In mid-2009, the Brazilian law firm Mattos Filho, Veiga Filho, Marrey Jr. and Quiroga Advogados had plenty going for it. Less than 20 years after being founded by about a dozen lawyers, Mattos Filho had grown to nearly 250 lawyers and was known for top-flight tax, corporate, and capital markets practices­.

But firm leaders could see the potential for defections ahead, partly as a result of Mattos Filho’s eat-what-you-kill compensation system. Under it, partners received a portion of their billings and a percentage of the revenues generated by clients they brought into the firm. With this formula, the compensation system was easy to administer—it required no partner reviews and little managerial input. But it had a downside. It was creating incentives for partners to hold on to work and causing disputes over which partner got credit for individual clients.

In addition, structural obstacles were making it difficult to bring fresh blood into the partnership. As the firm’s value rose, the cost of equity had become prohibitively high, and Mattos Filho was unable to bring on lateral partners because most high-profile clients were already tied to the firm’s existing partners­­. In short, the system that had helped Mattos Filho become one of Brazil’s leading corporate firms had become a barrier to further growth.

For help in remedying these problems, Mattos Filho turned to American consultants and the firm’s counterparts in The Am Law 100. (Because of local regulations that prevent foreign firms from practicing Brazilian law, domestic and international firms typically work side-by-side in Brazil.) In August 2009, four Mattos Filho leaders, including founding partner and tax rainmaker Roberto Quiroga Mosquera, traveled to New York to hire a consultant, ultimately deciding on former Arnold & Porter managing partner James Jones, then at Hildebrandt International. While in New York, the group also met with leaders at Cleary Gottlieb Steen & Hamilton; Skadden, Arps, Slate, Meagher & Flom; and Simpson Thacher & Bartlett to discuss the firms’ varied business models.

“One thing is to read the literature [about law firm business models]; one thing is to hear what your adviser tells you,” says Mattos Filho corporate rainmaker Sergio Spinelli Silva Jr., another of the partners on the New York trip. “The other thing is to talk with these guys who are our colleagues.”

This August, over lunch of picanha —a Brazilian cut of rump steak—at the restaurant in Mattos Filho’s São Paulo office, Spinelli momentarily slipped into Portuguese when describing how Simpson, Skadden, and Cleary, along with other firms such as Milbank, Tweed, Hadley & McCloy and Davis Polk & Wardwell have become his firm’s paradigma. “We want to be like these guys,” he says. “They’ve been in business for a hundred years, we’ve been only 20. We want to be here in a hundred years.”

Mattos Filho applied what it learned in New York almost immediately—it revamped its compensation system at the beginning of 2010, causing a substantial hit to senior partner pay, and adopted a U.S.–style partner review process. Under the firm’s new gated, 15-level modified lockstep system, Mattos Filho’s partners gave up all their equity and origination credit. As a result, the spread between the firm’s highest- and lowest-paid partner has gone from 27:1 in the year prior to the change down to 10:1. There’s talk of compressing it further.

But change takes time: Even nearly three years later, the partnership’s adjustment to the changes is far from complete. M&A partner Moacir Zilbovicius, another member of the quartet who traveled to New York, says that during the group’s first meeting with Jones and his colleagues at Hildebrandt, “they expressly said that what is difficult is not the decision [to change] itself—it’s the implementation.”

Now, as the firm enters its third year under the new system, it faces tough questions that were unheard-of in its old one: how to manage partner reviews and compensation decisions, when to offer partnership to laterals, and—most challenging of all, after eliminating the old incentives for high billables and rainmaking—how to foster an institutional identity without stifling individual initiative.

The history of Brazilian law firms, where equity and profits have traditionally been concentrated in the hands of a few founding partners, is peppered with partners breaking off to form rival outposts. Among top firms, the leaders of Souza, Cescon, Barrieu & Flesch Advogados split in 2001 from Machado, Meyer, Sendacz e Opice Advogados, whose leaders themselves split in 1972 from Pinheiro Neto Advogados. The latter is a venerable 360-lawyer firm that has represented foreign investors in Brazilian ventures dating back to the 1940s.

Mattos Filho was formed in 1992 when about 12 lawyers split from Mattos Filho e Suchodolski Advogados. Despite its relative youth, Mattos Filho is widely seen as Pinheiro Neto’s chief rival for the mantle of Brazil’s top full-service corporate law firm. The majority of Mattos Filho’s 302 lawyers practice in São Paulo, but the firm also has offices in Rio de Janeiro and Brasília, as well as a small office in New York. It reported gross revenues of 249.8 reais in 2011, or about $135 million, according to its latest annual report.

In Mattos Filho’s early days, firms like Pinheiro Neto and Demerest e Almeida Advogados dominated the market for representing inbound investors, so the firm needed to find a niche. Initially that was tax, a critical practice for companies facing Brazil’s labyrinthine laws. Founding tax partner Pedro Luciano Marrey Jr. says partners quickly recognized that although tax was vital—it still makes up about a third of Mattos Filho’s revenues—the future of the firm was tied to the development of the Brazilian capital markets. On that front, the firm had a leg up in founding partner Ary Oswaldo Mattos Filho, who, as the head of the Brazilian securities regulator, had helped open the country to outside investment in the early nineties. Another advantage was the relentlessness of Spinelli, the lead partner of Mattos Filho’s capital markets practice. Cleary partner Nicolas Grabar, who worked with Spinelli on the $70 billion public stock offering of Brazil’s national oil company, Petróleo Brasileiro (or Petrobras), in 2010, calls Spinelli a “problem-solver of the first order.” (Cleary represented Petrobras in the offering, while Mattos Filho represented the underwriters.)

Initially, Mattos Filho’s compensation structure was typical for Brazil: All partners took home about half their hourly billings and­—in a nod to the importance of rainmaking—were paid about 20 percent of the total fees earned from clients they brought into the firm. As time passed and overhead grew, partner take-home dipped to about 30 percent of billable hours and about 5 percent of originations. Although the origination credit at Mattos Filho initially enticed partners to search for new clients, it began to create complications. Unless there was a two-year gap between assignments from a specific client, credit for work went back to the partner who first landed the client. Since longtime clients were unlikely to go two years without hiring the firm, New York corporate partner Daniel Calhman de Miranda says origination credit was becoming “an inflexible legacy privilege that had nothing to do with anybody’s immediate contribution to the institution.”

Additionally, junior partners were being asked to pay an increasingly high amount for an equity stake in the firm. Under the firm’s old structure, partners had the option to start selling equity at age 60 and were required to sell 20 percent of their remaining shares starting at age 65 and to be fully bought out by the firm’s retirement age of 70. To fund the buyout, newly elected partners were asked to pay up to 10 percent of their annual income to buy shares—shares that had become more expensive as the firm grew. “We could see the future, and we could see that it would be very difficult for these young partners to pay millions of reais to buy into the firm,” Spinelli says.

The person whom partners credit with speaking out about the system’s problems was one its chief beneficiaries: founding partner Quiroga. “The change probably would not have happened if not for him,” says consultant Jones, now a senior fellow at Georgetown Law’s Center for the Study of the Legal Profession. (In addition to the meetings with firms in New York, Quiroga had also spoken with leaders at Spanish firms Uría Menéndez and Garrigues.) Quiroga, who received significant origination-based compensation every year, worried that the system was creating incentives for partners to hoard work and clients. He says he and other senior partners agreed to cut their pay in hopes of stabilizing the firm and setting it up for continued growth.

Quiroga took the long view in part because he could. While the other founding partners are 72, 68, and 65, he’s 51. Change was possible in part because the retirement of Ary Oswaldo Mattos Filho, and the approaching retirements of Marrey and real estate partner Otávio Uchôa da Veiga Filho, would free up large chunks of origination credit and equity. Quiroga had to convince the remaining partners who benefited the most from the old system­—senior partners who had long-standing client relationships and large equity shares­—to make sacrifices. Spinelli, another beneficiary of the old system, is just 46. “My view is not short-term,” Spinelli says. “I’ve been here for 25 years, and I intend to be here for another 20.”

São Paulo–based Milbank partner Andrew Jánszky, a veteran in the market, says that founding partner Ary Oswaldo Mattos Filho, 72, was also an early proponent of change. Jánszky says he remembers name partner Mattos Filho speaking to him about partnership issues in the nineties. “It mattered to him to leave something behind,” Jánszky says. “He’s been very generous with his firm and passing clients along [to junior partners]. This is unusual in this market . . . and that stuck with these guys.” With Jones’s help, Quiroga and a group of senior partners developed a plan to buy out the other three founding partners under the terms of the firm’s old system.

Mattos Filho is not the only top Brazilian firm that has reexamined its compensation structure in recent years. Pinheiro Neto made changes to its system six or seven years ago, according to managing partner Alexandre Bertoldi. Under the revised system, Bertoldi says, one-third of each partner’s compensation is a flat amount, and another third is awarded on a seniority-based lockstep basis that tops out after eight years. The remaining third is variable, based on the partner’s billables and the profit the firm clears on junior associates who work for the partner. The firm has never given credit for originations. The compensation spread between the highest- and lowest-paid partner at the firm is now 3:1, Bertoldi says.

Machado Meyer is also making changes to its own eat-what-you-kill system. Managing partner Raquel Novais did not respond to requests for comment on the changes, but according to a May 2012 article in Latin Lawyer , a trade publication, the firm is trying keep origination credit as a part of its system without overvaluing it.

Mattos Filho’s new system—a gated lockstep with 15 different compensation levels—makes nods to Cleary, Simpson Thach­er, and Skadden, the three firms that Mattos Filho leaders met with in 2009. The connection between Cleary and Mattos Filho is palpable: At least five Mattos Filho partners­—more than 10 percent of the partnership­—have participated in a program in which foreign associates spend time practicing at Cleary. Mattos Filho shares Cleary’s tendency to have senior partners like Spinelli and banking and finance partner José Eduardo Carneiro Queiroz, another member of the quartet that traveled to New York, offer cross-disciplinary services. Still, it became clear to Mattos Filho partners that Cleary’s compensation model would not work for them. “The general perception that we had was that to be pure lockstep was too radical an approach,” says Queiroz. “We have such a variety of practices, such a variety of results, such a variety of compensations that the lockstep system would not have matched all the issues.”

Simpson Thacher’s model, one that keeps the stability of a tiered lockstep-like system while building in incentives for winning business, seemed more applicable. Simpson Thacher’s S. Todd Crider credits the Brazilian firm’s senior partners with being “willing to vote in favor of things that were not in their immediate economic interest” for the good of the institution.

Mattos Filho shares Simpson Thacher’s focus on working for investment funds and financial institutions and targeting high-value, sophisticated work. Still, given the novelty of their system, leaders in the Brazilian firm thought they needed a more frequent review process than Simpson Thacher’s, where partners normally undergo a formal review only every three years. While Simpson Thacher’s system provides partners with a high level of financial stability and predictability, Mattos Filho’s new system needed to be tweaked, both upward and downward, in its first few years.

For a model for partner reviews, Mattos Filho drew from Skadden. According to M&A partner Zilbovicius, Skadden executive partner Eric Friedman told the Mattos Filho delegation that he spends 500–800 hours a year on individual partner reviews. Queiroz adds that Friedman “told us if you have this [type of] system and you don’t do [reviews] on a genuine basis, people will not accept it.” (Friedman declined to comment for this story through a firm spokesperson.) Mattos Filho now has a six-person compensation committee made up of Quiroga, Spinelli, Queiroz, Zilbovicius, M&A partner João Ricardo de Azevedo Ribeiro, and tax litigation partner Glaucia Maria Lauletta Frascino. Quiroga, Queiroz, and Ribeiro meet with the firm’s 46 partners several times throughout the year. The other three partners join in annual discussions about where partners should fall in the modified lockstep. While the compensation committee has access to traditional metrics like hours billed, they also consider other contributions such as mentoring, cross-selling, and business development. When it comes to the compensation committee members themselves, only managing partner Quiroga knows where they fall in the system.

The Firm’s new system faced its first big test in August 2010, less than a year after the changes took effect. Star capital markets partner Carlos Barbosa Mello led a group of 15 other Mattos Filho lawyers that jumped to Lefosse Advogados, a smaller rival Brazilian firm affiliated with Linklaters­. The move rocked the market and made headlines on the business pages of São Paulo’s newspapers.

Mello’s former partners say his reasons for leaving Mattos Filho were complex—his lack of power in the new governance structure, his desire for independence, and his discomfort with the makeup of the compensation committee. For his part, Mello declined to comment on his move or the changes at his old firm for this story, saying in an email that “matters pertaining to the partnership at Mattos Filho (or any other firm) are ‘per se’ confidential.”

The firm survived the loss, and its leaders now tout their own ability to attract and retain lateral partner talent as a sign that the changes are having the desired effect. Since 2010, Mattos Filho has added the first seven lateral partners in firm history, most of whom practice in areas where Mattos Filho had gaps, such as oil and gas, international arbitration, restructuring, and labor.

Still, challenges remain, not the least of which is the new, intensive review process. Under the old system, determining compensation relied on putting hours billed and origination credit into a formula, doing the math, and cutting checks. Now reviews and other management duties consume the time of key partners, especially managing partner Quiroga.

And the review process is still taking some getting used to. Frascino, the sole female member of the firm’s executive and compensation committees, echoes a concern that many of her partners share: “I’m not a corporate lawyer,” she says. “I work in the tax litigation practice. So my partners in general, they don’t know what I do. . . . For me, it’s not easy being evaluated if my partners don’t know what I do.”

That said, Frascino, a firm veteran who left significant origination credit and equity on the table, says she thinks the new model makes Mattos Filho better positioned to meet growing market demands. But she stresses that the executive committee members still have much work to do in earning their partners’ trust and keeping the firm moving forward. “[Trust is] not something [where] you say, ‘I got it.’ No. You say, ‘I got it today, and I need to get it tomorrow, and I need to get it next month and next year.’ “