Davis Polk & Wardwell’s decision this week to modify its lockstep compensation formula shows the Big Law talent war is alive and well in the industry’s highest echelons, despite moves by some law firm leaders to batten down the hatches due to the coronavirus pandemic.
The change at Davis Polk comes amid a record-shattering year for the Big Law capital markets practices, an area where Davis Polk has been especially successful.
It also highlights how the pandemic has created winners and losers even among the corporate lawyer set.
Firms that are on top now can further cement their positions by using their war chest to hire lawyers from firms that are cutting back, a strategy that Davis Polk may be embracing after a long history of largely ignoring the lateral partner market. Its move will also help it keep its most important lawyers who may have been able to fetch higher paychecks at non-lockstep firms.
“Another nation has joined the nuclear weapons club,” said Bruce MacEwen, a consultant to law firms at Adam Smith Esq.
Davis Polk was the sixth most profitable law firm in the country last year on a per-partner basis, according to AmLaw data, but its high-end partner compensation had remained hemmed in—relative to its peers—thanks to a longstanding seniority-based payment formula.
Only a handful of Wall Street firms, including Wachtell Lipton Rosen & Katz, Cravath Swaine & Moore, and Debevoise & Plimpton, still strictly follow that system, which was meant to reinforce a law firm’s culture and took hold when clients were more loyal to law firms than individual lawyers.
Coming and Going
But client loyalties have shifted and lockstep firms have been vulnerable to aggressive recruiting efforts popularized by Kirkland & Ellis, the country’s largest law firm by revenue and one of its most profitable.
Kirkland has poached a number of younger partners from Cravath, Simpson Thacher & Bartlett, and even Davis Polk, in the case of capital markets star Sophia Hudson. Kirkland’s recruitment efforts this spring reached the vaunted partnership at Wachtell with the hire of Edward Lee.
Mark Jungers, a veteran legal recruiter at Lippman Jungers LLC, said Davis Polk’s compensation shift can be read as a response to increasingly aggressive hiring practices.
“The ‘Kirkland Effect’ is still in full force and this is a defensive move to fight off Kirkland and the small number of other firms that are willing to pay marquee, high-performing people at what is the new market rate,” he said.
Davis Polk’s average equity partner earned $4.5 million last year, according to AmLaw data. Its partners earn in a range from around $2 million at the low end to roughly $6.5 million at the highest end, Jungers said. Davis Polk did not respond to requests for comment on those figures.
While $6.5 million is a high-end salary, it’s not top-of-market. Big Law partners have been lured by paychecks north of $10 million. Still, Davis Polk has been fairly successful in retaining its lawyers.
Only a handful of partners have moved in recent years. They include Avi Gesser, who joined Debevoise in January; Sarah Solum, who moved to Freshfields in July; Jean McLoughlin, who joined Paul Weiss last year; and John Butler and Rachel Kleinberg, who moved to Sidley Austin last year and in April, respectively.
Davis Polk has been only a marginal player in the lateral market, making its first and only hire of 2020 in August by bringing aboard Gibson Dunn & Crutcher antitrust lawyer D. Jarrett Arp. The firm hired Michael Hong from Paul Weiss in 2018 and Adam Kaminsky from Fried, Frank, Harris, Shriver & Jacobson in 2019.
Success Begets Success?
But there is some indication that the shift away from strict lockstep will make Davis Polk more active in the Big Law talent battle.
In announcing the compensation adjustment, Davis Polk managing partner Neil Barr, said the firm wanted to be more “growth-oriented.” He also said the move will “facilitate our ability to more effectively compete for talent,” while noting the firm’s primary source of new partners will remain its homegrown associates and counsel.
Jeff Grossman, head of business development and client strategy at Citi Private Bank’s Law Firm Group, last month forecast a busy lateral market in the second half of the year. The activity will be driven by the fallout from law firms’ diverging results during the pandemic, he said. Big firms fared better than small firms, with the 50 largest by revenue growing their top line by 7.1% in the first half of the year, compared to 3.4% for the lower half of the AmLaw 100, Citi said.
Davis Polk may be a prime example of out-performance.
The firm has been among the largest beneficiaries of a boom in capital markets work caused by the financial stress brought on by the pandemic. Growth in that practice has helped a number of firms avoid the salary reductions and austerity measures others have taken to ride out a downturn.
Davis Polk’s practice representing both issuers and underwriters in investment-grade bond issues has been the busiest among all law firms during a record-breaking year for that market. The firm’s combined practice so far this year already surpassed the volume it handled all of last year by nearly 25%, according to data compiled by Bloomberg.
It is also busy in the high-yield debt market, which has seen record levels of new issuance.
The firm’s North American IPO practice is also leading the way among law firms. Davis Polk has handled deals valued at nearly $15 billion total, according to data compiled by Bloomberg. The firm has worked on the second-most IPOs of any firm at 26. All of last year, Davis Polk worked on 30 IPOs valued at nearly $18 billion, the data showed.
Janet Stanton, a principal at Adam Smith Esq., said Davis Polk’s move away from lockstep could be viewed as the firm taking more of an offensive posture that could allow it to bolster its leading position.
“It’s simply another arrow in their quiver in what is increasingly a battle for talent,” Stanton said.