firms routinely misplace ambition and seem to find it irresistible to start looking for it in the compensation model. While energy is spent on jostling for a fairer way of dividing money, nobody has the time to care for strategy. Discussions should be about gaining more market at the expense of your competitors. For every hour spent discussing the compensation model, ten hours should be spent on how the firm can improve on all the core dimensions needed for being top tier. Energy should be poured into constantly understanding the world of the clients and where their market is heading. Focus should be on how to ensure that partners are aligned in ambition and foster a culture that supports that. A law firm’s compensation system is not a predictor for its success. Compensation cannot deal with issues like strategy and culture and it is in those two elements that the winners are forged.

 

 

The Ambition Ratio

Realistically there will within one firm always be differences between earning capacity among partners and between practices. This is in part in the very nature of a full-service law firm. It can be likened to supermarkets which run their business with the measure of profit per square meter. This means that large and cheap goods are the least profitable. If such goods move fast, like milk, then it is ok. However, products such as sugar will remain minimal in profit and sometimes even be unprofitable. At the same time most supermarket knows that they have to offer sugar to the customers. Not having a basic product might be the reason why a customer ends up in a competitor’s supermarket. The cost of offering sugar will have to be carried by the more profitable goods. Many law firms have to offer the equivalent of sugar in the supermarket and the more profitable partners will have to bear it for the good of the whole partnership. In most business law firms the partnership accept a number of partners that bring in less profit than the cut they take.

However, the differences in earning capacity have been reflected in the increasing compensation bandwidth in recent couple of years. Successful firms have been modifying their lockstep models to allow for wider equity partner compensation ratios - the disparity between the highest- and lowest-paid partners within a single firm. According to ALM data, the median equity partner pay ratio across the Am Law 200 stood at 9.7-to-1 for 2023. At the Am Law 100 the spread is wider: individual firms with large bonus pools report ratios well above that, and the highest-paid rainmakers can sit 20:1 or more above the lowest-paid equity partner. But those are averages. All as a consequence of the fierce competition for rainmakers. Partners seem to accept the need to hire stars at great expense in order for the firm to win the race to the top or even just to stay relevant. This is because a successful firm can accept the large compensation ratio as long as the ‘ambition ratio’ is very narrow. A successful firm is a firm that does not tolerate a difference in ambition. The least ambitious partner will not be much less ambitious than the most ambitious partner. Without a shared ambition, friction is bound to set in. There are few things that can be as corrosive in a partnership as the perception that there are partners that lack the ambition to be the best. Even if performance of such partners would still be borderline within the acceptable range, the perceived lack of ambition can infuriate top-talent in the firm. These ratios are exceptional by global standards. In the top tier of the Latin American market, compensation ratios of 3.5-to-1 to 4.5-to-1 remain typical, reflecting a less developed lateral market and a historically more relational approach to partner compensation. The AmLaw numbers are not a universal destination; they are the product of a specific competitive environment that most markets have not replicated and many have deliberately chosen not to.

Lack of ambition is closely intertwined with performance, but should still be considered separately. There will be partners that put in the hours for the firm (including non-billable), that are generally liked and try their best to contribute, perhaps by being involved in recruitment or knowledge management, but are simply not commercially successful as partners. One could rightly argue these should not be equity partners, but generally these partners do not infuriate the top-performers. What does greatly agitate the top-performers are partners that seem to be slacking. Those partners that do not put in the hours, arrive late and leave home early. Partners that still behave like employees, treating their equity stake as if it’s just a 9 to 5 job. Partners that are never seen in the office in the evenings or during weekends. Partners that are objecting to every initiative to make the firm better, or when not objecting, never follow-up. There is no perceived sense of responsibility for the success of the firm as a whole. These are partners that do not keep a team of associates occupied, have no substantial business, and most importantly show no effort to radically improve their situation.

In our experience divergence in ambition is mostly overlooked as a root cause of tensions in a partnership. The default tool to address tensions based on growing differences in performance, is invariably the compensation system. But it has proven to be an ineffective tool. It is the knee-jerk reaction of the more ambitious partners to turn to the compensation system to deal with the ‘slackers’. First stripping them of points so that their profit share will shrink. This might even be repeated until the minimum is reached. Another method is an extra share or bonus to the top-performers. As rational as it may seem, this is a fool’s errand. Taking away money does not address the core issue. We have seen many times that top-performers remain frustrated even if the gap between their compensation and those of the ‘under performers’ grows considerably. On the one hand financial incentives are very unlikely to result in material change and improvement. Being stripped of financial reward will not make a partner more ambitious. No matter how small part of the profit they receive, it is the sheer presence of unambitious partners that annoys the top-performers in a firm. The top performing partners in a law firm work and live under a great amount of pressure and stress. They feel they make a great deal of sacrifice to be successful. For the top-performers, receiving more money as a compensation for being more successful only goes so far. It will not erase the frustration of watching lack of ambition manifest in a fellow partner.

No matter the tweaking of the compensation system, the problem remains unsolved. Differences in commercial success can be managed within the compensation system, differences in ambition cannot. The core problem is not the poor performance, it is the absence of the will to do something about it. This psychological dimension is often left unaddressed. A law firm that does not think that significant differences in level of ambition is a problem is a law firm that has given up. Whether they know it or not.

 

Psychology of the ‘haves’

 

Having seen all imaginable versions of compensation systems in many parts of the world we can share the following observation: All current compensation systems sooner or later favour the ‘haves’. By the ‘haves’ we mean the handful of partners generating the most revenue and which are already favoured in one way or another by the compensation system. Typically in law firm partnerships the revenue is generated in roughly the same proportions. The top revenue generating partners usually represent 10% of the total number of partners and their revenue is generally around 15% of the total firm revenue. Around 80% of partners carry their own weight and generate 80% of the total revenue. Then there is the ‘bottom’ 10% of partners that generate less than they take home at the end of the year. With time, without exception, compensation models tend to inevitably gravitate toward increasingly rewarding the top 10%. As mentioned above, the average compensation spread among law firm partners has widened in the past decade.

 

Of course, the compensation system rewards the most productive partners, you might say, it’s essential for competitiveness. A firm has to keep its rainmakers. Well, let us then share another observation: the most favourable compensation model for a rainmaker is never reason enough for them to stay. Many times we have witnessed a compensation model being adjusted with contrived mechanisms that will ensure increasing ‘bonuses’ for the top earners only to find one or more of those very top earners leave within two years of the painful exercise. That being said, not adjusting the compensation will surely cause them to leave, you might argue. Sure, this is not unlikely in the Anglo-Saxon market. But if you are not in the US or UK market, which competitor are you fearing will snatch your rainmakers? Where is the hot lateral market? As already stated, partners very rarely leave for the money. A partner who likes the firm culture, gets along with other partners and feels supported is unlikely to leave for more money. And yet, here is a scenario many partners will find familiar: partner with the most revenue demands a deviation from the compensation structure to allow for him or her to receive more, under the explicit or implied threat that he or she will otherwise leave the partnership. The other partners concede because they fear the loss in their own compensation will be higher if the high-revenue partner leaves than if that partner gets proportionately more of the profit. Often a proper calculation of the numbers involved is not made, nor is any analysis done of whether there is even a realistic and more beneficial alternative for that partner. Because most importantly, nobody wants to be the one taking the conflict with the ‘blackmailing’ partner as to various degrees this is a sharp-tongued, argumentative individual, perhaps even perceived as aggressive, which will most likely end in stress and humiliation. As the years pile on in which this individual generates the highest revenue, his or her grip on the partnership grows as a sort of Palpatine going from young senator to fearsome emperor with mythical powers. It is more restful to be in their sphere than outside of it.

 

What is it that makes many partnerships seem to end up as some version of the Lord of the Flies in a wrestle between the desire for civilisation and the desire for power? If it isn’t the money, what is it then that in nearly every law firm, irrespective of the jurisdiction or sharing model, inevitably leads to the top earning partners asking for more? One can speculate on several reasons. For a start, the level of compensation is a proxy for power. Getting the biggest slice of the profit, having the most points in the compensation system, are the dues not of the longest serving but of the most powerful. It is a thinly veiled fact that any law firm is steered by its rainmakers no matter what the official governing structure looks like. Nobody seem to question succumbing into the view of the partnership as a zero sum game. A zero-sum game is one in which no wealth is created or destroyed. Whatever one player gets is at the expense of the other player. This can only exist with the attitude that the players share no common interests. Compensation is merely a division of the profits based on last year’s pissing contest. It has no other function than to reward the most successful individuals, where success is defined as money, and prevent them from leaving.

 

Arguably, one could consider a collective effort that would hand out its earnings based on a zero sum game as primitive. Sophistication comes from institutionalising distribution of gains to the prosperity of all. The 2024 Nobel memorial prize in economics was awarded to Daron Acemoglu, Simon Johnson and James Robinson for their work on explaining why the income gap between the richest and poorest countries is persistent: the prosperity of a nation is a result of its institutions. The Nobel laureates’ well-known book Why Nations Fail sets out the theory that it is not climate, geography or culture that determines a nation's prosperity, but the type of institutions it has. Their research shows that nations with inclusive institutions that allow virtuous circles of innovation, expansion and peace create long-term prosperity, while nations that have extractive institutions give rise to a high concentration of power and seek to concentrate resources in the hands of a small elite which stifles economic development. This might seem obvious when looking at developed nations versus developing ones. However, until this research the hypothesis that socioeconomic development will (eventually) promote democratisation was arguably equally valid. Research could for the first time establish that societal institutions that uphold rule of law and democracy are one of the causes of a long-term generally prosperous population instead of something that arises as a consequence of an already prosperous population. What Acemoglu, Johnson, and Robinson did was to look at European colonialism and empirically trace the importance and persistence of colonial strategies for subsequent economic development[10]. The type of institutions – inclusive or extractive – observed in many low-income countries today can be partly explained by the fact that colonisers shaped domestic institutions that were beneficial to themselves. This in turn depended on initial conditions in the colonised areas such as climate and local population. In short, colonies in temperate places such as USA and Canada, where European immigrants increasingly settled, implemented institutions that favoured a majority of the settled population. In contrast, fewer Europeans settled in tropical areas due to a higher settler mortality rate and an already relatively prosperous local population which led to an extractive colonisation strategy where institutions were formed to benefit that. The populations in all those regions are economically relatively worse off today than they were just before colonisation and the laureates could prove the causality with the extractive social institutions.

 

As with many theories there is critique showcasing exceptions to the theory, especially in recent times, however, let’s entertain the fast and loose thought that law firms are societies that can prosper or fail. When a group of individuals decide to form a partnership, even such fiercely independent and autonomous people as lawyers must give up part of their independence to the institution of the partnership. A system where the power is in the hands of the few rainmakers that increasingly push resources towards the ‘haves’, where the resources of the institution are skewed towards benefiting a minority and the rewards come at the expense of its fellow ‘players’, has a high risk of failing to become or remain among the most successful.

 

In Chapter 3 on Compensation Systems we look at the success of the US National Football League (NFL) and compare the model as if it was a version of a "modified lockstep" system. The NFL system is designed to prioritise the stability of the collective over the individual performance of a single unit. Keeping the good of the collective in focus is pure self-interest and it has proven to work. The NFL effectively mandates a high-base, high-parity environment where a majority of the earnings is distributed equally among its members. The teams that do well have a chance to profit from it by keeping the lion’s share of the revenue they generate in and around their home stadium. For the rest, the worst performing team will get the same share of the national revenue as the best performing team. In 2024 the NFL’s total revenue was USD23 billion and it distributed approximately US$13.8bn in equal shares of USD432.6m each to its 32 teams. So how come the successful, high earning, large home base team the Dallas Cowboys doesn’t complain that the Cincinnati Bengals - historically ranked at or near the bottom of the NFL in local revenue generation – take home an equal amount of more than USD432 million out of the revenue pot? The answer is that the Dallas Cowboys can only have their success inside the NFL. It’s the vibrant competition that keeps fans and viewers engaged. If the ‘tournament’ would be allowed to skew towards the best performing team, rewarding them more in accordance with their success, then a vicious circle starts wherein that team can afford the best players, best equipment, best sponsorships deals etc., reinforcing their success until it’s a foregone conclusion that they win and viewers drop out and fans become less engaged overall. TV deals become less valuable and less merchandise is sold. Keeping the League centre is key for the success of every team and especially the best performing teams. The League is the institution that guarantees success and therefore must be placed above all else. It has enabled the NFL to go from approximately $12 billion in 2020 (impacted by COVID-19) to over $23 billion for the 2024 fiscal year. An institution that fosters success doesn’t spring from the attitude of a zero-sum game. It doesn’t allow a culture that accepts inequalities just because some have been allowed to amass status or power. Instead it upholds a democratically run fellowship where there is a common interest, allowing for virtuous circles of creating sums greater than their parts.

 

The business of law

David Maister and others explained in an easily digestible manner what are the financial mechanisms of a law firm. Factors like leverage, hourly rate, number of billable hours, profit margin and number of equity partners became tools which law firms started using. As there was lots of low-hanging fruit at the time, this approach made many law firms more profitable almost overnight. There was, however, a Faustian trade-off: in exchange for financial gain, lawyers have become cogs in the profit machine. As stated, in an effort to make the important performance measurable, firms made the measurable performance important. Gone is the freedom. Targets for revenue and billable hours become the new normal. Traits and talents that cannot be measured are not being rewarded.

Albeit much wealthier, the legal profession will never be the same again. The generalist lawyers are a thing of the past. This has profoundly changed the culture in law firms. A law firm is a business before anything else. Gone are the days of the gentlemen’s club style law firm. Associates and staff are hired or laid off, depending on how profitability develops. The number of equity partners is carefully managed and shrinking in general as this will boost the profit per partner. Every year there is a growth in turnover among the best performing law firms in nearly each country. With the exception of the financial crisis, this has been the case for the past two decades, by far outpacing the growth of demand for legal services. The volume of legal work in the market does not correspond to the increase in law firm turnover. The disproportionate growth in revenue has been attributed to rate increases. It doesn’t really matter if clients complain, because all law firms are doing the same, not because there is collusion, but because they all have the same drivers. Year on year growth is a necessity for survival.

We described this phenomenon in the book Death of a Law Firm. If a law firm does not have a year on year growth in profit then the top performers might start to look around. Will a peer firm be able to provide them with what they are worth? A bleeding of partners will start and it only takes one or two of the partners that generate the most revenue to leave in order to send the whole firm into a tailspin. A run on the bank. This is due to the way fixed costs cause the profit to drop by a large percentage by merely taking away one stream of revenue, albeit the most significant one. Having to perform under this ever upward moving target inevitably creates stress. Working under stress makes partners less tolerant. They start getting obsessed by ‘underperformers’. In their eyes, it seems unfair that some partners work less hard and contribute less. Another element that unravels the fabric of solidarity. The pressure on partners to perform on an individual level is immense.

Ignoring this is naïve. Reading the above you will have a fair number of partners protesting their firm is different. ‘We may have a difference in the level of revenue generated by our partners, but this is not a problem for us. We have a great culture, there are no domineering hawks bullying the rest. We have jovial partner retreats and a pleasant work sphere all around.’ This might be true. More often, however, it tends to be that the firm confuses ‘culture’ with ‘lack of conflict’. The fact that there is a lack of conflict doesn’t mean that there are no problems, it usually means that they go unaddressed. A general aversion of conflict masquerading as a culture of solidarity and true partnership. Scratch that surface, and unsolved issues and resentment often oozes out like pus. Aversion to conflict means there are no frank discussions, no feeling that you can disagree openly and still remain partners with the objective of finding the best way forward. The pressure that top performers feel will one way or another cause conflict if the ambition ratio is too wide. It’s just a question of when and how it will erupt.

Adding to the pressure to maintain growth is the constant comparison among peers as aided by client guides such as Chambers and Legal500. Disproportionate amounts of time and money flow into this. Chambers was recently sold by the private equity firm Inflexion to another private equity outfit, US investor Abry Partners, for GBP 400 million[11]. This sale represented a fivefold return on Inflexion’s initial investment in Chambers and Partners in 2018. For sure an incentive to make even more money out of the vanity and uncertainty of lawyers. Why otherwise would partners ‘beg’ their clients to spend time on providing researchers with information and nice quotes? The type of clients they want rarely use these directories when selecting law firms. At the most it is an endorsement when used in a pitch. Imagine restaurants investing considerable time and effort in getting a ranking that will only be seen by their peers, but are not used in any way by their customers to base their decisions on. For lawyers the rankings are something they need to assure them that they are the best. It is used as a yardstick to compare with peers. The directories are earning good money on this and Chambers will be even more valuable in a couple of years.

Speaking of private equity, as we describe in Chapter 15 private equity has taken a keen interest in law firms. Many lawyers contemplate why their firm would be interested in private equity funding and rarely ask why private equity would be interested in their firm. If a law firm needs capital to make an investment they could go to a bank. Banks are only too happy to lend to stable law firms with a long history of uninterrupted and ever-growing cash flow. Private equity is not interested in being a bank, it wants to add value and then exit with a profit. That value is of the kind that private equity is an expert at: efficiency, systems, strategy and scale. The fact that law firms give such a good return on the dollar is not even that interesting. Private equity wants to pump value into the brand. It wants to professionalise and build an entity that can be sold to the next investor. And private equity, with experience of making businesses more profitable since the Second World War, sees a tremendous opportunity to add value to law firms. David Maister and the professionalisation of the law firm in all honour, law firms are nowhere near well-oiled corporates. When we speak of the ’business of law’, either lamenting the good old days or congratulating ourselves for running a business with eternal year-on-year revenue growth, this is a joke in the eyes of private equity. They see virgin ground full of untouched profitable businesses that are run by amateurs.

The compensation system is, at its core, a psychological instrument. It does not distribute money neutrally. It tells partners what the firm believes they are worth, signals who the institution considers important, and shapes behaviour far more powerfully than any management directive. The capuchin monkey in the experiment did not object to cucumber on nutritional grounds. She objected because the grape going to her neighbour was a statement about relative standing. Partners in law firms are doing exactly the same thing, with considerably more sophistication and considerably higher stakes. Any compensation system that ignores this dynamic is not a system: it is a provocation with a formula attached.

Beneath the formula there is also an identity question that compensation systems rarely acknowledge. When a partner cannot answer the question “am I part of this firm or is the firm merely a platform for my ambitions?” the compensation debate will never fully resolve, because no formula can substitute for belonging. That question sits beneath most of the conflict explored in the chapters that follow.

Private equity sees this clearly from the outside. It looks at a law firm and sees not a mystery but a management problem: talented people producing strong returns, held back by the psychology of their own partnership. The capuchin monkey and the cucumber. The gap between what partners say motivates them and what actually does. Understanding that gap is not an academic exercise. It is the prerequisite for designing a compensation system that actually works.

What compensation is, beneath the formula, is the subject of the next chapter.

 

[1] The ultimate source of life in the Plymouth colony was written by its governor William Bradford, Of Plymouth Plantation, between 1630-1651.

[2] See for example opinion by Ilya Somin, How private property rights helped save the Pilgrims, The Washington Post, November 26, 2015.

[3] Brosnan, S.F. & de Waal, F.B.M. (2003). Monkeys reject unequal pay. Nature, 425, 297–299. https://www.nature.com/articles/nature01963

[4] https://www.newyorker.com/science/maria-konnikova/how-we-learn-fairness

[5] Nature, The ontogeny of fairness in seven societies, 18 November 2015 P. R. Blake, K. McAuliffe, J. Corbit, T. C. Callaghan, O. Barry, A. Bowie, L. Kleutsch, K. L. Kramer, E. Ross, H. Vongsachang, R. Wrangham & F. Warneken

[6]https://www.researchgate.net/publication/328939222_Exploring_the_role_of_talent_and_luck_in_getting_success

[7] https://www.technologyreview.com/2018/03/01/144958/if-youre-so-smart-why-arent-you-rich-turns-out-its-just-chance/

[8] The Am Law 100 rankings, 2023 data (published 2025)

[9] In the formulation used here: Simon Jenkins, ‘A Gradgrind ethos is destroying the school system’, The Guardian (date not confirmed in source).

[10] Daron Acemoglu, Simon Johnson and James A. Robinson, "The Colonial Origins of Comparative Development: An Empirical Investigation," American Economic Review, vol. 91, no. 5 (December 2001), pp. 1369–1401. The three authors were jointly awarded the 2024 Nobel Memorial Prize in Economic Sciences "for studies of how institutions are formed and affect prosperity."

[11] Inflexion press release, "Inflexion sells Chambers to Abry Partners," 10 November 2023. The sale valued Chambers at over £400 million, generating a 4.7x return for Inflexion's Buyout Funds IV and V. The deal was reported by the Financial Times (Will Louch and Suzi Ring, 10 November 2023) and confirmed by Chambers and Partners' own announcement