Davis Polk Leaps Into Lateral Hiring Seen as Re-Shaping Industry

Davis Polk & Wardwell plans to increase lateral partner hiring and boost pay for top lawyers, seizing on an 18-month period that firm leader Neil Barr said will shape the law firm market for years to come.

The Wall Street firm, whose clients include Morgan Stanley and Meta Platforms Inc., is targeting hires in London and Northern California and in its asset management practice, Barr said. The firm will boost the high end of its pay scale among other compensation changes still being worked out, he said.

“While we have not always prioritized the lateral market, this is a tremendous opportunity for us,” Barr said in an interview. “So we will be leaning into the market to try and advance our strategic objectives.”

The moves promise to intensify competition for talent among the largest law firms, where Davis Polk ranks 20th based on 2023 revenue of more than $2 billion, according to American Lawyer data. Its average equity partner earned $6.2 million last year, eighth most among the 100 largest firms.

Barr said he expects to see significant moves across the lateral partner market over the next 18 months. Firms are modernizing and getting better at taking and managing risks, he said. They can communicate more clearly-defined strategies to lateral partner candidates and clients, which leads to more partner moves.

“Consolidation is customarily used to describe a merger, but I think we may look back and conclude this is a time of industry consolidation that’s occurring through lateral activity rather than mergers,” Barr said. “You’re seeing partner movements gravitate toward a handful or two handfuls of firms, and in that respect I think that’s very much going to shape the industry.”

Davis Polk’s Wall Street rivals have also been adjusting pay and ramping up hiring. Cravath, Swaine & Moore adopted a non-equity partner tier in which lawyers are paid annual salaries rather than getting a share of profits, Bloomberg Law reported in November. Paul, Weiss, Rifkind, Wharton & Garrison is also implementing such a tier, the American Lawyer reported in March. Those moves are designed, in part, to help firms pay their top partners more.

Davis Polk has no non-equity partners. The firm’s 174-lawyer equity partnership last year is roughly the same size as competitors Sullivan & Cromwell, Paul Weiss, Milbank, Weil, Gotshal, and Cleary Gottlieb, according to AmLaw data.

Internal Dialogue

Barr has spent his entire career at Davis Polk. He joined as an associate in 2000 after getting his law degree from Georgetown University.

When managing partner Thomas Reid took a job as Comcast Corp.'s general counsel in 2019, the firm handed the reins to Barr, then 44, who led Davis Polk’s tax department.

Under his watch, the firm has maintained its reputation as a top banking and finance shop, regularly leading league tables for law firms advising on initial public offerings and corporate bond deals. Its M&A practice is well-known for large public company deals, including the largest such deal last year, when it represented Exxon Mobil Corp. in its $59.5 billion acquisition of Pioneer Natural Resources.

Last August the firm inked what at the time was Manhattan’s biggest office lease of 2023. The firm signed a 25-year extension, adding another 30,000 square feet to its current space at 450 Lexington Ave.

But arguably Barr’s biggest change came the year after he took over, when Davis Polk moved away from a strict lockstep compensation model that paid partners by seniority.

It was a nervous moment for him and the firm’s partners. “We made it through that change well because we trust each other, and I think we did a nice job as an institution coming together,” Barr said.

Most firms that used a lockstep model have since adjusted it to offer larger pay packages to their most important partners. Firms with more flexibility on pay have helped usher in an era where Big Law partners can be paid like professional athletes, taking home as much as $20 million a year.

Davis Polk partners are currently in an ongoing dialogue about additional changes to its compensation structure that will be formalized “in the next couple of months,” Barr said.

A move to increase the top end of the firm’s pay spread would be similar to what other firms have done after leaving a historic lockstep structure. The spread between firms’ highest- and lowest-paid partners has generally been increasing, with a report last year saying it stood at 9.8-to-1 among the 100 largest firms.

Any changes, he said, will stay within the firm’s current framework, which allocates shares to partners based on their total contributions to the firm, does not pay bonuses or guarantees, and has no “credit” system for originating work. The firm is not considering a move to a black box structure, which restricts sharing of partners’ pay, and will continue promoting most of its partners from its internal ranks.

“We want all partners to be aligned on growing the pie for the firm over a long period of time—that is our overarching compensation philosophy,” Barr said. “It’s a modern compensation philosophy for us that interweaves well with our institutional value system.”

‘Self-Evident’

His plan for more lateral hiring is a change for Davis Polk. The firm historically has not been an active player in the talent war among major law operations.

Davis Polk hired only a handful of partners in recent years as it lost virtually none of its equity stakeholders to competitor firms. Last year it lured Latham & Watkins partners Thomas Malone and David Penna to the mergers and acquisitions and finance practices, respectively.

“As we increasingly look at ourselves as businesses, the thesis for going out into a market of talent and finding talented partners that can augment your firm just becomes self-evident,” Barr said.

The firm had identified London, Northern California and the asset management practice as areas ripe for expansion when Barr took the reins as leader, he said. Recent discussions with partners solidified those plans, Barr said.

Evidence of the strategy came last week, when Davis Polk in London hired partner Luke McDougall, the former co-head of Paul Hastings’ global finance practice.

“In each of these practices and offices, we very clearly have internal candidates we are going to promote to partner,” Barr said. “None of them will be done exclusively in the lateral market. But in each of these practices or offices we are subscale compared to what we’d like to achieve. So, we will be able to accelerate our strategy by engaging in the lateral market.”