Early in my career, I could not have comprehended why there would be any debate about the merits of open versus closed compensation systems in law firms. As with most lawyers, views on this topic are shaped by: 1) one’s personal philosophy as to whether owners of a business should know what others in the organization make and 2) the system your firm(s) adopted, as it becomes second nature. As I thought having such knowledge was a fundamental underpinning of all businesses and since I was “raised” in open firms, I reflexively believed that open systems were preferable.
As a lawyer who has practiced in law firms and corporations, and is now in my second decade as a legal consultant, I draw on a much broader knowledge-base in considering this topic. As this issue invariably arises when lateral partners are considering a move from an open to a closed firm, it has triggered some much deeper thought and a shift in my opinion. There are two principal reasons for this change.
First, I had always believed that corporations, which typically had much less pretense than professional service firms as to issues like this — they are businesses, after all, that were organized to make money — would be the model for open systems. I was thus very surprised during my general counsel career (which was in publicly traded and privately held companies) to learn that very few owners of these businesses, even at the senior management level, did not know what their peers or others made. Granted, the compensation of the five highest-compensated executives is disclosed in publicly traded companies, but, outside of that exception, perhaps only the VP of human resources and CEO know what others throughout a company make. As such, a cornerstone support for my longtime belief had been shaken.
Second, I have worked with many managing partners, served on panels with them that debated this very topic, and have talked to countless partners over the years about the issue. The nearly unanimous view among managing partners, in open and closed firms, is that if they had the ability to start a new firm tomorrow, they would institute a closed compensation system. Cynics might retort that such an option would be selected since it would make the lives of those managing partners easier and would vest them with more authority, but I know that these leaders fundamentally believe that closed systems produce healthier environments. The vast majority of partners in closed systems have corroborated that view; in fact, I have yet to work with a single partner in a closed firm whose interest in moving is triggered by a desire to work in an open firm.
With respect to compensation, partners have three overriding concerns. First, and undoubtedly foremost, the question arises as to whether a firm’s compensation system is fair. While that particular issue is one that merits its own article or book chapter, important indicia of fair systems are comprehensive review of performance data and intangible contributions, consideration of partners’ input on their performance, a healthy give and take among the compensation committee members, and a meaningful right of appeal after decisions have been made. This is a neutral point in the open/closed debate, as neither form should have a bearing as to whether the system, as it is run, is fair.
The second concern that a partner has in the compensation arena is whether he is being paid in line with his market value. This is a more complicated analysis than it is for a professional athlete, who can point to reams of publicly available compensation data and performance metrics to fairly accurately gauge his comparative value. Despite the existence of data in our profession (about some of the largest firms), such as average compensation per partner and profits per equity partner, these figures do not tell a partner what his market value is. In fact, even if there were publicly available charts that linked compensation to originations, for example, these, too, would not answer the question, as the analysis is far more nuanced, as not all dollars are equal and quite a few factors influence the compensation data. Nevertheless, this also is a neutral point in the open/closed arena, as the type of system does not influence relative market value.
The third consideration, which is at the very heart of the issue and is the one that triggers the most agita, is how the partner’s compensation compares to his partner down the hall, or in another office, whom he feels is his true peer. If the partner learns that this peer is being paid more, it can often be the factor that sparks dissatisfaction, complaints, and unrest in law firms. In fact, this “me versus him” dilemma is normally the most vexing compensation issue for managing partners and is the overriding reason why many favor closed systems. While it is true that the senior management team and compensation committee members in closed systems know the full gamut of compensation in their firms, and although there always are a handful of intelligentsia who can get the numbers, most partners in closed systems do not have this information, which helps to take this issue out of play.
As one might expect, there are hybrid systems that have open and closed aspects. One system that some firms employ is that the full range of compensation for partners is not distributed, but is made available to them upon request (which typically must be in writing). Anecdotal reports I have received from leaders and partners in such firms is that very few partners ever make such requests. Perhaps just knowing that there is a right to ask for this data is enough to quell the desire to actually get it.
In conclusion, it would be foolhardy to decree that a closed compensation system is a one-size-fits-all model for all firms. The culture of each firm, its history, and a plethora of other factors have to be weighed for each firm. There are many outstanding firms with open compensation systems that have partners who are relatively happy about their compensation. (I doubt there is any firm or business, with more than one partner or owner, in which everyone is truly happy as it relates to compensation.) The hallmark of strong firms — of any stripe, open or closed — is having a fair compensation system that takes into account the factors described above.
With all of that being duly noted, I have seen less discontent about compensation among partners who practice in closed firms. As long as the partners feel that the system is fairly administered, and if they believe that they are being paid in line with their market value, they are typically more sanguine than their peers in open firms, as they are less likely to engage in the more destructive “me versus him” analysis. If you are a partner in an open firm who is thus considering joining a firm with a closed system, do not let that difference stop you in your tracks. Conduct due diligence that focuses on how the system is actually run and seek feedback about it from partners in the firm (especially laterals who joined from open firms). Perish the thought, but, if you join, you just may end up being a bit happier about an issue that normally causes great angst. •