Elite Wall Street Firm Davis Polk Moves to Modified Lockstep Pay

Davis Polk & Wardwell, one of the oldest and most respected firms in the country, is moving to a modified lockstep compensation structure for its partners as it looks to grow in an increasingly competitive legal market.

Prior to the firm’s decision, which was announced to the firm Thursday, Davis Polk operated under a strict-lockstep model, which compensates partners based on seniority. The shift to this new structure will allow the firm the flexibility to pay more competitive salaries for talent, both internally and when the firm is looking to hire from the outside.

“The firm is strategically focused on measured growth and we are cognizant of the market environment in which we find ourselves,” said Davis Polk managing partner Neil Barr in an interview with Bloomberg Law.

“We ultimately concluded that our existing compensation structure, which paid partners solely on the basis of seniority, was simply not compatible with our strategic designs going forward.”

Barr was elected as the firm’s managing partner in 2019 succeeding Thomas Reid, who now serves as chief legal officer at Comcast Corp. The Wall Street firm currently has 158 partners, all of whom hold equity in the firm.

Davis Polk was just one of a few elite New York firms to have a strictly-lockstep structure, along with Cravath Swaine & Moore, Cleary Gottlieb Steen & Hamilton, and Debevoise & Plimpton. Those firms have typically been some of the most profitable, with partner compensation to match, but a seniority-based system can also be limiting when it comes to attracting talent.

Last year Davis Polk brought in $1.4 billion in gross revenue with profits per equity partner of $4.5 million, placing it sixth in highest partner profits behind Wachtell Lipton Rosen & Katz, Kirkland & Ellis, Paul Weiss Rifkind Wharton & Garrison, Sullivan & Cromwell, and Quinn Emanuel Urquhart & Sullivan, according to Am Law 100 figures.

The wheels for the change were set in motion in January at Davis Polk’s annual partners meeting where Barr announced they would be conducting a review of its compensation system this year. The firm then ran an inclusive, consultative process that resulted in its adoption of a modified lockstep compensation structure, Barr said.

“We would like to be a more growth-oriented platform and bring on and promote lawyers that can continue to support our clients in our core practices,” he said of the new system. Last month the firm brought on longtime Gibson Dunn & Crutcher antitrust partner D. Jarrett Arp in Washington, who was the firm’s first lateral hire of 2020.

Davis Polk has not traditionally turned to lateral hires to grow, relying instead on its internal pipeline, which Barr said it will continue to do despite the pay structure change.

“While we’ll always have our eye on the lateral market, and this will be a move that will facilitate our ability to more effectively compete for talent in that market, the primary source of our partner pipeline going forward will continue to be our associates and counsel who we promote to partner,” Barr said.

Fight for Talent

In recent years, the escalating war for top legal talent has forced many firms with lockstep models to fend off competition from firms that can tempt attorneys with higher compensation earlier in their careers.

Paul Weiss, which also operates under modified lockstep, poached veteran Cravath dealmaker Scott Barshay to head its global M&A practice in 2016 for a reported $10 million a year.

In 2018, Kirkland & Ellis added Cravath senior partner and former leader of its litigation department Sandra Goldstein for a reported $11 million a year for five years, plus a signing bonus. Earlier this year Kirkland also poached Wachtell dealmaker Edward Lee in New York, a rare lateral loss for the firm.

Roughly five years ago Simpson Thacher & Bartlett famously broke with its lockstep model to bring back partner Joshua Bonnie ahead of a proposed move to Kirkland, which had already raided the New York firm prior to that decision. Debevoise and Cleary have also reportedly reviewed their lockstep compensation models.

For Davis Polk, the decision was made from a position of strength. “We are fortunate enough to be having a good year,” Barr said.

The firm has worked on roughly $140 billion in M&A deals so far in 2020, including Telefonica S.A.’s merger with Liberty Global plc, Teledoc Health Inc.’s $15.1 billion acquisition of Livongo Health Inc., and Morgan Stanley’s $14.5 billion acquisition of E*Trade Financial Corp.

Davis Polk’s investment grade debt practice has been the busiest among all law firms in a year that has seen an overall boom in area, with more than 65% more debt issued so far this year than in 2019, according to data compiled by Bloomberg.

Davis Polk advised the most debt issuers and managers on bond issues through August, according to the data.

When law firm compensation systems change, especially when they’ve been in place for several decades, there are questions about the effects on a firm’s culture, but Barr isn’t concerned.

“I think the touchstone for our partnership in evaluating the range of potential options and ultimately landing on this one is our comfort that not only could we maintain, but actually reinforce our culture and advance it with the model that we will have,” Barr said.

Roy Strom contributed to this report.