4/9/2018 The dawn of the superstar lawyer

The Big Read Law

The dawn of the superstar lawyer

As top performers are offered pay equal to bankers and hedge fund managers, is the lockstep system under threat?

James Fontanella-Khan, Sujeet Indap in New York and Barney Thompson in London 8 HOURS AGO

Scott Barshay had just closed out the finest year of his career. The acclaimed corporate lawyer had
advised on roughly $300bn worth of transactions in 2015, most notably AB InBev’s $103bn
takeover of rival brewer SABMiller. In the process he generated about $100m in fees for his law
firm, Cravath, Swaine & Moore, which ranks among the most prestigious in America.

Just four months later he quit. Frustrated with Cravath’s age-old system of paying its partners
according to longevity and seniority versus sheer output, Mr Barshay left the only firm he had ever
worked at to move to a New York rival. Paul, Weiss, Rifkind, Wharton & Garrison agreed to pay
him more than $10m a year, a package worthy of his thick book of business — which includes blue-
chip names such as Qualcomm and Kraft Heinz — in the hopes he could turbocharge its
dealmaking practice.

The decision shook the legal industry. Becoming a partner at a firm like Cravath, with access to the
global corridors of power, from business to politics, is considered the pinnacle of the legal industry.
The so-called “white shoe” firm tried to downplay Mr Barshay’s 2016 move, arguing that its culture
and history could weather a one-off departure. But it has turned out not to be an isolated incident.
In the past year, two more partners, both younger than Mr Barshay, have left for Kirkland & Ellis,
another rival with an aggressive strategy to lure top lawyers with big sums.

Lawyers are hardly poorly paid at Cravath: first-year juniors reportedly start at $180,000 a year
while the equity partners earn an average of about $4m a year, depending on business flow. But a
group of firms is determined to use remuneration as a means to secure the services of superstar
lawyers to disrupt rivals who have dominated the industry, in some cases, for centuries. The
behaviour has created a dynamic where top lawyers are now able to command the kind of annual
salaries associated with leading investment bankers, hedge fund managers and even top athletes.

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The defections threaten the cradle-to-grave culture at venerable firms, such as Cravath and its
peers in the US as well as firms like Slaughter and May in Britain. Behind each of these is a
payment system known as the lockstep. The system is intended to guarantee collegiality among
partners.

For instance, if a takeover specialist has a client who is looking for a lawyer to deal with an
antitrust issue, that partner is more likely to recommend a colleague who is better versed in the
subject if his or her profits will not be affected.

The antithesis of this approach is a model evocatively branded “eat what you kill”: after sharing
certain costs, partners keep most or all of what they have generated themselves. In between the two
is the “modified lockstep” — profits are shared partly according to seniority but with some way of
rewarding partners who are the best performers and the most valuable to the firm, both financially
and reputationally.

“It’s becoming more and more difficult to retain star talent in a purely lockstep model,” says Brad
Karp, chairman of Paul, Weiss, which has a modified lockstep. “You’re seeing sums that rival sports
free-agent compensation arrangements being offered to star partners at corporate law firms,” he

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adds. And if lawyers work in a system where older partners make three times as much simply by
virtue of having been there longer, why would they not head to a firm that appreciates their
talents?

This is more than an arcane question of how lawyers get paid. Cravath is a small firm by today’s
standards but it is still an elite one, whose status has been predicated on skill in complex, high-
stakes takeovers and trials. Across the world, firms are trying to figure out how to survive — go
global, stay local, be boutique. It is an intensifying battle to see which will be left standing in a
mature, low-growth market.

Scott Barshay, left, who left Cravath for Paul, Weiss, Rifkind, Wharton & Garrison, with Lazard chief executive Kenneth Jacobs © Bloomberg
The origins of lockstep compensation, which several elite law firms have adopted at one time
or another over the past two centuries, stem from the Cravath system created by Paul Cravath, who
in 1883 represented George Westinghouse against Thomas Edison over the patent for the
lightbulb.

Every summer a large group of top law students is hired to support Cravath’s senior partners.
Fewer than 10 per cent will make the partnership, perhaps after eight or nine years. Working up to
100 hours a week, the junior lawyers rotate across groups and projects to maximise knowledge and
versatility. Clients “belong” not to any particular lawyer but to the firm as a whole.

For those who stay the course to become Cravath partners, it is a lifetime career that comes with a
guaranteed annual salary of several million dollars. Underscoring the “lifetime” part are traditions
such as the Cravath Walk: every partner is entitled to a procession of past and present partners at
their funeral, after which the assembled lawyers chant: “The partner is dead, the firm lives.”

In its 200-year history, Cravath has almost never made “lateral” hires from rival firms. And while
some partners would leave for government, to become bankers or a general counsel in Fortune 500
companies, it was until recently practically inconceivable for anyone to voluntarily depart for
another law firm.
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“The Cravath system is designed to develop our talent organically, ensuring consistently high
quality throughout the firm while fostering a collaborative and client-centred culture that enables
us to deliver the best advice to our clients,” Cravath said in a statement. “We remain confident that
our model is the right one for our business, our people and the clients we serve.”

Paul Cravath with daughter Vera in about 1913

When Mr Barshay left Cravath in 2016, many at the law firm argued that losing their top
dealmaker was a sacrifice worth making to protect its sacrosanct culture. Mr Barshay is calm and
unflappable but he is also ultra-competitive; not everyone at Cravath considered him a team
player.

But then two more partners followed him out the door: Jonathan Davis, 35, in 2016 and Eric
Schiele, 43, this year, both of whom were seen as future pillars of the firm. “These guys were the
next generation of leaders, their departure is worse than Barshay leaving,” says a person close to to
Faiza Saeed, Cravath’s presiding partner.

Like another star junior partner, Sarkis Jebejian, who left Cravath in 2012, Messrs Davis and
Schiele moved to Kirkland, a Chicago-based firm whose historic strength was in litigation (Kenneth
Starr, the special prosecutor in the Bill Clinton-Monica Lewinsky case, was a long-time partner).
Kirkland has methodically poached deal lawyer talent in both New York and London by offering
rich pay and allowing partners to grow their practice without the constraints of the lockstep pay
model.

Kirkland’s firepower became abundantly clear just before Christmas when David Higgins, a top
private equity lawyer at Britain’s elite “magic circle” law firm Freshfields Bruckhaus Deringer in
London, jumped ship for a reported $10m a year. For a UK lawyer that is a great deal of money —
perhaps four times as much as the best-paid equity partner at a top 10 City firm.

But what really rankled in that case was that Freshfields had overhauled its lockstep model,
allowing top fee generators to make as much as five times junior partners, specifically for star
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performers like Mr Higgins. Yet no sooner was the new system in place than he left. Freshfields
could pay Higgins more — but not as much as Kirkland. (He escaped the furore over his defection
by disappearing to Bhutan for two weeks.)

As news spread of higher salaries at Kirkland, Latham, Skadden Arps, White & Case and others, the
hungrier lawyers in City firms started to ask whether senior partners were pulling their weight.
“Younger partners were looking at their older colleagues at the top of the lock-step and questioned
how they justified their bigger slice of the equity pie,” says Stephen Rodney, chief executive at legal
recruiter Fox Rodney Search. “[US firms] were able to attract people by paying them a lot more
money.”

The risk for the big-spending US firms is they burn through dangerous amounts of cash on
lawyers. “History is littered with the corpses of law firms that overspent on lateral hires, so there is
always a question of sustainability,” says Steve Cooke, senior partner at Slaughter and May, the UK
firm closest in ethos to Cravath. “It’s very hard to hire multiple stars from the outside without
damaging the internal ecosystem, if of course the firm has a good one in the first place.” Last year,
Slaughters hired a pensions expert from Herbert Smith Freehills; it was the firm’s first hire at
partner-level in 128 years.
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The ghost at this particular feast is the defunct US firm Dewey & LeBoeuf. After several years of
rapid expansion, the firm went bankrupt in 2012, torpedoed by lavish contracts for top rainmakers
when clients were cutting back on legal work after the 2008 financial crisis.

Law firms in numbers

© Pascal Perich/FT

$10m
Reported salary of David Higgins, Freshfields partner after move to Kirkland

2,500
Billable hours per year lawyers at some non-lockstep firms have to produce

$3bn
Annual revenue of the largest firms, achieved by the likes of Kirkland & Ellis and Latham &
Watkins last year

The likes of Cravath, Debevoise, Cleary Gottlieb Steen & Hamilton, Wachtell and Slaughter and
May are determined to maintain the lockstep model but recognise it requires conviction. “Lockstep
is not easy. It’s an affirmative choice that requires a shared sense of purpose,” said Michael
Gerstenzang, the partner leading Cleary.

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“For lock-step to work you need three things: first, it must be really hard to make partner; second,
partners who are not producing need to go; and third, everyone needs to be making enough
money,” says an M&A banker who used to work at one of the lock-step firms.

Lockstep firms also like to tell horror stories about life at hard-charging, eat-what-you-kill firms
where partners vie with each other for clients. Instead of producing up to 1,800 billable hours of
work a year (work a lawyer can charge for), some are said to demand as much as 2,500 billable
hours. “There is a perception of pure lockstep that it is a kinder environment but sometimes there
is a huge amount of pressure — you’re either in or you’re out,” says Mr Rodney. “In merit-based
firms it is true you can be brought down — but at least you can be brought up again.”

There is no doubt that working for the elite London and New York firms still has enormous cachet.
According to Jeffrey Lowe, global practice head at the legal recruiters Major, Lindsey & Africa,
defections may continue but such prestigious firms will retain their advantage.

“At a Cravath or a Sullivan & Cromwell, for example, you will always be perceived to be at the top of
the food chain. There will always be people at the top of the food chain who could make more

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money somewhere else. But a lot people don’t measure themselves in dollars — it’s about where
you went to school, where you summer, what firm you work at. It’s all part of a persona.”

Still, Cravath understands the world is changing. Multiple sources close to the firm say it is
considering having partners rotate among clients so no single attorney “owns” the relationship. It
has also convened a committee to examine its compensation system, instituted a social media
strategy and made other changes to ensure its appeal to a new generation of young, ambitious
lawyers.

Additional reporting by Arash Massoudi

The new hierarchy New York and London firms no longer

dominate
The departure of some of their most talented younger partners is not the only indication that the
old order in the legal world is fraying around the edges. Once the New York and London firms
were considered the foremost outfits. Today, many of the richest firms, and therefore the hottest
destinations for new lawyers, are headquartered in Chicago — Kirkland & Ellis and Sidley Austin
— or Los Angeles — Gibson, Dunn & Crutcher and Latham & Watkins.
Kirkland recently became the highest grossing law firm in the world with 2017 revenue exceeding
$3bn; it beat Latham & Watkins, which only days previously had itself become the first firm ever to
break the $3bn mark.
These firms are highly profitable because they have focused on private equity and hedge fund
clients whom the top New York firms have eschewed in favour of the Fortune 500 and Wall Street
banks. Their bet is that this new crop of deal-focused firms can now also successfully compete for
those corporate clients that have traditionally gone to the likes of Cravath, Sullivan & Cromwell,
Wachtell, Lipton, Rosen & Katz and Davis Polk.
The younger lawyers who have moved firms have not been motivated solely by the money. Some
of those who left lockstep firms say that at less hierarchical institutions they can do more exciting
work and assume leadership roles at a younger age. The former chair of a top US firm says that in
several years of luring away City lawyers, money had never been the sole issue: “Magic circle
partners look at the platform of the top American firms and wonder if UK firms will ever crack the
US market.”
A spokesperson for Kirkland & Ellis says: “At Kirkland, young partners are not limited in their
development by hierarchy or any other structural obstacles.”

Copyright The Financial Times Limited 2018. All rights reserved.

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