11 Strategy and Compensation

 

In 1998, the partners of Goldman Sachs voted on whether to take the firm public. The financial arguments were clear enough. What made the debate so charged was that the partners understood they were not just deciding on a capital structure. They were deciding what kind of institution Goldman would become and whether the culture that had made it extraordinary could survive the change. It is the right question to ask. It is rarely asked directly enough in law firms. Strategy, culture and compensation are not three separate levers a firm can adjust independently. They form a closed system. A firm’s strategy defines which clients it serves and at what level. Its culture determines whether partners behave in the way the strategy requires. Its compensation model either reinforces that behaviour or quietly works against it. Get the alignment right and the three become self-reinforcing. Get it wrong and the firm finds itself with a strategy no one is executing, a culture no one is protecting, and a compensation formula that rewards exactly the behaviour the strategy was designed to move away from. This chapter examines how the three interact, where the fault lines typically run, and what the Goldman story, told in full later in these pages, reveals about the price of getting it wrong. The Goldman case is also revisited in Chapter 15, where we examine what it means for law firms considering Private Equity investment.

 

Strategy

There is a lot of talk when it comes to strategy, but what exactly is a strategy? One core characteristic of a strategy is that all of the partners are clear and also fully aligned on what exactly the strategy is. Surprisingly, already on this very basic level a large number of law firms miss out. Sure, when asked the firm management will be able to explain what the firm’s strategy is. When it comes down to individual partners, the strategy becomes much more vague and loosely defined. Zooming in on day-to-day execution of the strategy, things are all over the place.

What is it that makes it so hard to define a strategy that is clear to all partners and that gets concertedly executed? Probably one of the main problems is alignment. Driven by deliverable targets and compensation parameters, partners often are primed to focus on developing their own practice rather than executing the firm’s strategy. It may seem contradictory, but pressure put on individual partners to meet performance targets is often a hindrance to growth and increased profitability of the firm as a whole. It is unlikely that compensation can be used as a tool to execute a strategy, but the opposite is certainly true: compensation can easily become a hindrance.

The strategy defines which segment of the market a firm wants to service. This will largely depend on the size of the market, growth opportunities and the position of competitors that are already established in that market. Some firms aim for mid-market work, while others aim for the top segment only. Some focus on a limited number of practice areas, whereas others aim to be full-service, offering a broad range of specialisms. There are law firms that stick to their home market, while others pursue international expansion.

Focusing means eliminating certain options. This is something which is hard for lawyers. Almost by nature a lawyer wants to keep options open. Making strategic choices will also have an effect on the different practice area’s and thus on the practices of individual partners. Up until the mid-1990s, in Europe, most law firms including the top law firms had a broad practice. Partners were not yet as specialised as is common today and there was a lot of freedom and little or no coordination on how individual partners developed their practices. Law firms were more resembling a club than an institutionalised professional services firm. Strategy was not really a thing back in those days.

When from the mid-1990s the UK magic circle firms aggressively started expanding across continental Europe, things abruptly changed. With the arrival of Freshfields, Linklaters, Allen & Overy and Clifford Chance, came not only a significant rate hike, but it also opened the eyes of the ‘dormant’ EU national champions on what the most lucrative practice areas are. Suddenly every law firm started to focus on M&A. Every firm aspired to carve out a leading position and reputation for this profitable practice. For the EU national champions this worked out well. They already had the longstanding close trusted connections to the blue-chip clients. They also had the talented partners to make this transformation possible.

Focusing on M&A and higher rates does not come without side effects. Not all practice areas can carry similarly high rates. For some areas, like public law or employment, clients would not accept, and because their rates could not keep up with the M&A partners, pressure was mounting on many other practice areas that were now deemed ‘support practices’.

A secondary effect of focusing on M&A is that it limits the growth opportunities for all the other practices. If M&A is at the core of the strategy, by definition IP is degraded to a support practice. This dynamic created a high number of spin-offs. Rather than being marginalised, IP partners, like partners in other practice areas, started law firms of their own. By setting up a firm whose strategy was to focus solely on high-end IP, these partners carved out a new lucrative niche in the market. As an additional bonus, with setting up an IP focused firm, they could now once again offer growth opportunities to talented associates. When staying within their previous M&A focused firm, this would have been severely restricted.

Today a quarter of a century down the line, the dust of the original M&A gold rush has settled. For the top law firms in the market it has become common that M&A is their core strategic focus area. There are not many new break away specialist law firms that are founded. For most law firms when it comes to on which practice areas to focus, the choices have been made. Sometimes when the market opportunity arises, there are slight shifts in emphasis: a bit more restructuring when the economy is down, or a bit more Private Equity when interest rates are falling. When it comes to practices that’s about it.

Today a full-service law firm is a law firm that is centred around M&A (and often also Litigation and/or Finance). The thinking behind this is simple as these are the practices where for the clients the stakes are so high that they are prepared to pay the highest rates for lawyers.

 

Strategy and Compensation

With few exceptions, not all practice areas can be equally profitable. This raises the question of whether partners should be compensated in accordance with the profitability of their practice area. To examine this, let's have a look at M&A for example. We all know M&A can be one of the most profitable practices due to the strategic importance to the client and due to the sheer amount of money involved of which the legal fees will always be a minor percentage no matter how high they are. Full-service law firms that have placed M&A at the core of their strategy often argue that M&A will act as an engine for the firm: M&A will create a flow of work for other practice areas. This is often true, but at the same time the M&A practice only gets its mandates because the firm also has a number of other high level practice areas such as Competition for instance. Without a top-tier Competition practice, the firm would not have a successful M&A practice. So let’s pose the question again: should partners be compensated in accordance with the profitability of their practice?

The answer might now be more nuanced. The hardest task for any lawyer is to bring in a steady stream of high-level client work. In the above example, the pressure rests on the shoulders of the M&A partners. More so than on the Competition partners. At the same time the Competition partners in order to build or maintain a top of the market reputation will need to find high level competition mandates that are not handed down from M&A. This is an aspect that is directly related to compensation. Most law firms administer matters in the name of the partner who has the overall responsibility towards the client. For M&A this will be the M&A partner. For the Competition partner, regardless of the strategic importance or complexity of the involvement, this will not be the same and less compensation related revenue will be in that partner’s name. Per billable hour spent on the matter, the M&A partner will receive a higher compensation than the Competition partner. Not only that, but also on paper the M&A partner will be much more successful and will likely have more influence in the firm.

For the remaining pure lock-step compensated law firms all these are irrelevant considerations as compensation will only depend on seniority and not on performance. Pure lock-step firms have become a disappearing breed as most law firms today operate with a modified lockstep which also has a performance related component for determining a partner’s compensation. For the vast majority of law firms, the question how to calculate the performance-based compensation factor is highly relevant. Get it wrong and partners will be less likely to cooperate on matters that are not administered under their own name.

When it is the strategic objective of a law firm to have a top-of-the-market M&A practice and also to handle high-end legal matters for the most discerning clients, this can only be achieved if all practice areas have an outstanding market reputation. This in turn can only be achieved if there is no A and B partners. Where the A partners are more important because of their practice area than the B partners who are in what is considered a support practice.

One of the hotly debated topics regarding compensation is ‘spread’, meaning the difference between the highest paid partner and the lowest paid partner. In a traditional pure lock-step compensation model the spread would be around 4-to-1. A young partner would start at the bottom of the ladder, let’s say at 25% and would over time gradually plateau at 100%.

At the other end of the spectrum, I recently came across an EWYK-based firm, where the highest paid partner received 8M and the lowest 180K, which results in a spread of 45-to-1.

According to ALM data the median equity partner pay ratio of the full Am Law 200 was 9.7-to-1 for 2023. At the Am Law 100 the spread is wider, and at firms with large bonus pools or super-point structures the ratio between the highest- and lowest-paid equity partners can reach 20:1 or beyond. Generally speaking, firms with smaller spreads are becoming less common. Such firms tend to be egalitarian and built around more traditional lock-step model. These firms have more homogenous levels of partner contribution, meaning that partners are performing at fairly similar levels with similar types of contributions. This has become increasingly rare in the industry, as we see more and more firms composed of partners contributing at different levels, with some major business generators who are outperforming the middle and lower end of the partnership by a material degree.

In an era where large law firms are making significant upgrades to their partner pay systems and competing harder than ever to grow, more firms are growing the spread of highest-paid to lowest-paid equity partners.

 

Culture

What is it that a law firm wants to achieve with its strategy? After all strategy remains a means to an end and not a goal in itself. When asked, it might be tempting to say that the purpose is to earn as much money as possible. There is no denying that money will be an important part of the equation, but on second thought it rarely is the principal goal. Why not? Perhaps ask yourself this question: would you like to work with people you do not like or trust, if it would make you more money? Would you be happy to do large volumes of uninspiring commodity work while having a team of 30? A High volume of highly leveraged work can be very profitable after all. Most partners would not like either of these propositions. They prefer to work among people they like, trust and appreciate. Also they would want to be involved in challenging matters that will not just earn them money but help build a market leading reputation. Money is a consequence and, in a way, a conditio sine qua non, but it is not the core of the strategy.

Culture is at the core of what keeps a partnership together. Culture is also a most powerful element in achieving esprit de corps (team spirit) which is needed to achieve ambitious strategic targets. Any strategy is doomed to fail if there is no concerted effort of the partners to implement and execute.

Each and every law firm has a culture. Culture is an intangible asset, hard to catch in words and difficult to change. Once I was asked by a client what in my opinion was the most important element for a law firm to be successful. Obviously, there is no such thing, but in my experience ‘generosity’ and ‘trust’ are key ingredients. It is hard to reach the top level as a law firm while having a low trust dog-eat-dog culture, in which each partner operates as a lone wolf.

Generosity is a key component for any partnership that aspires to operate as a close-knitted team. Generosity in the context of a partnership means that partners are not primarily focused on their own personal interests, but consciously also take the interests of other partners and the partnership as a whole into account. Such attitude can take many shapes and forms. Within the context of compensation, generosity boils down to not only focus on personal financial interests. There are partners that will always try to work/manipulate the system in order to get as many mandates as possible administered under their name. This will boost their compensation and solidify their status within the firm. In general such attitude undermines team spirit and can be harmful to the growth of the firm as a whole.

Sometimes when a practice group appoints a new partner, rather than transferring some of the clients in order for the young partner to have a ‘starting capital’, they leave the young partner struggling to carve out a new niche that will not compete or cannibalise the practices of the existing partners. This is not a generous way of expanding the partnership as it will be much harder for the young partner to build a practice. Sometimes this forces the young partner to operate as a ‘subcontractor’ on mandates that are managed by more senior partners.

Perhaps generosity also implies putting firm interest above self-interest. Every partner owes the launch of their career to a firm that trained and educated the partner when still an associate. Partners owe their practice to a large extent to the brand reputation of their firm and to the quality and reputation of their fellow partners. Most partners would not be half as successful if they were to operate as sole practitioners. Perhaps acting in the firm’s interest is acting in best self-interest after all.

Trust is the other essential pillar that underpins a successful partnership. On several occasions I have asked partners if they would feel comfortable if one of their fellow partners would contact their client without explicit consent. Most were horrified by the thought of this. How come? If the partnership would be a close-knitted team where all partners would meet the same quality standards and were always to act in the firm’s interest, this should not be an issue.

In our day-to-day practice, we regularly come across partners that are quite opinionated on some of their fellow partners. They may think a partner has poor communications skills, lacks the commitment to go above and beyond to deliver outstanding advice or service. Basically, what they are saying is that some other partners do not live up to their high standards. They would not trust such partner to be in direct unsupervised contact with their client. This is exactly the lack of trust that we are talking about: lack of trust in the quality, capability and commitment of the other partner. Sometimes it is the opposite. A partner might fear the client might actually like the other partner better and work would shift as a consequence.

Like lack of generosity, lack of trust stands in the way of successful development of a firm. When partners act as individuals that operate from silos, the added value and synergy of the firm and the partnership as a whole will remain underutilised. Whereas under such circumstances some individual partners might earn more, the sum of all partners’ revenue and profitability will be lower than when there would be mutual generosity and trust.

Culture is the glue that holds a partnership together. Culture is also what makes a partnership a nice place to work or a horrible place. The culture of a firm is reflected in its compensation formula, but the compensation system cannot change the culture. When a firm is low on generosity and trust, a lock-step compensation will not fit, and even in a modified lock-step, the performance related component must weigh more than the lock-step. EWYK will probably work just fine.

When such a firm would want to adopt a strategy that requires structural cooperation between partners and practices, they could be tempted to change the compensation system by introducing components that reward cooperation. More often than not when we have seen this happen, it failed. In theory this made sense, practically it was the culture that made it fail. Money is not a substitute for generosity and trust.

A strong and collaborative culture is an invaluable asset for a law firm that should be cherished and nurtured. We have seen several examples of firms with a strong collaborative culture, high on generosity and trust, that were able to successfully integrate partners from other firms that had quite an opposite culture.

When a firm’s founder(s) is still actively present, culture is often the culture that is reflected by the founder’s style of leadership. After the founder has retired, that culture is often carried on by the management that succeeded the founder, as those were raised and educated in that culture. Over time, however, the culture might start to change as generations take over that have never known the founder and the competitive landscape changes. As a word of warning, a collaborative culture could deteriorate when a firm has become so successful that partners are starting to take success for granted. When this happens and partners become less hungry, behaving entitled and start putting demands rather than commitment, it is time to raise the alarm.

 

Lessons from Goldman Sachs

The 1999 IPO of Goldman Sachs remains the definitive case study in the emotional and cultural cost of converting a private partnership into a public corporation. Lisa Endlich's account of those years, Goldman Sachs: The Culture of Success[1], is essential reading for anyone who wants to understand what is really at stake when a professional partnership undergoes a structural transformation and why the arguments against change are so often more visceral than financial.

For 130 years before the IPO, being a Goldman partner was not a job title. It was an identity. Partners were the keepers of the firm's flame, and that sense of stewardship was reinforced by a philosophy known as 'long-term greedy', a term coined by senior partner Gus Levy in the 1960s and 70s, which held that protecting the firm's reputation and client relationships over decades mattered more than maximising short-term profit. The philosophy worked because it was structurally enforced: a partner's capital was largely illiquid and tied up in the firm, often representing their entire net worth. You could not simply sell your stake and leave. That illiquidity created a psychological state of stewardship. When everyone's personal balance sheet was intertwined, mutual accountability was not a value, it was a financial necessity.

 

The debate

The internal argument over whether to go public exposed a fault line that every professional partnership will recognise. Those in favour of the IPO argued from necessity: Goldman needed capital to compete globally, and the pure partnership model was throttling the firm's ambitions. Those against argued from identity: once partners became shareholders answerable to anonymous public investors, the relationship between the individual and the institution would shift from relational to transactional. A partner feels a moral obligation to the firm's survival. A shareholder feels a financial obligation to the quarterly earnings report. These are not the same thing, and the difference matters.

The friction was personified by the opposing figures of Jon Corzine and Hank Paulson. Corzine was the expansionist who pushed hardest for the IPO, viewing it as the vehicle for global dominance and lasting institutional legacy. Paulson had initially been the model of conservative resistance, fearing that public exposure would destroy Goldman's legendary secrecy and tribal cohesion. When Paulson eventually pivoted to support the IPO, it was not a change of heart about culture but a pragmatic concession that the firm's 'long-term greed' was being strangled by a shortage of capital. The ousting of Corzine just months before the listing was the partnership's final act of self-assertion, removing the man who had pushed them furthest from their own identity, even as they proceeded to do exactly what he had argued for.

What the IPO actually destroyed was not the firm's financial strength – it made the partners extraordinarily wealthy overnight – but the psychological architecture that had made the culture work. The shared vulnerability of illiquid capital, the sense of collective destiny, the unspoken obligation to police one another's behaviour because everyone's net worth depended on everyone else's conduct: all of this was replaced by individual liquidity and the diffuse accountability of a public company. You were no longer protecting a family estate. You were managing a rental property.

 

What this means for law firms

The Goldman story is relevant to law firms today not because many law firms are contemplating a public listing, but because the same underlying dynamic – the tension between the sovereign partner and the institutional employee, between individual liquidity and collective stewardship – is present whenever a firm considers a significant change to its ownership or compensation structure. A law firm that brings in Private Equity investment (see Chapter 15), introduces a wide nonequity tier, or dramatically expands its compensation spread is making the same fundamental trade-off that Goldman made in 1999. The financial logic may be compelling. The cultural cost is real.

 

Three lessons from Goldman are directly applicable.

First, you can monetise a partnership but you cannot easily monetise the sense of duty and tribal identity that a private partnership generates. The moment a partner begins to think of the firm primarily as a platform for their own practice rather than as an institution they are stewards of, the behavioural change is immediate and difficult to reverse. Compensation systems that concentrate reward at the top and increase the spread between highest and lowest earners accelerate this shift, regardless of the firm's stated values.

Second, the most dangerous period is the transition itself. During the Goldman debate, partners who had built the firm's capital over decades watched as the IPO gave younger colleagues the ability to cash out in a way that the stewardship model had never permitted. The sense of generational betrayal, the feeling that the relay baton was being sold rather than passed, was acute. Law firms navigating a change to their equity or compensation structure should expect the same emotional responses: not just resistance to change, but a specific grievance about the implied disrespect for those who built what is now being restructured.

Third, the Corzine-Paulson dynamic is a warning about the role of leadership in cultural change. The person who argues most forcefully for transformation may be the one who has to be removed for the transformation to succeed. Conversely, the most credible advocate for change is often the person who genuinely loves the institution and has the most to lose from getting it wrong. Managing partners proposing significant changes to compensation structure should consider carefully who is seen to own the argument and whether the messenger is undermining the message.

 

Two responses: Freshfields and Slaughter and May

The Goldman effect rippled through the Magic Circle in ways that illustrate both paths available to a partnership facing structural pressure. Freshfields Bruckhaus Deringer's 2017 partner vote on lockstep modernisation and Slaughter and May's continued resistance to any such change represent opposite responses to the same challenge, and both are instructive.

At Freshfields, the case for change was argued on competitive grounds: the pure lockstep made it impossible to hire star lateral partners in New York, and the firm's global ambitions were being constrained by a compensation ceiling that US rivals did not face. The vote passed. Partners agreed to widen the equity ladder significantly, introduce a second tier for lower-margin practices, and give management discretionary gates at which partners could be held or moved down. The emotional consequence was predictable: the sense of being a brotherhood of equals, where every partner at the same seniority earned the same regardless of their practice's profitability, was replaced by a visible and increasingly contested hierarchy. The collegiate spirit that the lockstep had protected did not survive the modification intact.

Slaughter and May made the opposite choice and has maintained it. Partners still eat lunch together and retrieve their napkins from individual pigeonholes at Bunhill Row, a physical expression of an egalitarian philosophy that is not merely sentimental. By keeping the lockstep pure, the firm removes the financial incentive to hoard clients or compete with colleagues. A partner can refer a major client to someone better placed to handle it without experiencing any reduction in their own compensation. The result is a level of mutual trust that merit-based firms find difficult to replicate. The firm pays for this with constraints: it does not compete in the global arms race for scale, and it has been consistently the last of the Magic Circle to raise associate salaries, a position that is becoming harder to hold as London pay wars intensify.

Neither choice is obviously right. What the contrast between the two firms makes clear is that a compensation system is not a technical instrument that can be adjusted in isolation. It is the financial expression of a set of beliefs about what kind of institution the firm wants to be. Change the system, and you change the beliefs, or you discover that the beliefs were never as widely held as the leadership assumed.

 

The core lesson

The Goldman IPO is sometimes read as a cautionary tale about greed overcoming principle. It is more useful to read it as a story about the structural conditions that make certain kinds of professional culture possible. Long-term stewardship, mutual accountability, and the willingness to subordinate personal interest to institutional health are not personality traits. They are behaviours that compensation systems either support or undermine. Goldman's partners did not become less principled after the IPO. They became differently incentivised, and their behaviour followed. Law firm managing partners who believe that culture is strong enough to survive any compensation structure should reflect carefully on that precedent.

 

Strategy – Compensation – Culture

As said at the outset of this chapter, strategy, compensation and culture are closely related. From a business perspective, a collaborative firm will be more successful than a collection of individuals operating under one brand name. When teamwork and collaboration are essential to the strategy, this needs to be reflected in the compensation. Compensation by itself is insufficient to create a collaborative partnership. Culture is the glue and also the catalyst. Law firms that have a higher level of generosity and trust among the partners have a higher likelihood of becoming/remaining successful in the market. Firms that lack such a culture are limited in their potential. In the next chapter we will zoom in on how to nurture, develop or change the culture of a firm.

 

The client's view

Throughout this chapter the relationship between strategy, culture and compensation has been examined from the inside: how the formula distributes money, how it shapes behaviour, how it reinforces or undermines the culture the firm is trying to build. There is a perspective that is consistently absent from these discussions inside law firms, and its absence is telling. The client's view of how a firm's compensation system operates is rarely considered when that system is being designed. It should be.

This omission is understandable. Clients do not sit in compensation committee meetings. They do not know whether their primary partner is on the high or low end of the firm's internal spread, or whether the cross-selling conversation that never happened was the result of a credit structure that made it unattractive. What clients do know, with considerable precision, is the quality and consistency of the service they receive. They notice when the partner who knows their business moves. They notice when the advice they get from one part of the firm seems disconnected from what they are hearing from another. They notice, over time, whether the firm feels like an institution that knows them or a collection of individuals who service different parts of their legal needs without any of those individuals taking responsibility for the whole. These observations are the downstream consequences of compensation design. Law firms simply do not attribute them that way.

The most visible manifestation is what happens when a partner moves. The standard internal framing is a retention problem, a compensation problem, a culture problem. From the client's side the experience is different. For some clients the departure of their primary contact is a straightforward disruption that they will absorb, adjust to, and move on from. For others it is the trigger for a review of the entire relationship. Which response the client has depends on factors that most law firm compensation discussions treat as given rather than as variables the firm can influence through its own design choices.

The first variable is the nature of the matter. As the Value Matrix© makes clear, at the high-stakes end of the market, the rates a firm charges are not the primary decision factor for the client. A general counsel managing a transformative acquisition, a bet-the-company litigation, or a regulatory crisis is not optimising for cost. They are optimising for certainty of outcome, and for the trusted judgement that gives them confidence in a situation where the consequences of error are severe. When the stakes are at that level, clients will follow the partner. They will absorb the procurement process of engaging a new firm. They will accept the rate adjustment that may come with the move. They will explain the change to their board if necessary. The relationship is personal and the lawyer's judgement is what they are buying. No institutional loyalty overrides that.

The second variable is the depth of the firm relationship. At the other end of the spectrum sits a client that has worked with a firm across multiple practice areas, multiple jurisdictions and multiple partner relationships over many years. For this client the firm is not a vehicle for accessing a specific individual. It is an institutional counterpart with accumulated knowledge of their business, their risk appetite, their internal governance and their history of decisions. When a partner moves, this client does not follow. The switching cost is not merely logistical. It is the loss of institutional memory that cannot be transferred and that took years to build. This client may express loyalty to the firm in terms that sound cultural or relational. The underlying mechanism is more structural: the firm has made itself genuinely difficult to replace because it has woven itself into how the client operates.

Between these two poles sits the majority of significant client relationships, and it is here that the connection to compensation design is most direct. Most large clients are neither purely personal relationships nor purely institutional ones. They have a primary contact who is their main point of trust. They also have relationships with other partners and practice groups that have developed over time. The question of whether they follow the partner if they leave, stay with the firm, or take the opportunity to run a competitive review depends heavily on how embedded those secondary relationships are. And that embeddedness is not accidental. It is the result of whether the firm's compensation system incentivised cross-practice collaboration or made it economically invisible. A credit structure that rewards origination but does not compensate the partners who deepen a relationship across practice groups will produce a client base where personal relationships are strong but institutional ones are thin. When a key partner moves, those clients go with them. A structure that rewards cross-selling and collaborative service will over time produce clients who are harder to move because the value they receive from the firm as an institution exceeds what any single partner could replicate independently.

This is the strategic argument for compensation design that firms rarely make explicitly. The debate about origination credits, collaboration bonuses and cross-selling incentives is almost always conducted in terms of what it does to partner behaviour and firm revenue. It should also be conducted in terms of what it does to the client base over time. A firm that has consistently rewarded individual origination over institutional relationship-building will find, when lateral movement accelerates or key partners retire, that its client relationships are more portable than it understood. A firm that has built its compensation around the long-term deepening of client relationships will find that its most valuable clients are the ones least likely to leave. This is not a cultural observation. It is a structural consequence of how the compensation system has been allocating credit and reward for the past decade.

The practical implication for any firm reviewing its compensation model is to ask a question that is almost never on the agenda: what does our current credit structure tell our clients? Not what it tells our partners, not what it signals about our values, but what it produces in terms of the actual quality and continuity of service that clients experience over time. The answer will often be uncomfortable. Firms that have allowed origination credit to calcify around long-standing individual relationships, with no meaningful incentive to share access or build secondary contacts, have created a client base that is hostage to the health and continued tenure of a small number of individuals. Firms that have built genuine institutional depth, where multiple partners carry meaningful relationships with the same client, have created something much more durable. Compensation design is one of the primary levers through which that depth is either built or prevented. The client never sees the formula. They live with its consequences.

 

Hypothetical Example: PE investment

When private equity enters a partnership, the entire structure has to renegotiate itself. The strategy shifts from income preservation to valuation maximisation. The partnership culture, built on consensus, annual distributions and the comfortable fiction of equality meets a shareholder mandate for efficiency, scalability and an exit. What follows is not a management challenge. It is a stress test of the relationship between strategy, culture and compensation. Any weakness in that relationship will show up fast, and the chapters that follow explain why.

The strategic pivot under private equity is focused on building enterprise value rather than merely increasing profit per partner. In a traditional model, partners are rewarded for their individual craft and their specific book of business. Under private equity, the strategy is to industrialise that craft, using capital to invest in technology, practice management, and aggressive lateral hiring that creates a platform capable of functioning independently of any single partner. This strategy requires a firm to operate like a corporation, with centralised decision-making and a focus on EBITDA growth. To achieve this, the culture must undergo a painful evolution from sovereignty to accountability. Partners who were once the undisputed kings of their own practices must now answer to a board and align their workflows with standardised firm-wide systems.

The Goldman Sachs IPO of 1999, examined in detail in Chapter 11, provides the defining case study of what happens when a private partnership converts to a corporate model: the culture of collective stewardship that made the institution exceptional does not survive the transition intact.

The mechanism for achieving this change is almost always found in the total overhaul of compensation. In a private equity-backed firm, the annual harvest of all profits is replaced by a model that prioritises equity over cash. Partners typically receive a competitive salary and a performance-based bonus, but a significant portion of their wealth is tied up in equity that only realises its true value during an exit such as a sale to another private equity firm or an IPO. This compensation model is the primary tool used to bridge the gap between the old culture and the new strategy. By making partners shareholders in the enterprise, the firm forces a culture of collaboration. If a partner hoards a client or refuses to use the new firm-wide AI platform, they are not just being difficult, they are actively devaluing the equity that their colleagues are counting on for their retirement.

The bandwidth for this transformation is largely determined by the age and career stage of the partnership. Younger partners often have a higher bandwidth for change because they are attracted to the second bite of the apple, the prospect of a massive payout in five to seven years that could far exceed a lifetime of traditional partnership draws. Older partners, however, may feel that the cultural contract they signed decades ago has been breached. They often resist the move toward data-driven accountability and the loss of the collegiate feel of the firm. Successful firms manage this by using the private equity capital to buy out the most resistant senior partners, effectively clearing the path for a new generation that is comfortable with a more corporate, performance-oriented culture.

The private equity model proves that compensation is the ultimate arbiter of culture. You cannot have a corporate strategy and a partnership culture if your compensation model still rewards individual silos. To successfully transition, the firm must align all three: the strategy of building a scalable asset, the culture of corporate discipline, and the compensation of equity-based rewards. When these three are in harmony, the firm moves from being a collection of practitioners to a powerful, unified market force. When they are misaligned, the firm risks a cultural organ rejection that can lead to the exodus of its most valuable talent.

 

The difficulty of change

Every chapter in this book has, at some point, arrived at the same implicit destination: the compensation system the firm has is probably not the one it would design from scratch today, and changing it is harder than designing it. This is worth addressing directly, because it is where the analytical value of a book like this one meets its limit.

Compensation reform fails in law firms with remarkable consistency, and the reasons are structural rather than accidental. The first is that the partners who benefit most from the existing system are the ones with the most influence over any proposed change. A firm that has drifted toward an aggressive performance-weighted model over a decade has, in the process, promoted and retained the partners who thrive under that model and lost those who did not. Asking that group to redesign the system in favour of greater collectivism is asking them to vote against their own interests. Some will do it, out of genuine strategic conviction. Most will find reasons why the existing system is more defensible than the proposed alternative.

The second reason is the reference point problem established in Chapter 2. Partners experience compensation changes primarily as gains or losses relative to their current position. A reform that is designed to be fair in its outcomes will still produce a significant number of partners who are net losers relative to where they were, and those partners will feel that loss more acutely than the winners feel their gain. The political coalition against change is almost always larger and more motivated than the coalition in favour of it, even when a clear majority of the partnership would benefit from the new system over time.

The third reason is sequencing. Compensation reform cannot be separated from culture, strategy and governance. A firm that tries to change its compensation formula without first establishing alignment on what the firm is trying to be will find that the new formula produces different behaviour than intended, because the culture it is landing in has not changed. The formula is the last thing to change, not the first. This is counterintuitive, because the formula is the most concrete and visible element of the system, and it is tempting to reach for it first. But a new formula imposed on an unchanged culture will be worked around, gamed and abandoned, leaving the firm in a worse position than before it started.

None of this means that compensation change is impossible. Firms do it successfully, and the ones that manage it well tend to share a few characteristics. The managing partner or managing board has built sufficient political capital and trust within the partnership to sponsor a process that will be uncomfortable. The diagnosis of what is wrong with the current system is specific and evidence-based, not vague and rhetorical. The proposed change is framed as a strategic necessity rather than an ideological preference, with a clear line drawn between the current system's incentive structure and the firm's stated ambitions. And the process is transparent: partners understand what is being changed, why, and what the implications are for their own position, even when those implications are not favourable.

This book is designed to support that process at the stage where it most often breaks down: the stage of building shared understanding. In our experience working with firms across every major legal market, the single most common reason compensation reform fails before it starts is that the partnership cannot agree on what the current system is actually doing. Partners on the winning side of the existing formula have one account of why it is fair. Partners on the losing side have another. Neither account is entirely wrong. The gap between them is not primarily factual. It is interpretive and closing it requires a common analytical framework and a willingness to look at the evidence honestly.

The gap between what firms say they value and what their compensation systems actually reward is well documented. Research indicates that approximately four in ten high-performing lawyers report their firm’s compensation model is only moderately or poorly aligned with its strategy. Firms that achieve genuine alignment between culture, strategy and compensation see lawyer satisfaction increase substantially alongside a meaningful reduction in flight risk. The implication is straightforward: compensation reform is not primarily a technical exercise. It is a cultural and strategic one. The firms that succeed at it are not those that found the cleverest formula. They are those that were honest enough about what the current system was actually doing, and disciplined enough to change it.

The analytical framework is what this book provides. The willingness to use it is something only the partnership can supply. What happens after the conversation is a different kind of work, and one that is necessarily tailored to the specific firm, its history and the people in the room. This book is not a substitute for that work. It is a preparation for it.

 

[1] Lisa Endlich, Goldman Sachs: The Culture of Success (Little, Brown & Company, 1999; UK edition: Warner Books, 1999).