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In the Bible it says that until Adam ate fruit from the tree of knowledge, he didn’t know he was naked and thus had no shame. Law firm compensation works kind of the same way. One chairman of a Legal Times D.C. 20 firm offers the story of a partner content with his salary — until his wife found out from another partner’s wife what that woman’s husband was being paid. In a flash, she was on the phone to a member of the firm’s compensation committee using language that might well make Al Swearengen from “Deadwood” blush. (No word if her husband is now litigating polar bear disputes out of the Reykjavik office.) An extreme reaction? Maybe. But it is typical of the fallout most compensation committees have to deal with when deciding partner pay. Consultants and recruiters frequently say that the best way to be rid of such headaches is to be rid of the system that creates them. That means embracing a closed compensation system, where partners cannot find out what other partners are making. “The problem usually isn’t how much a partner is making but what they’re making in relationship to each other,” says Michael Short of consulting firm Hildebrandt International. “Firms with big differentials don’t spend nearly as much time talking about it as firms with little differentials. “ Which points to a conundrum: It’s received wisdom that, as they expand, law firms are becoming more corporate — MBA office managers, 360-degree performance reviews, the boilerplate Six Sigma reference. And yet, despite the race for talent and the push for higher profits per partner, the vast majority of firms use open compensation systems rooted in a bygone era when law was more a gentleman’s profession and less a cutthroat business. “An open system helps partners see what the firm values,” says Michael Nannes, chairman of Dickstein Shapiro. “A huge sense of partnership is to know about the books.” But knowing about the books, leaders of closed-system firms say, actually fractures relationships and produces rifts within a partnership that show clearly that not all owners are equal. “I’ve had big producers at closed systems say it was less satisfying to their egos because nobody knew what they were bringing in,” says a Washington recruiter. “It’s like the tree falling in the woods — �Wait, no other partners are around to hear it?’” Granted, each firm will publicly say the way they pay their partners (and by extension the resulting culture) is the best way to operate. However, consultants and firm insiders say it’s typically the chairman of an open-system firm that secretly yearns for the peace a closed system brings. So what gives? Is the open pay system used by most firms an antiquated relic? THE CLOSED BOX Think Michael Corleone from “The Godfather”: It’s nothing personal. It’s strictly business. “A closed system gives you more latitude to make a business decision instead of a political decision,” says Cesar Alvarez, who heads Miami-based Greenberg Traurig, which has operated under a closed system since its founding in 1967. “Making a logical business decision is what ultimately should matter, and that is very difficult to do in open systems, particularly for major business producers that need to be paid outside the firm’s average compensation per equity partner.” Alvarez says this enables him to operate freely from a partner’s personal interest. Greenberg is one of a handful of major law firms that use a closed system. In Washington, they are vastly outnumbered; Sidley Austin is the only D.C. 20 firm to use black-box compensation. Other prominent firms include Jones Day and McKee Nelson. Lawyers in those firms swear by the model. They insist that their partners, unbound from a hierarchy, are more willing to work together — that ignorance, in short, can in fact be bliss. The raw financials of those firms are also impressive, so there’s plenty of money to go around. Greenberg, with 18 offices and 1,400 lawyers, has profits up by more than 880 percent since 1996. And, with profits per partner over that time having nearly tripled, from $480,000 to $1.2 million, the firm topped the $1 billion mark last year. “To grow quickly we needed to attract major business generators,” Alvarez says. “Our greatest asset in doing that is our closed system. If we had an open system, then we’d probably still only be here in Miami.” By taking out transparency, Greenberg’s leaders think they are removing jealousy as well. Now a Greenberg partner must be happy only with his compensation in comparison to what he thinks the market will offer, not what someone is making down the hall. The firm is freed from a public pecking order that can be a source of rancor among competitive lawyers. “It’s about minimizing the visible winners and losers,” Alvarez says. “And nothing is more visible than what you’re paying people.” Nelson Migdal arrived at Greenberg’s Washington office from Holland & Knight, where he was executive officer of the firm’s Washington office, in November 2005. The real estate partner isn’t looking to return to an open system. “The Greenberg founders were trying to create an environment where it’s totally collaborative,” Migdal says. “It’s more of a meritocracy model. We’re not going to float all boats. The folks that carry the water make the money. And the people that don’t, don’t — but their peers don’t know.” THE OPEN BOX “I’m trying to build a partnership where everyone feels like they have an interest,” says Robert Ruyak, chairman of Howrey. “It’s about making the owners of a firm truly owners of the firm.” Engendering that feel is the industry norm. But just how open the systems are is changing. There are gradations among open-system firms, distinct degrees of transparency. The most common model is the semiopaque system used by firms such as Wiley Rein and Kirkland & Ellis, where information is available but is not distributed. None of these firms have been able to completely transition to a black-box, closed compensation model. Instead, they use a system where partners wishing to view compensation numbers or revenue flow must schedule a meeting in the chairman’s office, similar to visiting a data room on an M&A deal. This scenario leads one to imagine a partner leafing through a Moleskin, while the chairman peers over his shoulder — calling to mind Shelley Duval getting caught snooping in “The Shining.” Other firms, like Bingham McCutchen or Pillsbury Winthrop Shaw Pittman, send pay information out over e-mail or make it accessible on a firm Web site. “I can certainly understand the benefits of a closed system,” says Jay Zimmerman, chairman of Bingham. “It can mean there’s more cooperation and less competition. On the other hand, we find an open system works and is an important sense of fairness to the partners. And I’ve always been of the view that a little healthy internal competition is good for the partners.” That formula has recently worked well for Bingham. Last year, the Boston-based firm acquired D.C.’s Swidler Berlin and saw its gross revenue climb to $686 million after a 15 percent jump. Zimmerman says the firm’s openness is not a hindrance when acquiring partners. And that transparency is a good check on management. He argues it adds a discipline that would otherwise not exist. “You never want to get too far out in front of your partners,” he says. “Going through this exercise every year, while difficult, is not a bad thing in order to access our priorities.” THE BETTER BOX TO BE IN? An iron truth of firm compensation seems to be that if you are in an open system now, there is little chance of moving to a closed one. In fact, among the consultants, recruiters, and partners interviewed for this article, no one knew of a system that moved from open to closed. “It’s too much to ask for a partnership to give up access to information,” says Hildebrandt’s Short. “Meanwhile, the chairmen are spending their internal capital in other areas.” And so, despite all the talk of the legal world going corporate, firms appear to be shying away from one practice at the heart of big business: not asking any questions about what the other guy makes. The information flow may slow as firms grow and spread across the map, but adopting a truly corporate posture toward compensation seems a distant prospect. “Everyone is religious about the way they do it,” says Avery Ellis, a recruiter at Mastel & Co. “You need to have a tremendous amount of trust and faith in running a closed system.” And in law, trust and faith are often four-letter words.
Nathan Carlile can be contacted at [email protected].

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